Tender moments

On 25 June the European Commission decided to start proceedings against the UK over the award of a contract for development of land in the Osbaldwick area of York. This is not an ordinary case. It has the potential to change the longstanding practice of close private-public cooperation in urban regeneration projects.

The commission's action follows from the ruling of the European Court of Justice in Auroux v Commune de Roanne (C-220/05) that development agreements must be put out to tender, which has caused alarm in the property world since the judgment was first published in January 2007. The Auroux ruling has led many large council-led projects, including large projects in Gloucester, Eastbourne and Kingston, to be delayed or cancelled. Industry representatives have complained loudly about the chilling effect the judgment has had on council decision-making. The commission's infringement proceedings may create further uncertainty, at least in the short term.

The UK accepts that the City of York Council was in breach of EU law when it awarded a housing development contract without a tendering process. This was a public works contract (a works concession). Yet, the commission is still complaining that 'no measures have been introduced to ensure that the award of future land development agreements will be compliant with the applicable EU rules'. The case is not, therefore, just about the York development. It is about the UK's general attitude towards land development partnerships between public bodies and developers.

Urban regeneration schemes depend on agreements between council and developer. Such agreements, occasionally involving the exercise of compulsory purchase powers, are a flexible and effective means for the redevelopment of otherwise problematic sites. Such agreements are attractive to the developer, given that the early stages of any regeneration project are high-risk/high-return ventures. The developer will own at least part of the relevant land and will seek to benefit from his initiative in assembling the land. In this sense, these agreements have an element of barter in them: the developer is willing to listen to the requirements of the council in return for the certainty and value gained through the permission to develop. The council, in turn, achieves its planning aims and benefits from the ready finance.

The commission's case is that many such agreements are effectively public works contracts that should be put out to tender whenever they fall above the relevant threshold. The commission's arguments follow the principle established by Auroux. Before Auroux, the general consensus was that development agreements were exempt by virtue of an explicit land exception in the public procurement directives. The sale of land was thought to be only of limited interest to the free movement of services, which is the underlying aim of this area of EU law.

The 'main objective'

Nevertheless, development agreements involve not just the transfer of land but also the design and construction of buildings. Such sophisticated agreements are normally 'mixed agreements' that under standard ECJ case law (see Case C-331/92 Gestion Hotelera) are to be assessed according to their 'main object'. In Auroux, the ECJ ruled that the procurement rules apply to public-private ventures, even when the work is not to be owned by the contracting authority. The court said that an agreement to execute a work constitutes a public works contract 'regardless of whether or not it is anticipated that the first contracting authority is or will become the owner of all or part of that work'. Moreover, the value of the contract includes any revenues the developer expects from third parties (more analysis of the Auroux judgment is provided in a very helpful paper by the Procurement Lawyers Association at https://www.procurementlawyers.org).

The court offered little in the way of argument. It does not help that the facts of the case were ambiguous. Under the terms of the agreement, the municipality of Roanne, in France, was to eventually take ownership of any unsold parts of the new development at the expiry of the agreement. The council was also to guarantee the execution of contracts still ongoing and would take over the debts contracted by the development vehicle. So, in this case, the council still bore the financial risk of the project and in a way owned it. So the ECJ said much more than it needed to. The facts could have justified the application of the procurement directives anyway, without radically changing the principle. Nevertheless, after Auroux, it is clear that any agreement between a council and a developer involving the construction of public works as a 'main objective' is covered by the public procurement directives, even though the developer was to keep the ownership of the work or pass it on to third parties.

