Category: Public procurement

Section 106 Agreements & Public Procurement

Faraday v West Berkshire Council (Court of Appeal, 14 November 2018) is essential reading for those advising on development agreements between local authorities and developers: the fact that the developer has the benefit of an option as to whether to take an interest in the relevant land and carry out the development does not prevent the agreement from being treated as a public works contract. Quite a reversal from Holgate J at first instance.

For planners and planning lawyers advising on section 106 agreements, the case is more reassuring than for those struggling with development agreements. The Court of Appeal considered that the position in relation to development agreements was to be distinguished with that in relation to section 106 agreement. It expressed the position more firmly than the High Court had previously needed to in Midlands Co-Operative Society Ltd, R (on the application of) v Birmingham City Council and Tesco Stores Limited (Hickinbottom J, 16 March 2012).

The Midlands Co-Operative case concerned a deal reached between Birmingham City Council and Tesco for the redevelopment of land in Stirchley owned by the council on which there was an indoor bowls and community centre. Part of the arrangements between the council and Tesco included a section 106 agreement to provide and fit-out a replacement community centre and indoor bowls facility. The decisions to enter into a contract to sell the site and to use CPO powers to assist with assembly of the remainder of the development site were challenged by a competing developer, the Co-op, which asserted that the arrangements amounted to a public works contract and that that public procurement requirements had been breached.

Hickinbottom J rejected the challenge, on the basis that whilst the council had exchanged contracts to sell the land to Tesco there was no legally enforceable obligation on Tesco to carry out the works unless it chose to proceed. Whether it proceeded with the scheme was at its discretion.

“For those reasons, I do not consider that Tesco is now under any legally enforceable obligation to perform any relevant works that mean that the arrangements between it and the Council or any of them (including the contract for the sale of the Community Facility) fall within the scope of “public works contract” for the purposes of the 2006 Regulations; and, hence, the procurement provisions of those Regulations do not apply.

If there had been legally enforceable obligations to perform works, at least the three further potential issues would have arisen, namely (i) whether those obligations were mere planning obligations that would not invoke the provisions of the 2006 Regulations, (ii) whether the 2006 Regulations would not apply, because the main purpose of the arrangement was not the procurement of works, and (iii) whether the 2006 Regulations only give rise to private rights, such that a public law claim based upon them is inappropriate. In the light of my finding that the arrangement involved no legally enforceable obligation to perform works, those issues do not arise in this case; and it is unnecessary for me to consider them further.”

The Court of Appeal in Faraday rejected the notion that if the developer is not under a legally enforceable obligation there cannot be a public works contract. In the lead judgment, Lindblom LJ set out the court’s reasoning as follows:

“The touchstone, then, is whether, in substance, the agreement in question, at the date it is concluded, provides for a relevant procurement.

In this case, judged by that test, the development agreement clearly did provide, at the date it was entered into, for a procurement by the council of the development it was intended to deliver. At that date, no further act of procurement by the council remained to be done, for which a lawful public procurement procedure could later be conducted. The time for that had passed. When it entered into the development agreement, the council had nothing more to do to ensure that a “public works contract” would come into being. It had, in fact, done all that it needed to do to procure. It had committed itself contractually, without any further steps being required of it, to a transaction that will fully satisfy the requirements of a “public works contract”. It had committed itself to procuring the development from St Modwen. The development agreement constitutes a procurement in its result, and a procurement without a lawful procurement procedure under the 2004 Directive and the 2006 regulations. The procurement crystallizes when St Modwen draws down the land. The ground lease entered into by St Modwen will contain an unqualified obligation to carry out works, and a corresponding obligation will also be brought into effect in the development agreement itself. The development agreement made that commitment on the part of the council final and provided also for a reciprocal commitment on the part of St Modwen. It did so without a public procurement process, and without affording any opportunity for such a process to be gone through before the “public works contract” materializes. At that stage it would be too late. Thus a “public works contract” will have come into being without a lawful procurement process. The regulation of the council’s actions in procuring the development will have been frustrated.

