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Procurement Blog - Development Agreements

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Summary: Court of Appeal identifies first English contract as ineffective; gives definitive view on “Faraday” style Development Agreements; and has valuable comments on the use of VEAT Notices

A long awaited appeal decision was finally handed down on 14th November 2018 on the matter of Faraday Development Limited vs West Berkshire Council and St Modwen Developments Limited. The original August 2016 judgment was much reported due to the clear guidance it gave as to when a Development Agreement is not a public works contract subject to the Public Contracts Regulations (2006 as then but now 2015). This appeal decision clarifies the law further regarding conditional obligations to build and has interesting things to say on the use of VEAT Notices.

In summary, West Berkshire Council had undertaken a “non-OJEU” tender process for the appointment of a developer for a Council owned site at the London Road Industrial Estate. The unsuccessful bidder challenged the agreement on the basis that:

  1. it was a Public Works Contract for the purposes of the procurement regulations and therefore should have been subject to advertisement in the OJEU and a fully regulated procedure;
  2. if it was not a public works contract it was a public services contract with the same implications; 
  3. if it was neither then the deal had been deliberately structured to avoid the Regulations and therefore was a sham and illegal in any event under the anti-avoidance regulation; and
  4. that it failed to demonstrate that the Council achieved “best consideration” for the site under s123 of the Local Government Act 1972.

We set out a full summary of the case in our blog found here.

The claimant was unsuccessful on all points however was granted leave to appeal. The appeal challenged the original judgment’s view on points 1 and 3 above and also that the sought remedy of ineffectiveness was time barred as the Council had published a Voluntary ex ante transparency notice (a “VEAT Notice”) prior to signing the contract.

Was the transaction a Public Works Contract?

In summary the outcome of the Appeal was that the original judgment had correctly considered the characteristics of a public works contract e.g. it must have works as its main object and must also contain an enforceable obligation within it to deliver those works (amongst other factors not disputed in the claim).   The Court had also correctly applied these tests to the front end of the Development Agreement. The development agreement was not a public works contract at the point it was signed as it contained no obligation to undertake works at that time.  However the first Court had erred in not giving full consideration to the enforceable obligations to do works which were within the annexures to the Development Agreement in the form of the template leases which would be entered into should the developer choose to take the leases (which was of course the whole point of the agreement).  Justice Holgate had taken the view these ‘didn’t count’ as it was at the developers discretion whether or not to draw down those leases. The enforceable obligations to build only came into play if the developer chose to buy the land. 

The Court of Appeal disagreed with this conclusion on the basis that it did not consider the agreement as a whole. At the point the leases were called upon a public works contract did indeed come into being. By signing the Development Agreement (although not itself a public works contract) the Council was committing itself contractually to enter into a public works contract that had not been subject to OJEU and at the behest of the private developer. It was committing itself to act illegally in the future.

Readers of our blog on the original judgment will know that we anticipated that the content of those leases may be the subject of an appeal and we are certainly not surprised by this outcome. Enforceable obligations to build anywhere in a public sector development deal was always high risk.  The Council took a gamble and it failed to pay off.

The good news is that it does not upend the fundamental principles upon genuine development agreements can be based to avoid the need for a full OJEU process where such processes are not wholly suited to the deal in question.

The sobering point to note for all real estate lawyers is this; the judgment is a reminder if one were needed that a lease can also be a public works contract. While the infamous Roanne case was a rude awakening that development agreements could be public works contracts, some remain in denial about leases.  The two definitions are not mutually exclusive. A lease will only be exempt from the application of the Regulations if it is not also a public works contract. This new Faraday judgment and the recent case of Ocean Outdoor UK Ltd v London Borough of Hammersmith & Fulham (2018) EWHC 2508 (TCC)  (which sought to challenge advertising leases on grounds of the Public Concessions Regulations 2016, although in that case unsuccessful) put beyond doubt that leases are at risk if they contain obligations to do works and in all of the circumstances it is clear those works are the main object of the transaction.

The effect of the VEAT Notice

The Court of Appeal’s view on the effectiveness of the VEAT Notice to remove the remedy of ineffectiveness having regard to the “good faith” obligation as defined in the Fastweb case is also of interest.

The Council had stated within the VEAT Notice that it considered that the development was both an exempt land transaction and not a public works contract because it placed no binding obligations on St Modwen to undertake any works; the Council had not specified the requirements for the works; and the Council would not exercise a decisive influence on the works.

One might consider that this was a reasonable justification given that the original Court agreed with the Council on most of these points. The Council could not have been said to have acted without good faith or a reasonable belief in its defence. However the Court of Appeal agreed with the appellant that the information within the VEAT Notice fell well below the standard of information required by Regulation 47K(4) of the 2006 Regulations. Not only was the first statement regarding no obligation to undertake works factually incorrect but there was no information regarding the nature of the agreement. The information stated what the agreement was not, not what it was. The agreement was also not a ‘land transaction’, its main object was works. A description of the main object was not given in the VEAT Notice as is required.

The lesson to be noted here is that to be successful in removing the remedy of ineffectiveness a VEAT Notice must give full disclosure and transparency regarding the contract to be entered into.  This is a delicate balance. Contracting Authorities often feel in drafting a VEAT Notice they are providing a claimant’s argument for them and laying out their defence to be pulled apart.  As in Faraday, the Court may allow a claim seeking ineffectiveness to proceed anyway and then retrospectively decide whether the VEAT was good enough – unlikely to be the case if the Court has already decided the claimant’s case was sound!

There is surely still a time and a place for VEAT Notices but it is clear reliance cannot be placed on them as a guarantee of avoiding an ineffectiveness claim.

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