OGC publishes guidance on the application of procurement rules to development agreements

The Office of Government Commerce (OGC) has published its long awaited preliminary guidance on the application of the public procurement rules to development agreements between public bodies and developers.

The guidance

The guidance follows a judgment given in 2007 by the European Court of Justice in the case of Auroux v Roanne (C-220/05) which concerned the application of the public procurement rules to a contract granted by the French municipal authority of Roanne to a semi-public body under national law without a competitive process. Following Auroux, there has been widespread concern about the application of the procurement rules to land development agreements.

The OGC’s guidance is not definitive and does not provide the certainty that industry has been calling for. The guidance is subject to further pronouncements from the European Commission on this issue, which are expected in late 2009 or early 2010.

Notably the guidance does not deal with the issue of when planning agreements under section 106 of the Town and Country Planning Act 1990 and agreements in connection with compulsory purchase powers are caught by the rules. These will be the subject of a further OGC paper “in due course”.

Summary

The guidance provides that a development agreement may be less likely to be caught by the rules if it meets some of the following characteristics:

• the proposed development (or a significant part) is to be undertaken at the initiative of the developer;
• the development agreement is ancillary or incidental to a transfer or lease of land or property from the authority to the developer, and is intended to protect the interests of a contracting authority which retains an interest in the land or property;
• the development agreement is based on proposals put forward by the developer, rather than requirements specified by the contracting authority, albeit that these proposals may be sought and the “winner” chosen by the authority;
• there is no pecuniary interest passing from the contracting authority to the developer as consideration for undertaking the development, either directly or indirectly;
• the development agreement does not include specific contractually enforceable obligations on the developer to realise a work or works (even if those works are the general intent of the parties).

Where the development agreement falls short of these characteristics it will be more likely to be caught by the rules.

It is clear that where a local authority has no control over a development and there is no consideration passing from the authority to the developer, the agreement is not caught by the rules.

What the guidance fails to fully address is the extent to which the rules apply to development agreements: (i) where the local authority imposes some contractual conditions on the developer (e.g. broad spec and delivery time frame); and (ii) where the development is partly for the local authority’s use and partly for exploitation by the developer but the public works element is inseparable from the overall agreement.

When a development agreement is caught by the rules

The procurement rules define a public works contract as a contract “for the carrying out of a work or works for the contracting authority or….to procure…the carrying out for the contracting authority of a work corresponding to specified requirements”.

Development agreements are agreements between local authorities and developers for the use or development of land. They typically concern either the development of a greenfield site or the regeneration of a brownfield site.

In determining whether a development agreement is a public works contract within the meaning of the rules, the OGC’s guidance sets out three key questions:

• Is there a work or works required or specified by a contracting authority?
• Is there an enforceable obligation (in writing) on a contractor to carry out that work or works?
• Is there some pecuniary interest for carrying out this work (not necessarily a cash payment)?

If the answer to all of these questions is yes, it is likely that the agreement will require to be advertised according to the rules.

Definition of “specified requirements”

In order to be caught by the rules, part of the development must be undertaken according to a contracting authority’s “specified requirement[s]”.

“Specified requirement” is broadly construed. In other words it is not necessary for the contracting authority to have produced a full and detailed technical specification setting out its requirements at the outset. However, the contracting authority must have decided what it wants and have set this out with sufficient clarity even if the specific means of achieving its objectives are to be decided at a later stage. In practical terms this means that a broad invitation to develop a site in accordance with applicable planning policies for the land in question (where the developer puts forward its own intentions, proposals and specifications) is unlikely to be caught. Similarly, the mere setting of broad parameters for a development will not in and of itself bring the development agreement within the application of the rules. A public works (or works concession) contract will only arise where there is a specific legally binding contractual obligation to undertake the works.

Works ancillary to transfers of land

Acquisitions or disposals of land or property, which are explicitly excluded from the scope of the public procurement rules, may become subject to public procurement rules if the lease or sale contains or is accompanied by a requirement to undertake a work or works as defined in the rules. In “mixed contracts” such as these the question will be whether the work is merely incidental or ancillary to the assignment of property. The OGC recommends a “conservative and purposive approach” to defining what is incidental. So, for example, the works are unlikely to be caught where the value of the works is small compared to the value of the sale and would not have been pursued if the land was not being sold.

All relevant agreements between the authority and developer will be taken into account, and so it is not possible to avoid the application of the procurement rules by hiving off the “works” contract (in line with the general approach that artificial arrangements cannot be used to circumvent the rules). The guidance goes on to consider the specific circumstances applicable to leases and building licences.

Mixed land ownership

It is clear that in the case of mixed land ownership (i.e. where the land is owned by both the authority and developer), the application of procurement rules will depend on the specifics of the proposed arrangement. In circumstances where part of the activity within an overall development is likely to have the characteristics of a public contract, the authority could consider competitively letting a separate contract or contacts for those parts, distinct from any development agreement for the rest of the development. The OGC has not provided any clear guidance on the applicability of the rules in circumstances where letting a separate contract for the public works element is either impractical or not feasible.