Many of our NHS clients are looking at innovative ways to seek investment in and development of their existing estate and facilities within limited budgetary constraints.  Some of the previously well-known solutions and structures for these arrangements have been called into question due to the recent “Faraday case”. We have been working with our clients to ensure that much needed solutions can still be found and delivered,  in consideration of some of the legal uncertainties that still remain.

If you are entering into leases, freehold sales or development agreements you need to be careful that these are not classed as “works contracts” under the procurement rules. Although land transactions are generally exempt from the rules, if they contain a binding obligation on the other party to carry out construction worksor enable the contracting authority to specify the required works they could still be caught by the rules and require you to carry out a procurement process or risk a procurement challenge.

The Facts

A recent appeal of the “Faraday case” looked at this issue.

  • West Berkshire Council awarded a Development Agreement without a compliant procurement process and was challenged for breaching the procurement rules.
  • The Council argued that there was no “works contract”, as the developer did not have any obligation to carry out the works. The Development Agreement contained an option for the developer to acquire a long lease. If it exercised this option, this would trigger obligations to build. If it chose not to exercise this option however it could simply “walk away”.
  • The Council lost on appeal. Although the Development Agreement was not a “works contract” (as it did not include an obligation on the developer to carry out works) it was still unlawful for the Council to enter into this Development Agreement. This was because the Council was committing itself to entering into a works contract if the option was exercised. Faraday sought to look at the “totality” of the transaction in its entirety.
  • The case also looked at the use of a voluntary notice (called a “VEAT”). This is published before award of a contract to protect against a claim of ineffectiveness. In this case it didn’t work as the VEAT did not explain that obligations to build would be triggered by the exercise of the option – it was not transparent enough and did not contain the information required to alert the market to the realities of the project

What to take away

This does not mean that all development agreements and land transactions will be subject to the procurement rules, but you do have to be careful:

  • The key question remains 's there an obligation to build?' If there is, this may be a “works contract”.
  • This is the case even if this is contingent on other things (such as planning or an option by the developer/purchaser). The fact the developer/purchaser they could “walk away” is not enough, if an obligation could apply at some point. There needs to be no legally enforceable obligations to build/construct.
  • A land transaction without any obligation to build may still be exempt. For example, a lease of land which can be developed but does not oblige the leaseholder to do so.
  • The transaction as a whole  needs to be looked at, not each agreement in isolation.
  • The structure of your deal needs to be justified. For example, there may be good commercial reasons to not include an obligation to build which should be clear in documentation. If however this is just to avoid procurement rules, this could be challenged.
  • The NHS needs to properly understand and be comfortable with the level of risks identified within these transactions, including the degree of control it may have over how the transaction may or may not develop.

How can Capsticks help?

Our Corporate and Commercial and Real Estate  teams are experts in Development Agreements, land transactions and procurement rules. We can help in structuring your transactions to meet your commercial needs and to ensure compliance with procurement rules and delivery of much needed improvements in your Estate.  Some doubt and uncertainties still remain following the “Faraday” decision. However, we have worked with leading Counsel and sought Opinions as to how best to structure these transactions so as to ensure that any remaining risks are minimised as much as is possible. Please get in touch with Jamie Cuffe or Tracy Giles if you want to discuss how we can help you.