For many years, public bodies pursuing developments have grappled with the distinction between land transactions and public contracts and in particular whether regeneration projects could be pursued outside the public procurement regime.
On 26 August 2016 the High Court handed down its judgment in the case of R (Faraday Development Limited) v West Berkshire Council and St Modwen Developments Limited (2016), providing new domestic judicial thinking in the line of case law which stretches back to the O’Malley and Roanne cases. The case provides us with further support for the ability of a public body to undertake regeneration projects without complying with public procurement legislation.
Faraday Development Limited (Faraday) pursued judicial review proceedings and a procurement challenge under Part 6 of the Public Contracts Regulations 2015 (PCR2015) in relation to a development agreement entered into by West Berkshire Council (the Council) and St. Modwen Development Limited (SMD) which sought “to facilitate the comprehensive regeneration” of land in Newbury, Berkshire.
Faraday held interests in land within the area of the proposed regeneration site, and initially the Council entered into discussions with Faraday and its joint venture partner in relation to the proposed regeneration. Faraday secured planning for a mixed-use development. However, the Council ceased to negotiate with Faraday and instead undertook an advertised process outside the public procurement regime. Over three stages there was a successive reduction in the number of bidders and by the third and final stage these were reduced to three, which included Faraday and SMD.
Following consideration of the bids, the Council decided that SMD’s bid was most favourable and should be pursued, although the report to the Council’s Executive noted there was little difference between the SMD and Faraday bids. The report of the Council’s engaged expert noted that Faraday’s bid was based on a higher density solution, which represented a riskier proposal for the Council, and noted SMD’s “national reputation for delivering long term complex redevelopment projects”, each of which were seen as suggesting that the Council should proceed with SMD.
The development agreement between the Council and SMD included an initial obligation on SMD to prepare certain project plans and strategies, a business plan and a master plan, all of which would be subject to approval by a Steering Group made up of representatives of both parties. SMD were also required to assemble the necessary land interests required to deliver the various plans and strategies.
After completion of the initial phase of work, which required some significant input from SMD on the design and structuring of the project, SMD were required to prepare a budget for infrastructure costs and apply for outline planning permission. Subsequently SMD would prepare a development strategy and plot appraisal for each plot and, after being approved by the Steering Group, SMD would use all reasonable endeavours to obtain full planning permission. SMD had an option to acquire plots for redevelopment, but was not under an obligation to acquire. SMD were obliged to pursue and complete redevelopment of the relevant plot if it exercised its right to acquire.
In its judgment the Court set out the key features of the development agreement that were relevant to the case and these included:
- SMD was responsible for proposing the content of the plans and strategy documents, an approach which was consistent with the Council’s decision to call upon external expertise and experience;
- The indicative business plan appended to the development agreement provided only a framework for the items to be contained in a more comprehensive plan, which again would be produced by SMD – the plan was indicative only and contained no real detail concerning the development, and in particular contained no specification;
- Proposal documents prepared by SMD were subject to unanimous approval, and a failure to reach agreement would result in referral to the dispute resolution procedure that included consideration by an independent expert;
- SMD were responsible for determining the content of planning applications;
- The various plans and strategies developed by SMD had to be consistent with market conditions prevailing at the relevant time and the objectives of the project, which included the maximisation of returns for the Council;
- SMD had a choice, not a legal obligation, as to whether they exercised their option to acquire a ground lease, although it was recognised that SMD had a commercial incentive to acquire an interest and develop the plots given the considerable investment made to the project; and
- The Council retained its ability to receive the existing levels of ground rents as well as potential increased returns following redevelopment.
High Court judgment
The Court dismissed the claim on all three grounds pursued by Faraday, in particular that:
The Council did not fail in its duties to achieve best consideration reasonably obtainable on disposal of an interest in land under Section 123 of the Local Government Act 1972, despite the lack of firm financial information concerning the returns which might be realised
The Court held that in seeking to achieve the best possible returns in relation to its land interests, the Council had clearly had in mind achieving the best consideration reasonably obtainable. The Court further held that there was no obligation for the Council to probe the financial elements of the bids beyond what had been submitted given the future uncertainties.
The Council’s position was assisted by the references to its statutory duty, the context in which the project was pursued (maximising its returns), the exclusion of employment generation benefits from the consideration received on disposal and the engagement of experts to provide advice on protecting its position and maximising its returns.
