When is a Development Agreement caught by procurement rules?26/11/18
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 works they could still be caught by the rules and require you to carry out a procurement process or risk a procurement challenge.
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.
- 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.
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 is there an obligation to build?' If there is, this is 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 could “walk away” is not enough, if an obligation could apply at some point.
- 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 however 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.
How can Capsticks help?
Our Housing and Regeneration team 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. Please get in touch with Chimi, Katrina or Lee if you want to discuss how we can help you.