When are land deals exempt from the requirements of the public procurement rules?


Okay, it's a bit late for a Euro football analogy, but a recent case regarding the leasing of an office building in Vienna by a public body has further clarified an issue of importance to developers and contracting authorities: when are land deals exempt from the requirements of the public procurement rules? (Case C-537/19 Wiener Wohnen)

Those rules, incidentally, remain in place largely unchanged as a result of Brexit, and case law of the European Court remains of persuasive [1] value before the English courts.

"Pure" land deals are expressly exempt from the procurement rules. However, the mere fact that (for example) a lease of land is part of a deal will not save it from application of the rules if the transaction falls to be viewed as a public works contract under which the contracting authority is procuring construction works.

A disgruntled competitor might attack a transaction on this basis if it wished to block it, and fears of expensive and protracted litigation might discourage public bodies from proceeding with an otherwise-desirable development.

So where is the line drawn? The answer is important for developers and contracting authorities looking to avoid delay and uncertainty of application of the rules to a deal they have negotiated: if a deal can be brought the right side of the line, the prize is doing away with the need to run a competition with all the attendant cost, delay and uncertainty (not to mention the risk for the developer that a competitor will hoover up or block a deal which it has worked hard to secure).

A few preliminaries

As a reminder:

  • the labels applied by the parties are not decisive; unsurprisingly, simply calling a document a lease or land disposal won't carry the day;
  • simple land disposals never engage the rules: self-evidently they are not procurements, but the opposite. An interesting question, as we will see, is the extent to which some commitments by the would-be landlord, as part of a lease or agreement for lease, are to be seen for the purposes of the rules as merely part and parcel of the tenancy (ie a land disposal) rather than the acceptance by the landlord of an obligation to carry out works;
  • the English courts have held on several occasions [2] that it is legitimate for developers and contracting authorities to design procurements so as to avoid application of the rules. So, if it works commercially for the parties, there's nothing wrong in arranging the furniture so as to fall within the land exemption, or otherwise escape the clutches of the rules [3].
The latest challenge

The most recent case, Wiener Wohnen [4], follows an earlier Italian case, Pizzarotti [5]. Let's look briefly at each.

In Pizzarotti, a new court complex was to be built in Bari. The origins of the case were odd, and involved the winning bidder in a process arguing that the Italian authorities should follow through on the award of a contract to it. A defence raised was that the process leading to the award to Pizzarotti was unlawful as it amounted to the award of a works contract, in contravention of procurement law. That issue was submitted to the European Court for a decision.

Relying on previous case law, the court said that where a contract contained elements which could be differently categorised (in this case, works and a land deal) it was necessary to look at the main object of the contract.

Crucially, the court held that, where (as in this case) the building concerned had yet to be built, the main object would generally be works. 

But it noted that there is another requirement if an agreement is to constitute a public works contract for the purposes of the rules: that (in the words of the court's judgment) the authority "has taken measures to define the characteristics of the work or, at the very least, has had a decisive influence on its design."

In the Pizzarotti case, the court decided that the requirements laid down by the Italian authorities put them in the position of decisive influence so that the transaction was properly to be viewed as a public works contract subject to the Italian procurement rules. So Italy 0.

But the second half has delivered a late victory for authorities and developers and suggested a game plan which can be used by teams in the future.

Wiener Wohnen ("WW") is a large public body based in Vienna and responsible for public housing. It needed new office space and engaged a consultant to find suitable locations. Those identified included a site on the Guglgasse on which a developer, Vectigal, proposed to build offices.

The proposed building consisted of two blocks, imaginatively named A and B, with the possibility of bridges to connect them. WW took an indefinite duration lease from Vectigal with a break at 15 years and at 10-year intervals thereafter. It also took options on 3 additional floors, which options were later exercised.

The European Commission attacked the transaction, alleging it amounted to a public works contract. Specifically, citing Pizzarotti, it pointed to:

  • the decision in that case to the effect that the main object, where a building was yet to be constructed, was generally to be considered to be the execution of works rather than merely a land deal;
  • the optional bridges between blocks A and B, the construction of which it alleged WW had influenced; 
  • the additional floors which WW could (and indeed did) call off; 
  • a series of requirements laid down by WW in specifications which were attached to the lease, and which it alleged gave it decisive influence over the construction of blocks A and B, going beyond what would be expected if WW were merely stipulating those matters which would be expected to be of concern to a 'mere' tenant; and
  • the fact that WW appointed a consultant to oversee the construction works.

