New Procurement Guidance on Development Agreements

Background
For a long time, the received wisdom within procurement circles was that development agreements were not subject to normal EU procurement legislation on the basis that they were not public works contracts.
However, the tide has turned and public sector procurers and private sector developers need to be aware of these changes and the advisability of taking appropriate professional advice before embarking on schemes of this type.
The starting point to understand what has changed was the decision of the European Court of Justice in the Roanne case. A French local authority had signed a "public development agreement" with a developer for the construction of a new leisure centre and other works. The developer would acquire land, organise an architectural competition, manage construction and procure funding for the project.
The ECJ ruled that the development agreement constituted a "public works contract" and therefore needed to be put out to tender under the public procurement rules. The main reasons were that:

• The main purpose of the agreement was the execution of a work which corresponded to requirements specified by the local authority
• It was irrelevant that the developer would not execute the works itself but would have them carried out by subcontractors 
• It made no difference that the developer was going to compete the sub-contracted works; the public procurement rules still applied to the award of the initial development agreement

The decision raised concerns among many UK local authorities and developers with some local authorities delaying their urban regeneration projects until competitive tendering procedures could be organised.

OGC Guidance
The Office of Government Commerce (“OGC”) has recently published guidance to help clarify the implications for a broad spectrum of development agreements. However, the guidance offers no single definition of a “development agreement” and each development agreement will need to be analysed separately to assess whether it involves public works contracts or concessions that should be put out to competition.

Key factors identified by OGC include:

• Specified requirements. In general, if the deal imposes detailed and specified requirements by the public body on the developer, then the public procurement rules apply. Note, this doesn’t have to be a full and exhaustive "technical specification". On the other hand if the developer is not contractually bound by specific obligations to develop the land in a certain way, the development agreement is unlikely to trigger the procurement rules.
• Enforceable obligation. The developer must have a contractual obligation to carry out the required works. Just an expectation that works will be carried out will not be enough to bring the contract within the public procurement rules, even if the authority has the right to re-acquire the land in the event that the works are not undertaken. Not terribly helpful as a litmus test though—who lets a development contract with only an unenforceable expression of hope that the development will be carried out?
• Planning laws are not specific requirements. The OGC thought that the procurement rules are unlikely to apply if developers are invited to develop land in accordance with local planning laws but without providing specific requirements.
• General invitations. The procurement rules will generally not apply, the OGC says, when the public body invites developers to table their own development proposals, even if the public sector sets the parameters for those proposals
• Developer's freedom to decide. In the OGC's view, the procurement rules will not apply when a developer is contractually entitled to unilaterally decide what to do with the land (subject to planning law) including to delay the development, or to transfer it to a third party.
• Pecuniary interest. Likewise, where there is no monetary payment from the public body to the developer as consideration for undertaking the development, either through actual payment, or indirectly, for example, by the assumption of obligations such as contributions towards project finance or guarantees against possible losses by the developer, the OGC’s view is that the procurement rules will not apply.
• “Straightforward” leases and land sales. Normally the procurement rules will not be triggered. However, there is likely to be a procurement issue where the lease or sale of land for the purpose of a development includes a requirement that specific works are carried out on the land, which are not ancillary and minimal in comparison to the value of the lease or sale, and the main purpose of the land sale is not to achieve those works.
• Discrete public works within a wider development. Where certain parts of the development are likely to be considered public works (such as works on a public library or the authority's own offices), the OGC recommends that the authority holds a competitive tendering process just for the public elements. In such cases, the authority may require that the developer provides it with a replacement facility, which is also likely to comprise a public works contract (if executed to the authority's specification) and so should be competitively procured.

Health Warning
OGC Guidance is no substitute for appropriate tailored professional advice. Each development must be considered on its own facts. Subject to that the following broad rules of thumb may be helpful:

• Is there a work or works required or specified by a contracting authority?
• Is there an enforceable obligation (in writing) on a contractor to carry out that work or works?
• Is there some pecuniary interest for carrying out this work (not necessarily a cash payment)?
  If the answer to all the above questions is “yes”, it is likely that the development agreement will be subject to the public procurement rules.