Fear of the rules

Many projects around the UK have now been stopped for fear of falling foul of the procurement rules. The Office of Government Commerce has just issued a procurement policy note ('Preliminary Guidance on the Application of the Public Procurement Rules to Development Agreements', information note 11/09, 16 October 2009), which helpfully explains the case law, but does not avoid ambiguity. The issue is not simple to resolve. Councils cannot easily endorse a blanket rule of following the EU procurement methodology. Developers may find the prospect of bidding for a project they have initiated and carefully planned far too risky. Competitors would also be faced with the awkward challenge of bidding for works on a rival's land. Councils will face the added cost and delay in initiating complex and potentially hazardous processes for selecting a partner, laying themselves open to challenge under the complex and occasionally unfamiliar procurement regulations. Moreover, if a council is too prescriptive early on, say by producing a fully-fledged master plan, it may stifle the private sector's ability to innovate. The element of flexibility in the relations between developer and council is lost. Shared vision may be hard to build.

It is clear that Auroux ought to be read narrowly. Not all development agreements should be put out to tender. But where should we draw the line? The aim of the public procurement legislation is to promote competition, not to undermine planning policy. Recital 6 states that the directive should not undermine policies towards sustainable development. The aim is to treat all market participants fairly and equally, where they compete for business '“ not to create a market where there is none. In other words, relations between public authorities and businesses that are not in the nature of purchasing something for money should not be covered.

According to this reading, section 106 planning agreements between local authorities and developers should not, in principle, be covered by procurement rules, as long as they stay within their lawful limits. Such agreements sometimes involve the undertaking by the developers that they will execute some works according to the instructions of the council. Following Auroux, they may well be covered by the public procurement directive. But the result would be absurd. A developer would have to offer out to tender a job probably in his own land, for which he himself should also be a bidder. But the content of section 106 agreements is not a business deal aimed at mutual profit. The aim is planning gain so that a planning permission may be granted where it would not have been granted before. The council does not aim to maximise its returns, but to serve planning policy. In entering an agreement it is exercising its regulatory function. It is not procuring works, services or goods.

Alternative solutions

There are ways in which the ECJ could restate the principle, short of overruling Auroux. It could interpret it in a way that protected urban regeneration projects from the unintended consequences of the procurement directive. Perhaps a good interpretive tack would be to say that whenever the developer owned such a proportion of the land that rendered competition with him 'unreasonable', there should be no tendering process.

Another possibility might be that any contribution by the developer in kind should not be included into the value of the contract. A more radical departure from Auroux would be to say that only works paid for by the authority would count. Or that only works eventually owned by a public entity (not necessarily the procuring authority) were to be covered. Others will think of other solutions. But a reconsideration seems necessary.

Will there be a reconsideration? There is a hopeful sign. The commission took a less maximalist view in June 2008, in the case of an urban development project in the city of Flensburg. In that case, the city sold a piece of land to a private developer for the construction of a building that would correspond to certain urban development needs. Yet the contract of sale did not contain a legally binding obligation for the developer to carry out any particular works. It only stipulated a right to purchase the land back, if the case building were not constructed. The commission closed the infringement case against Germany, stating that the contract did not contain a legally binding obligation on the developer.

Auroux is being tested in a number of cases now before the ECJ. One is Case C-536/07 Commission v Germany, which arises out of a commission complaint that the City of Cologne awarded a contract for the construction of four trade fair halls to a private company without conducting a competitive procedure. Advocate General Trstenjak delivered his opinion on 4 June this year, vindicating the commission and following the principle established by Auroux. He concluded that in determining if the agreement was a public works contract, the fact that the developer owned the land 'is not decisive'. He gave no sign of dissatisfaction with Auroux. Two more cases were announced on 8 October by the commission, one against the Netherlands (IP/09/1478) and one against Spain (IP/09/1469).

Perhaps the most promising case is Case C-451/08 Muller v Bundesanstalt fur Immobilienaufgaben, which is a preliminary reference from the Oberlandesgericht Düsseldorf. The facts are quite complex, but the German court took the opportunity to refer no less than nine questions, many of which invite a more general clarification of the Auroux decision. We should therefore follow closely the progress of this case, which should be decided in 2010. This judgment will largely determine the fate of the infringement proceedings in the City of York case. But it may be a long and anxious wait.