The Commission alleged that, without WW's involvement, blocks A and B would not have been built. It also alleged that the building was not simply a standard building, further pointing to WW's decisive influence.

The Austrian government defended the Commission's action on the basis that the procurement rules did not apply because of the land exemption. There was also much discussion of the extent to which WW's specifications merely encapsulated existing legal requirements on environmental and other matters. Austria argued that these requirements didn't go beyond the remit of a potential tenant.

The court found in Austria's favour and threw out the Commission's action. Although, echoing Pizzarotti, it said that the immediate object of the contract was the construction of the two blocks, it emphasised the need for WW to have "taken measures to define the characteristics of the [blocks] or at the very least to ha[ve] had a decisive influence on its design" if the deal was to be considered a public works contract and subject to the rules. That would be the case if WW's requirements had gone beyond the usual requirements of a tenant, but was not the case here.

In a little more detail:
  • the amount paid and payment arrangements may be relevant but will not in themselves constitute decisive influence;
  • the presence or absence of a repurchase option or options to let additional space is irrelevant, as is lease duration;
  • the court further defined "decisive influence" as being constituted by influence over architectural structure such as the building's size, external walls and loadbearing walls. In contrast, it said:
    • stipulations concerning interior fittings demonstrate decisive influence only if they are distinguished because of their specificity or scale; and
    • laying down specifications to ensure that the building complied with the normal ‘state of the art’ on the market concerned were normal concerns of a tenant and therefore non-problematic;
  • the mere fact that there were a large number of detailed stipulations from WW was not, in itself problematic if they passed the test of being tenant-like requirements; as an example, a stipulation as to the size of the buildings' electrical supply was a legitimate tenant concern;
  • the court found that planning for the building had been completed when WW had identified the Guglgasse site as a possible location, and that the additional floors and bridges were not planned in order to meet a specific requirement of WW;
  • in contrast, the court said, it is normal for a tenant "…which seeks to rent an office building to make its wishes clear as to the specifications which that site should, as far as possible, meet whether in respect of a building which is yet to be constructed or a change of tenant where upgrade work is carried out. Such steps do not allow a lease to be reclassified as a works contract."
How does this play out in the UK?

Caution is required in applying the above directly to UK situations, remembering that local law and planning requirements can mean that a direct analogy with non-UK situations can be difficult or may be misleading. But UK authorities and developers can, with care and where the commercialities allow, use this line of cases to construct development arrangements and agreements for lease so as to stay safely within the land exemption where new buildings, or modifications to existing buildings, are part of the picture. The following principles are a useful guide:

  • assuming that it is commercially necessary – as will often be the case – for the developer to accept obligations to carry out works, test each such obligation against the yardstick of whether that obligation is one which a tenant would be expected to seek, or goes beyond the normal remit of a tenant;
  • it may be helpful to adopt suitable labels (though these will not be decisive); it may also be helpful to state that the requirements laid down are those which the authority as tenant requires;
  • imposing obligations mirroring legislative requirements or (probably) public sector guidance should be non-problematic; nor should imposing specifications aimed at ensuring that the building complies with the state of the art for similar buildings in the sector concerned;
  • rights to supervise compliance with tenant-like obligations should likewise be non-problematic, as should remedies consequent on their non-fulfilment;
  • options to take additional space will not be problematic.

Proceed with caution and extra time and penalties can be avoided!

Footnotes

[1] Broadly speaking, pre-Brexit European Court decisions under the procurement Directives remain binding in cases decided under the (current) public procurement regulations. There is an exception for the Supreme Court and Court of Appeal which may depart from pre-Brexit EU case law where they consider it right to do so. The English courts are not bound by post-Brexit EU procurement case law, but they may still have regard to it and, in practice, we can expect them to give considerable attention to decisions that are relevant to the case before them.

[2] eg Birmingham Midshires decision

[3]  There are other ways of doing so, including the so-called Flensburg exception, and (even after the appeal decision in Faraday) the conclusion of a deal which does not, at any stage, involve the acceptance of an obligation on the developer to carry out works.

[4] Case C-537/19, decided on 22 April 2021

[5] Case C-213/13, decided on 10 July 2014

 

 

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Jonathan Davey

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Peter Hardy

Peter Hardy

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Clare Dwyer

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