The High Court has dismissed best consideration and procurement claims against a local authority development agreement. Deborah Ramshaw explains why.
In Faraday Development Limited v West Berkshire Council  EWHC 2166 (Admin) the High Court dismissed a claim for judicial review of West Berkshire Council’s decision to enter into a development agreement with St Modwen Developments. The claimant, Faraday Development Limited, sought to argue that the council had failed to take proper account of its duties under best consideration and had also acted unlawfully by not advertising the agreement using an OJEU-compliant tender process.
In a careful and well-reasoned decision, the Court found in favour of the council on all points. The decision is to be particularly welcomed as providing detailed guidance in a UK-specific development context for local authorities and developers on how development agreements can be structured without requiring an OJEU tender process or running into choppy waters on best consideration.
Bond Dickinson acted for the council on the negotiation of the development agreement and in successfully defending the claim.
The development agreement is for the regeneration and redevelopment of an area in Newbury known as the London Road Industrial Estate (the LRIE). The council has a significant freehold land interest in the LRIE, which represents one of its last major assets. In 2011 a decision was made to regenerate and redevelop the LRIE. Between 2011 and 2015 the council devoted considerable time and resources to achieving this aim, engaging experts (Strutt & Parker) to conduct a rigorous bidding process. As a result, St Modwen was appointed as the council’s development partner, and in September 2015 the council entered into a development agreement with St Modwen (the DA) with an estimated value of £125m.
Faraday has substantial property and commercial interests in the LRIE and were joint venture partners in Wilson Bowden Developments’ unsuccessful bid to be the council’s development partner for the LRIE. In November 2015 FDL issued claims that (a) the council failed to have regard to its duty under s.123 of the Local Government Act 1972 to obtain the best value that can reasonably be obtained for the disposal of its land interests; and (b) that the DA was a “public contract” such that the council’s failure to run a tender process under the Public Contracts Regulation 2015 was unlawful.
The Court’s conclusions
On 26 August 2016 the Court found in favour of the council on all points, describing arguments run against the council as “wholly fallacious” and “speculative … at best”.
In relation to the best consideration limb, the Court considered the entire process undertaken by the council. This had involved selecting Strutt & Parker to advise on the most appropriate way of redeveloping the LRIE; their production of a number of documents to be supplied to bidders on which bids were to be based; a long- and short-listing process; two rounds of interviews with short-listed bidders; and the issue of written follow-up questions to the three finalists. The council ultimately selected St Modwen as its development partner in accordance with Strutt & Parker’s final recommendation.
The Court found that it was clear that the council intended to achieve twin objectives by carrying out the redevelopment, namely securing regeneration of the LRIE and obtaining an improved financial return. Faraday argued that regeneration of itself was an irrelevant consideration which the council should not have taken into account, and that improving its financial return did not equate to obtaining the best consideration reasonably obtainable.
However, the Court found that the council had plainly had in mind its duty under s123 to obtain the best consideration reasonably obtainable for the disposal of its land interests in the LRIE. This was clear from the evident desire of the council to maximise its returns, despite there being few explicit references to the s123 duty in the documentation.
Nor did the Court agree that regeneration was an irrelevant consideration. Of particular interest in this respect was the importance it placed on the scale and long term nature of the regeneration project when evaluating whether best consideration had been achieved. The ability of the potential development partners to deliver regeneration on such a challenging and complex site was “directly relevant, indeed critical, to the satisfaction of the obligation under s123(2)”, and in such circumstances, the council was “entitled to focus on its assessment of the experience and expertise of the developers bidding in order to form a view as to how those uncertainties could best be addressed.”
Faraday also complained that the council had failed to seek further information from bidders, given that it had been advised by Strutt & Parker that there was insufficient financial information to choose between Faraday and St Modwen’s bids. The Court found that this was an “unjustifiable gloss” on Strutt & Parker’s advice. When viewed as a whole the regeneration project would be a long term exercise, be subject to a number of uncertainties such as development costs and future market conditions and the bids were necessarily based only on reasonable estimates. This was therefore not a case where further financial information ought to be, or even could be, sought or obtained from the bidders. In any event, Strutt & Parker had already probed the offers by way of the written follow-up questions.
The council did not tender the DA as it believed that it fell outside the scope of the Public Contracts Regulations 2015 (PCR15): the parties agreed that the Public Contracts Regulations 2006 were in force at the relevant time but it was agreed by all parties that it would be convenient for the reasoning in the judgment to be expressed by reference to the PCR15. Although the main object of the DA was the execution of works to facilitate the regeneration of the LRIE, there was no legally enforceable obligation on St Modwen in the DA to carry out any works. It was not in dispute that the DA contained certain obligations on St Modwen in respect of design, for example master planning services, obtaining planning approvals and negotiating for outstanding land interests. In the council’s view, that was not enough for a public contract to arise.