The development agreement was not a “public contract” that was subject to public procurement legislation
In accordance with the well-established case law in this area, the Court restated that a project is within the scope of public procurement legislation only if its main object falls under the definition of a “public contract”. The initial scoping and planning work did not constitute the main object of the development agreement. Instead, the Court found that the main object of the development agreement was “to facilitate the comprehensive regeneration” and improve the Council’s financial returns.
Faraday had argued that anti-avoidance provisions should be implied into the legislation, but the Court rejected Faraday’s assertions that an indirect obligation following an unfettered option to acquire land was sufficient to bring the project within the scope of public procurement legislation.
The Council acted lawfully and was not irrational in operating outside the scope of public procurement legislation, and it did not act in an arbitrary manner in doing so
The Court supported the Council’s approach given the uncertainty and the desire to stimulate market interest in the opportunity. The Council had acted lawfully and rationally in accepting the advice it had received and in relying on the commercial incentives present as a result of the development agreement and as a result of the expertise and experience of SMD.
The judgment correctly recognised that one of the key purposes of the public procurement legislation was to ensure competition of opportunity. The judge commented, perhaps fairly, that the market was generally appreciative of the Council’s decision not to follow a regulated process. As somebody with more than a keen interest in procurement, I would always advocate the advantages of a well-organised, planned and resourced procurement, although I appreciate that many still see procurement as a barrier rather than a tool that can help deliver better outcomes and achieve value for money.
For those considering whether a project has to be procured in accordance with public procurement legislation, the Court provided useful guidance as to whether a project is governed by the legislation, and in particular set out some questions in relation to any such project:
- What is the main object of the agreement, having due regard to the project as a whole and any essential obligations?
- Does the main object fall within the scope of the definition of a “public contract”?
- If the main object is outside the scope of a public contract, the project falls outside the scope of public procurement legislation.
- If the main object is within the scope of a public contract, does the agreement place any legally enforceable obligation to carry out the main object?
- If the agreement does not place any legally enforceable obligation to carry out the main object, the project falls outside the scope of public procurement legislation.
- If the agreement does place a legally enforceable obligation to carry out the main object, the project may fall within scope of public procurement legislation, depending on the application of the general criteria such as threshold values and exclusions from the regulations.
Although this guidance is helpful, any public body will need to ensure that it is objective in considering the main object of a project. A public body will not always have the same interests or intentions as those of the Council in this case, and it will be vital that the project as a whole, including the essential obligations placed on a development partner, are fed into the public body’s deliberations.
As a general point, it is interesting to note that the Court found there was no support for implying a general anti-avoidance provision into the PCR2015.
Finally, the Court held that it was rational for a public body to proceed outside public procurement legislation, and in this instance the Council did not act in an arbitrary manner in doing so.
It should also be remembered that although a regulated process under public procurement legislation was not followed, the Council did openly advertise the opportunity (in this including case through Property Week and the Estates Gazette) and undertook an open and transparent process which considered which of the bids received was most likely to achieve the Council’s outcome. The importance of good governance and the adoption of clear, robust and aligned policies and practices proved useful in demonstrating that the Council had acted rationally and lawfully. The judgment outlined the internal reporting process and pointed to the engagement of experts to provide advice that was taken into account by the Council’s Executive. Although this is nothing new to many public bodies, it does emphasise the importance of good governance, transparency, and audit trail.
In this case the Council published a voluntary ex ante transparency notice, setting out why it did not believe the development agreement was subject to public procurement legislation. This would certainly be an advisable step for any public body seeking to enter into this kind of arrangement. Doing so flushes out any potential challenger, as well as potentially removing the risk associated with a development agreement being set-aside if a declaration of ineffectiveness is granted. Although a notice which is not based on a justification made in good faith would not offer the protection against set-aside risk, this case supports a public body being able to rely on a justification that a regeneration project is outside the scope of public procurement legislation because the main object of the agreement is neither the execution (with or without design) or a work, nor the realisation of a work by whatever means.
Of course, this was only a High Court decision and an application for permission to appeal is pending before the Court of Appeal, so the legal position outlined in this case cannot be relied upon with any great certainty. Public bodies would be advisable to continue to tread with care in this area, although this latest position, particularly in a post-Brexit environment, suggests that land deal based projects may not always be subject to public procurement legislation.