Public Procurement: Lease or Public Works Contract. Where’s the dividing line?

Matthew Mo and Kyle Duggan look at the implications of a recent European Court procurement ruling on development agreements entered into by public bodies.

A recent judgment published by the Court of Justice of the European Union (“CJEU”) has provided some clarity on the contentious issue of when a lease agreement strays over the line and becomes a public works contract. By way of reminder agreements for the acquisition or rental of land are typically excluded from the public procurement regime governed by the Public Contracts Regulations 2015. However contracts for the execution of construction works entered into by contracting authorities are (subject to thresholds or other available exemptions) typically required to be put out to regulated, competitive tendering. A question that crops up very frequently is the extent to which a development agreement entered into by a public body is an excluded contract for the transfer of land or a regulated contract for public works.

A look at some of the features of the European case of Commission v Austria C-537/19 ECLI:EU:C:2021:319 highlight some of the issues that can occur in this context. The contract in question was one entered into by an Austrian contracting authority: Wiener Wohnen (“WW”) for the lease of an office building. At the time of entry into the lease the office building had not been built but the CJEU noted that in principle the exclusion relating to rental of land may cover the leasing of non-existent buildings. WW was able to specify certain requirements and features to be incorporated into the building including (non-exhaustively):

1. Taking up the option to have a bridge constructed between the two wings of the building;
2. Agreeing to lease additional floors of one of the wings which would only be constructed if the option was taken up.
3. Requiring the building to comply with energy performance requirements going beyond those imposed by Austrian legislation.

In addition WW appointed an external company to supervise the construction project.

Following investigation the European Commission determined that the lease was in fact a contract that had as its main object the completion of public works. Accordingly, it ought to have been put out to tender. The Commission brought proceedings. Having identified that in principle an agreement for lease of an office building fell outside the scope of public procurement obligations the CJEU confirmed that contracting authorities cannot rely on that exclusion where “the execution of the planned work constitutes a ‘public works contract’”. The important question the CJEU had to answer in this case was whether or not WW had “taken measures to define the characteristics of the work or, at the very least, has had a decisive influence on its design”. If it had then even though the agreement was called a lease it would be in reality a public works contract that should have been competitively tendered in a regulated procurement.

The CJEU gave some guidance on the meaning of the test identified above. In particular the test will be met where: “the specifications requested by the contracting authority exceed the usual requirements of a tenant in relation to a building such as the complex concerned”. In addition a decisive influence can be identified: “if it can be shown that that influence is exercised over the architectural structure of that building, such as its size, external walls and load-bearing walls. Stipulations concerning interior fittings may be regarded as demonstrating a decisive influence only if they are distinguished because of their specificity or scale.”

On the facts of this case the CJEU determined that the test was not met even though WW had specified “numerous and detailed” requirements. Taking the specific examples identified above: the bridge option and the option of constructing additional floors had been documented in plans drawn up by the building developer before WW had become involved so could not demonstrate sufficient decisive influence even though they would not have been built without WW taking them up. The requirements as to environmental performance did not go beyond those that might usually be specified by any tenant with a view to ensuring the longevity of the building given incremental increases in such obligations and, as such, were likewise insufficient to demonstrate that the decisive influence test was met. It is notable that the Court took a detailed look at what it considered to be normal practice in the landlord-tenant relationship in the context of assessing whether or not WW’s demands went beyond the norm. The supervisory role undertaken by the company appointed by WW was equally not sufficient to amount to a decisive influence over the design. The Court noted that this was by no means unusual in a project of this size and allowed for effective monitoring of deadlines and the identification and mitigation of delays well in advance.

It is worth noting that the case had the benefit of an advisory Advocate-General’s (“AG”) opinion. The AG’s view was that this arrangement was a public works contract and that WW’s involvement in the design had gone too far such that it was exerting a decisive influence. Whilst the Court ultimately disagreed this serves to highlight the very complex and nuanced nature of these issues.

There are some key points for contracting authorities to take from this judgment including re-assurance that lease arrangements that involve some measure of specifying internal fittings do not trigger public procurement obligations. However, it is sensible to exercise a high degree of caution if specifying requirements as to a building’s structure.

One final point to note is that this judgment (decided in April 2021) will not be “retained EU case law” - see our article on the meaning of this here - and will not therefore bind UK Courts however, given that it interprets the principles of EU law upon which the Public Contracts Regulations 2015 are based and builds upon an existing chain of EU law on this point which is retained it may be taken into account by judges in the English and Welsh Courts in interpreting these types of issues.

Matthew Mo is a partner and Kyle Duggan is an associate at Bevan Brittan.