Faraday raised a number of bases on which the DA was caught by the PCR15. Faraday’s main argument was that the services obligations provided the ‘legally binding obligation’ element required for a ‘public works contract’ under the PCR15. Faraday’s fall-back argument was that the development agreement was itself a ‘public services contract’.
The Court helpfully suggested a step-by-step approach to tackling the various aspects of the legal test for a public works/services contract (para 174 of the judgment). The Court’s starting point was whether the ‘main object’ of the contract was a public works contract or public services contract (as opposed to an agreement not caught by the PCR15, e.g. a land transfer). Only if the answer to that question was ‘yes’ should the analysis move on to whether the contractor was under a legally binding obligation to carry out those works/services.
Legal Test for Determining Whether the Contract Falls Under the Public Procurement Regime
The Court set out the test as follows:
(1) What is the main object of the contract having regard to (a) the transaction as a whole and (b) any obligations which are essential to the transaction?
(2) Does that main object correspond to the definition of one of the three types of public contract?
(3) If the answer to (2) is “yes”, is the contractor under an enforceable legal obligation to carry out that main object (eg works) which is legally enforceable by the contracting authority? (The Court referenced both the Müller case and the Midlands Co-operative cases in this respect).
(4) If the answer to (3) is “no” then the contract falls outside the scope of the public procurement legislation. If the answer to (3) is “yes” then then contract may fall within the scope of that legislation subject to applying other criteria (eg the definition of “public contracts”, the threshold values and the exclusions from the procurement regime.
The Court held that by approaching the issues in this order, the error of pre-determining the object of a transaction by beginning with and simply focussing on the obligations in the contract is avoided.
The Court rejected Faraday’s argument that the main object was the ‘execution of works’. Faraday’s claim on this point rested on what can be categorised as an ‘indirect obligation’ to carry out works. Faraday argued that the obligation on St Modwen to carry out certain services, which then led to an option for St Modwen to take a freehold or ground lease of land containing an obligation to redevelop that land, was sufficient to qualify as an indirect obligation to carry out public works. The Court dismissed Faraday’s arguments that this approach was justified on an anti-avoidance principle directed at artificial measures. The Court noted that Faraday had not produced any evidence to show that the relevant provisions in the DA were aimed at avoidance and served no ‘proper commercial purpose’. Indeed Faraday had engaged in the tender process (with its development partner) in full knowledge of the procurement process being followed.
The Court also held that the main object of the DA was not the ‘provision of services’, it being plain that the provision of those services was not an end in itself. As the Court put it, the services that St Modwen had to provide under the DA were “intended to facilitate the regeneration or redevelopment of the LRIE so as to maximise WBDC’s financial receipts in accordance with the objectives [in the DA]. The achievement of that regeneration or redevelopment is undoubtedly a main object of the DA, notwithstanding that the Council decided to achieve it by reliance upon the non-binding assurance provided by SMDL’s proven experience, expertise and commercial commitment to bring it about, rather than a legal obligation.”
The Court summarised the status of the Council’s DA under the public procurement rules as “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 [related to design services and land assembly] do not represent a main purpose in themselves, but simply facilitate the Council’s regeneration and financial objectives…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”.
Practical points for local authorities
The judgment provides useful guidance to local authorities and developers as to factors that can, and cannot, be taken into account when considering whether best consideration has been achieved. Most importantly, the Court found that the council was right to have taken regeneration, and each developer’s ability to deliver an appropriate regeneration scheme, into account.
The judgment is also good news for local authorities and developers in that it reaffirms the fact that authorities can be found to have complied with s123 even in the absence of specific references to the statutory provision in all of the relevant documentation. Nevertheless, to avoid any uncertainty, parties involved in the purchase or disposal of local authority land would be wise to ensure that the duty is explicitly addressed, which should reduce the likelihood of a challenge being mounted in the first place.
The council’s decision to appoint experts to advise throughout the process was plainly a sensible one, given that Strutt and Parker’s appointment was a key element in Holgate J’s conclusion that the council had acted in accordance with s123. Other local authorities should likewise consider whether they have the requisite knowledge or expertise to be comfortable that the process by which they propose to dispose of land will be s123 compliant; if not they may wish to consider appointing experts early on in the process, as West Berkshire did in this case.
Finally, both local authorities and developers would do well to provide training to relevant individuals in order to remind them of the s123 duty, thereby ensuring that the duty is at the forefront of the minds of anyone likely to be involved in the purchase or disposal of local authority land.
This decision highlights the possibilities that exist for local authorities and developers to cooperate on the regeneration of a site without requiring a public tender process. Local authorities will no doubt welcome the Court’s confirmation that structuring a development agreement so that the developer has the option of not going ahead with the redevelopment is not to be regarded as an artificial or improper device for avoiding the PCR15. The Court’s decision makes clear that the key to procurement compliance is careful drafting of the development agreement to avoid any public procurement triggers. It also underlines the importance of the ensuring that the drafting of the development agreement aligns to the authority’s objectives for the project and the commercial drivers (and risks) for the contractor in taking on the development.