Developer warns council of legal action after termination of £150m redevelopment

A developer has threatened judicial review proceedings against Winchester City Council over its decision to terminate the development agreement for a £150m redevelopment.

The local authority has been seeking since the 1990s to redevelop the city's Silver Hill area, which covers 2.3 hectares and includes the bus station, a medical centre, a shopping area and a car park.

At a meeting on 10 February this year the Cabinet at Winchester decided:

• To serve notice of termination of the Silver Hill Development Agreement (dated 22 December 2004) on the developer on the grounds that the unconditional date and the date for start of works as defined in the Development Agreement had not occurred by 1 June 2015.
• That no further action be taken to implement the compulsory purchase order (CPO).
• That a decision on whether or not to retain the freehold and leasehold interests within the Silver Hill area which were acquired by the council in January 2014, together with the budget and estate management implications, be considered at a special Cabinet meeting (scheduled for 4pm on Tuesday 29 March 2016), and subject to consideration of a business case, with a preference that the properties be retained by the council.
• That a report be brought to the special Cabinet meeting setting out in outline how development might be brought forward on the Silver Hill site in the light of termination of the Development Agreement.
• That an update report on the possible acquisition of the St. Clements Surgery and construction of a replacement surgery on Upper Brook Street Car Park be considered at a special Cabinet meeting.

But City law firm Hogan Lovells has since sent a pre-action protocol letter on behalf of the developer, Silverhill Winchester No 1 (SW1), arguing that the council's discretion to terminate had been exercised unlawfully and warning of a potential judicial review challenge.

In the letter, which can be viewed here, the developer claimed that while it did not dispute that the council had a contractual right to terminate the Development Agreement, it did not accept the council’s assertion that the right to terminate had arisen because of the developer’s alleged failure to satisfy the works commencement date by a particular date.

Hogan Lovells also said that the council’s decision to terminate the Development Agreement before the outcome of the ‘Gottlieb Proceedings’ were known was unlawful because it was “unreasonable, irrational and a disproportionate interference in SW1’s enjoyment of its possessions as protected by Article 1 of the First Protocol to the European Convention on Human Rights".

In the ‘Gottlieb Proceedings’, SW1 is appealing Mrs Justice Lang's ruling in the High Court in February 2015 in favour of Kim Gottlieb, a Winchester councillor opposed to the Silver Hill scheme, that the authority’s decision in 2014 to adopt an updated scheme for the redevelopment without conducting a procurement exercise was unlawful. This appeal had a “real prospect of being successful”, the Hogan Lovells letter insisted.

The law firm added that the termination amounted to “foreclosing prematurely any possibility of pursuing the development” in circumstances where:

(a) [its] client was (as the council was "well aware") vigorously pursuing appeal proceedings (the Gottlieb Appeal) that, if successful, would allow it to proceed with the 2014 Scheme;

(b) the outcome of those proceedings would be known in a relatively short space of time; and

(c) the council had already (“rightly”) continued to work with SW1 on the development since the Gottlieb JR was decided and the Gottlieb Appeal launched, and SW1 had accordingly continued to invest in pursuing the scheme.

Hogan Lovells said that although SW1 and the council had agreed to revert to the 2009 scheme, the Gottlieb judicial review had made it temporarily impossible for SW1 to enter into a binding agreement with a funding partner and therefore satisfy a funding condition.

The letter added that SW1 found the council’s termination “extraordinary in light of the significant time (more than ten years) and public monies that have been invested in this project, as well as the thousands of man hours and many millions of pounds” the developer had invested.

In its response to Hogan Lovells, which was sent last week (3 March) and can be viewed here (in the attachment to item 8), the council said it did not accept the proposed grounds of challenge and would contest the claim.

Amongst other things the council said it did not accept that the exercise of its contractual discretion under the Development Agreement to issue a termination notice was amenable to judicial review.

It added that "none of the claimant's points (either individually or collectively) begin to demonstrate that the decision was unlawful in the public law sense".

In her February 2015 ruling Mrs Justice Lang agreed with Cllr Gottlieb that variations in 2014 to the 2004 development agreement – when taken as a whole – had resulted in a contract that was materially different in character and should have been subject to procurement. She therefore quashed Winchester’s decisions to authorise the variations.

In the aftermath of the judgment Winchester’s then Leader, Cllr Robert Humby, resigned and the city council appointed Claer Lloyd-Jones, a senior local government lawyer, to investigate how it came to lose the judicial review, despite receiving legal advice that it could make the changes required by the developers.

Lloyd-Jones’ report, which can be downloaded here, concluded that the truth was “more complicated than simply losing a case”, and that 13 factors had combined to create a general risk of losing the judicial review.

These factors, which created “a perfect storm”, included the speedy development of European law of public procurement “such that a procurement exercise is always required for a public works contract”, the variations to a development agreement possibly triggering a requirement for a further procurement, due to cases decided since the making of the Development Agreement in 2004, and the 2004 agreement not being subject to competition. Lloyd-Jones said it was now settled law that the Development Agreement should have been tendered.

In her report she noted the very slow pace of the Silver Hill development and changes to market circumstances. Lloyd-Jones also highlighted a change in QCs advising on the scheme. One had warned in 2010 that the absence of a procurement in 2004 might make it harder to rely upon the contract change mechanisms contained in the original development agreement. The second QC, however, “did not seem to think that EU procurement law was as relevant to the variations as the variations clause”, the report said.

Lloyd-Jones went on to cite political leadership uncertainties – there had been 10 leaders of the council since the inception of the project – and that these had cast a particular burden on senior officers. Assurance systems such as risk management were “either in their infancy or non-existent”.

The fact that Winchester was a member-led authority requiring all decisions to be made at member level was another difficulty that acted against clear and speedy decision-making on the Silver Hill project, she said.

Further issues identified by Lloyd-Jones included an absence of internal challenge and debate on Silver Hill, both among members and officers. This included a lack of challenge from Overview and Scrutiny. The report also noted how Cllr Gottlieb had the necessary funds and strength of mind to judicially review his own authority.

In summary, Lloyd-Jones, the council had “failed to provide itself with adequate assurance systems in order to make safe and legally correct decisions”.

The report made a series of recommendations. These included the council standing back and asking the question ‘do we want this?’ as the development as now proposed had significantly departed from a 2003 planning brief. The council must also “express a definite idea of what it wants developed at Silver Hill”, Lloyd-Jones said.

She also called for a governance review to be conducted to create a new constitution and ways of working for the new council from May 2016.

“Many of those findings and recommendations are directed towards councillors having sufficient assurance mechanisms in place to give them confidence in their work, to make their decision-making safe, and to make them as free from successful challenge as possible,” Lloyd-Jones said.