Squaring development deals with the procurement rules
Construction projects connected to a transfer of land may in some cases be subject to the public procurement rules. Here's an overview of issues that housing associations and local authorities should consider when structuring their development deals.
Up until a decade ago, it was generally assumed that public sector bodies could agree development deals involving a transfer of land without having to worry about the public procurement rules. In 2007, the pendulum swung the other way: the European Court of Justice concluded in the Roanne case that some development deals, or works carried out in accordance with those deals, could amount to public contracts, regardless of whether there was a land transfer. Accordingly, any relevant works undertaken that exceeded the public works contract threshold would need to be advertised in accordance with the procurement rules.
The judgment was a shock for the UK property market, and led to social landlords taking a more cautious approach to procuring development deals, though many development deal structures continued to fall outside of the procurement regime.
Since Roanne, the rules around when development deals are subject to procurement rules have been refined and clarified in the Helmut Müller and subsequent cases. In the 2016 West Berkshire case, the High Court of England and Wales upheld the European rulings and provided some useful guidance for UK public bodies as to when the procurement rules would apply, and identified some flexibility for authorities to structure development deals outside the procurement regime.
So when is a development deal a "public works contract"?
Most development deals are highly bespoke, and so it's difficult to apply a one-size-fitsall approach. Both judicial and government guidance agree that each deal needs to be assessed on a case-by-case basis, and that public bodies should avoid "off-the-shelf" solutions being applied to every deal.
The Public Contracts Regulations 2015 currently define a "public works contract" as "the realisation, by whatever means, of a work corresponding to the requirements specified by the contracting authority exercising a decisive influence over on the type or design of the work." The greater the control a client exercises over the works, the more likely it is to be a public works contract. For example, projects where the client requires the developer to construct a specific type of building or number of units, or to construct the works to the client's specification, are more likely to be covered by the procurement rules. Likewise, where the client has rights to inspect or certify the works as being complete, or to require the development to rectify defects, these are also likely to be public works contracts.
When considering whether a development deal is or isn't covered, the Courts will also look at the overall purpose of the development. If the land transaction is contingent on the developer constructing or procuring the construction of the works, or if the works are for the overall "benefit" of the contracting authority (whether financial or non-financial), then the works are more likely to be viewed as a public works contract. By contrast, works that are incidental to the development, or where the client doesn't exercise control over the works, are less likely to be covered.
With this in mind, it is possible for social landlords and developers to structure development deals which do not qualify as public works contracts. This usually involves the client reducing its influence over the type or design of the works, or agreeing that the land transaction is not accompanied by obligations to develop the site. The High Court has held that development deals where the developer has a contractual option to enter into the deal, and where any construction obligations are subject to the developer taking up that option, will not qualify as public works contracts.
Given the complexities involved, social landlords looking to enter into development deals should seek advice on the impact of the procurement rules as early as possible in the procurement process. A clear understanding of where procurement rules start and end (and the flexibilities that currently exist under UK case law) can be useful in helping structure development deals, ensuring that social landlords achieve their development objectives while remaining compliant with their legal obligations.
Likewise, developers who are tendering for public sector developments or looking for public sector partners to develop sites they own or control, should also take advice about the application of the procurement rules, in order to avoid having to implement riskmitigation strategies with their public sector partners further down the line.