By entering into the development agreement, therefore, the council effectively agreed to act unlawfully in the future. In effect, it committed itself to acting in breach of the legislative regime for procurement. As Mr Giffin submitted, that is in itself unlawful, whether as an actual or anticipatory breach of the requirements for lawful procurement under the 2004 Directive and the 2006 regulations, or simply as public law illegality, or both. The only other possibility would be that a contracting authority is at liberty to construct a sequence of arrangements in a transaction such as this, whose combined effect is to constitute a “public works contract”, without ever having to follow a public procurement procedure. That would defeat the operation of the legislative regime.”

Whilst it was not necessary to deal with the point for the determination of this case, Lindblom LJ was careful not to suggest that this meant that the section 106 agreement in the Midlands Co-Operative case would on his reasoning have amounted to a public works contract:

“The section 106 planning obligation was […] a very different kind of agreement. It had a distinct status and role in the statutory planning scheme. Its purpose was to regulate the development of land for which the local planning authority was granting planning permission. By its terms the developer, and its successors in title, would not be able lawfully to proceed with the development for which planning permission was granted, and in particular would not be able to demolish the existing community facilities on the development site, until it had constructed replacement facilities. The section 106 agreement did not oblige the developer to proceed with the development. But in any case it was not the kind of transaction that is governed by the public procurement regime. By its very nature, it was not a “public works contract”. Its essential object – and its necessary justification in the interests of the proper planning of the local planning authority’s area – was to ensure that the community facilities would be replaced if the planning permission were implemented. Otherwise, the proposed development itself would not have been acceptable, and planning permission should not have been granted for it. As Hickinbottom J. said (in paragraph 116 of his judgment), “the council’s primary objective was of a planning nature – to develop the Site – rather than having performed the works involved in replacing the community facility”. In this case, by contrast, when it entered into the development agreement, the council was not exercising any of the functions of a local planning authority under the statutory planning scheme. It was entering into a contract whose essential object was the execution of the works for which it provided. It therefore fell within the scope of the public procurement regime.”

That is an important paragraph, because if obligations on developers in section 106 agreements to carry out works were to trigger public procurement requirements, the whole practice of using planning obligations to achieve acceptable development would rapidly have come to a halt. Instead, we have clarity that there is not a problem.

Good news. And also good news that as a planning lawyer I may not now need to focus so much on the Public Procurement (Amendment etc.) (EU Exit) Regulations 2019 – laid before Parliament on 13 December 2018 and prepared with the objective of continuing the current public procurement regime post Brexit.

Simon Ricketts, 12 January 2019

Personal views, et cetera

PS Some chat about the lawyers involved in these cases:

Leading counsel for the unsuccessful claimant in Midlands Co-Operative was David Holgate QC, as he was back in 2012 – and the position as a judge he later took at first instance in Faraday was very much in line with the approach that Hickinbottom J had taken in Midlands Co-Operative in the face of Holgate’s submissions – no legally binding obligation on the part of the developer, therefore no public works contract.

Junior counsel for the city council in Midlands Co-Operative was a very young Charlie Banner, who deservedly becomes Charles Banner QC on 11 March 2019. He was led in Midlands Co-Operative by David Elvin QC, whilst in Faraday Banner would appear for the claimant (and at first instance was given some of the treatment from Holgate that in Midlands Co-Operative Holgate had himself received from Hickinbottom) (with Elvin appearing on the other side for the defendant council).

Photograph via Sothebys

Some Blog Post Postscripts

I’m conscious that these posts (this is the 149th) sometimes don’t age well – they try to capture a point in time and I don’t go back to change them unless I’ve got something really wrong or, worse still, there’s a misplaced apostrophe (they’re written on an ipad, on a train or at the kitchen table, as fast as my two fingers can move, so bear with).

So I thought I’d take the opportunity to note a few post-post updates…

CIL

Since my 15 December 2018 CIL Life post, the claimant in Giordano has applied to the Court of Appeal for permission to appeal, having been refused it by Lang J. Will 2019 see the Court of Appeal grapple for the first time with the joys of CIL liability?

Since my 9 November 2018 An Update On CIL: Reform Promised, Meanwhile Continuing & Increasingly Expensive Uncertainties post the Government published Reforming developer contributions: technical consultation on draft regulations (20 December 2018). The purpose of the consultation is to “ensure that the draft regulations deliver the intended policy changes and do not give rise to unforeseen consequences.” The consultation runs until 31 January 2019. Supporting guidance will accompany the final regulations.

As well as delivering on the proposals announced in October 2018 (I assume – I haven’t yet worked through some of the algebraic amendments), the draft regulations exempt starter homes from the levy, where the dwelling is sold to individuals whose total household income is no more than £80,000 (£90,000 in central London). The draft regulations also make a number of other clarifications to address various glitches.

The Trinity One litigation

My 8 September 2018 What If? The Trinity One Case post commented on a situation where a developer had sought to resist a claim for an affordable housing commuted payment on the ground that the basis for calculating the payment, the Total Cost Indicator figures previously published by the Housing Corporation, had ceased to exist. I mentioned that the position could change as a result of separate litigation underway in relation to the developer’s attempt to reduce its section 106 liability by way of the section 106BA/BC procedure.

Well, the position did indeed then change as a result of R (City of York Council) v Secretary of State (Kerr J, 22 October 2018). The case is of little general interest now given that it concerns the mechanism whereby developers could apply for modification or discharge of affordable housing obligations in a section 106 agreement on the basis that modification or discharge was required to achieve an economically viable development, which mechanism was brought to an end on 30 April 2016. But it will have been immense interest to the parties. Kerr J accepted Trinity One’s position that (1) its appeal against refusal of its section 106BA application was not out of time because it was sufficient for the application to have been made by 30 April 2016 and (2) the application could be made even after the development had been completed.

Land value capture

My 31 August 2018 Market Value Minus Hope Value = ? post was written whilst the House of Commons Communities and Local Government Select Committee was taking evidence in relation to its land value capture inquiry. The committee reported on 13 September 2018 and the Government’s response was published on 29 November 2018.

The Committee urged that the Government should consider appropriate mechanisms:

“Our view is that there is scope for central and local government to claim a
greater proportion of land value increases through reforms to existing taxes and charges, improvements to compulsory purchase powers, or through new mechanisms of land value capture.”

However, the response is a classic straight bat:

“The Government agrees that there is scope for central and local Government to claim a greater proportion of land value increases. The Government’s priority is delivery, in line with the Housing Minister’s commitments to provide more higher quality housing more quickly.


Changes to land value capture systems can have profound impacts on the land market in the short term, even where they are sensible for the longer term. Accordingly, the Government’s priority is to evolve the existing system of developer contributions to make them more transparent, efficient and accountable. It will of course continue to explore options for further reforms to better capture land value uplift, providing it can be assured that the short-run impact on land markets does not distract from delivering a better housing market.”

Raynsford Review

My 9 June 2018 Judicious Review post commented on the interim report published by the Raynsford Review. The final report was published on 19 November 2018.

Public procurement

Finally, a long time ago, in my 6 September 2016 section 123…Go! post, I commented on Holgate J’s ruling in Faraday. That judgment has now been overturned in R (Faraday Development Limited) v West Berkshire Council (Court of Appeal, 14 November 2018) – see the Landmark Chambers summary.

2019

Plenty happened in planning law in 2018, despite much political focus being away from domestic issues. What will 2019 bring? Feel free to subscribe to this blog to get one quick take a week on what seems interesting to me at least. (And, shameless plug, do subscribe as well to Town Legal’s weekly updates of planning law cases and/or of Planning Inspectorate appeal decision letters).

Here’s to another year.

Simon Ricketts, 28 December 2018

Personal views, et cetera

Section 123…Go!

Rightly, no-one ever believed section 1(1) of the Localism Act 2011: “A local authority has power to do anything that individuals generally may do”. Section 2 (“boundaries of the general power”) put paid to that. 
There are many good things which authorities might do, if they were allowed. In some circumstances, this would be to dispose of their interests in land at an undervalue, where this would unlock viable development, or would for example secure more affordable housing.  
In an excellent recent Property Law Journal article  Stephen Ashworth sets out the pitfalls of section 123 of the Local Government Act 1972, which prevents local authorities from disposing of land “for a consideration less than the best that can reasonably be obtained”. “Consideration” means financial consideration rather than any wider benefits that may be secured. There is an exemption from consent in cases where the undervalue is £2m or less and the purpose of the disposal would contribute to the promotion or improvement of economic, social or environmental well-being. Stephen rightly questions this:
“Critically the £2m limit is risible in the present market. It is the value of less than five London starter homes. It is often less than the difference between competing bids for land. At the very least it needs updating. In a devolutionary world, maybe, if a limit is necessary, it should be set locally, perhaps by mayors or local enterprise partnerships.”

It is certainly disappointing that the £2m cap hasn’t been increased, or that the Secretary of State has not set out any guidelines that encourage deals at an undervalue above the threshold which promote well-being, particularly in the form of increased delivery of housing, especially affordable housing. 

By coincidence, since the article was written, on 26 August 2016 Holgate J delivered judgment in R (Faraday Development Ltd.) v. West Berkshire Council & Anor  where he rejected a claim by a competing developer that West Berkshire’s development agreement with St Modwen in relation to the comprehensive regeneration of the London Road Industrial Estate in Newbury was in breach of section 123. Landmark Chambers’ summary  sets out the judge’s distillation of the principles to be applied in determining when a court should intervene in relation to the application of section 123. After a detailed examination of the deal that had been negotiated he rejected the section 123 challenge. It was common ground between the parties that if that ground of challenge failed, so too would the allegation fail that the deal amounted to unlawful state aid (ie a distortion of competition by favouring any party by virtue of the support provided by the Council to that party). 

The case is also interesting and useful for its detailed examination as to whether the arrangement between St Modwen and the Council was caught by public procurement requirements as a public works contract, in which case the Council would have breached its obligation to follow the formal public notification and competitive procedures laid down in the Public Contracts Regulations. After an analysis of the European case-law, the judge rejected this ground too:
“In my judgment the DA is a contract to facilitate regeneration by the carrying out of works of redevelopment and to maximise WBDC’s financial receipts, particularly rent, from the LRIE. The provision of services under clauses 4 to 7 and land assembly do not represent a main purpose in themselves, but simply facilitate the Council’s regeneration and financial objectives, the “twin objectives” with which WBDC’s process began (see paragraph 29 above). WBDC lawfully decided that the DA itself should not impose upon the developer an enforceable obligation to carry out the redevelopment. It is therefore not a “public works contract.”

 The case should give comfort to developers and authorities alike that the pitfalls of section 123 along with equivalent risks arising from EU state aid and public procurement legislation can be safely navigated. However, challenges on these grounds remain an ever-present threat, whether for instance the state aid complaint  that has been brought in relation to the London Borough of Hammersmith and Fulham’s arrangement with CapCo in relation to the Earls Court development and the successful challenge (Stephen Ashworth acting for the claimant…) of Winchester City Council’s revised development agreement with Thornfield for the now possibly defunct Silver Hill project in R (on the application of Gottlieb) v Winchester City Council (Lang J, 11 February 2015). 

The need for some common-sense over section 123 is illustrated by the interesting wrinkle in London in relation to section 123: it doesn’t apply to Transport for London, because it is not a “principal council” for the purposes of the section, even though Schedule 11 paragraph 29 of the Greater London Authority Act 1999 does require that when it engages in development, either directly or through a subsidiary, it must do so “as if it were a company engaged in a commercial enterprise”. So it can dispose of land at an undervalue (subject to avoiding state aid problems) but can’t take an equivalently enlightened position when developing in its own right or through a subsidiary! These complications will no doubt constrain how the London Mayor delivers on his promise of increased levels of affordable housing on Transport for London land, the subject of a 26 August 2016 EGi piece. 

It would of course be equally useful to see a lighter touch state aid and public procurement regime, but that relies on rather larger political cogs. 
A final note arising from Faraday:
Interesting to see that the case featured Landmark’s Batman and Robin, David Elvin QC and Charlie Banner, this time on opposing sides, with Robin being given a very hard time by Holgate J, if the judgment is anything to go by…


Batman and Robin in happier times. 

Simon Ricketts, 2.9.16
Personal views, et cetera