The Sky Blue saga continues

The Court of Appeal has recently handed down a judgment in a dispute over whether Coventry City Council provided unlawful state aid in relation to the Ricoh Arena. Paul O'Sullivan considers the lessons from the ruling.

Last month saw the latest instalment in the long-running litigation surrounding the Ricoh Arena in Coventry, the home stadium of Coventry City Football Club (CCFC), which it shares with Wasps RFC. The Court of Appeal has now handed down judgment in the second State aid challenge brought by the owners of CCFC (the SISU group of companies) against Coventry City Council: R. (Sky Blue Sports and Leisure Ltd) v Coventry City Council (No.2) [2018] EWCA Civ 2252).  

In the earlier round of judicial review proceedings, SISU had challenged a loan made by the Council to its then half-owned subsidiary, Arena Coventry Limited (“ACL”). ACL operates the Ricoh Area under a lease from the Council, which is the freeholder. SISU claimed that the loan constituted unlawful State aid. The High Court found that the loan was not a State aid because a private market operator in the Council’s position might also have made the loan on the same terms. This was confirmed by the Court of Appeal in R. (Sky Blue Sports and Leisure Ltd) v Coventry City Council (No.1) [2016] EWCA Civ 453).

SISU’s second State aid challenge concerned a decision by the Council to sell a lease extension to ACL for £1m, taking the term to 250 years (ACL’s original term having been for 50 years commencing December 2003). This was part of a wider transaction, in which the Council agreed to sell its 50% shareholding in ACL to Wasps for £2.77mand Wasps agreed to purchase the other 50% share in ACL, held by the Alan Edward Higgs Charity. The sale of the lease extension was subject to the share acquisition from the Charity going ahead, which it did for the same price.

SISU’s application for permission to seek judicial review was originally refused by Singh J (as he then was) in July 2017. The judge held that SISU’s claim that the lease extension involved State aid was unarguable as the price achieved by the Council was in line with an independent market valuation from KPMG which was in the range £0.6m - £1m. The Council had achieved the top of that range.

Central to SISU’s case was the contention that the lease extension granted by the Council was in fact part of a sequence of commercial steps the effect of which was to confer on Wasps 100% control over a 250 year leasehold interest in the stadium as a business, for a total consideration of approximately £20m when its market value was in fact £48.5m - an underpayment of approximately £28m or 60%.

The Court of Appeal rejected that contention and dismissed SISU’s appeal. Giving judgment, McCombe LJ noted that for the prohibition on State aid to apply a benefit is only conferred by the state upon a beneficiary undertaking, in an undervalue transaction, if it is the state’s own asset that has been transferred at such undervalue:

“That other assets are already owned by the recipient or are acquired at the same time from other parties, conferring an overall benefit on the recipient, is not relevant to the question whether or not aid has been provided by the state by a transfer of its assets at an undervalue” [48].

SISU had not provided a competing valuation of the lease extension. Instead, it relied on valuations of ACL’s 250 year lease of the Arena in Wasp’s hands after the overall transaction had been completed, including the sale by the Charity of its 50% share in ACL. McCombe LJ ruled that this was not the correct approach. The State aid rules required the Court to focus on the assets actually sold by the Council, and whether it achieved a market price for those assets. SISU could not rely on valuations of other non-Council owned assets to challenge the only valuation of the lease extension, which had been provided by KPMG. The Council had achieved a price consistent with that valuation and, therefore, it was not possible to argue that any State aid had been granted in these circumstances.

With regard to the sale by the Council of its 50% shareholding in ACL, SISU had already expressly conceded that it would not be challenging that transaction. McCombe LJ observed that this concession was inevitable, because the Council had achieved the same price for its shares as a direct private market comparator, namely the Charity as the other 50% shareholder in ACL.

The judgment also confirms that the fact that a public authority does not use a tender or open marketing process in a land sale transaction will not automatically mean that the transaction fails to meet market conditions, thereby constituting the grant of State aid. Market price established by independent asset valuers is “the minimum price that can be agreed without granting State aid” (see Land Burgenland and Austria v Commission Case C-214/12).

In agreeing with McCombe LJ, Irwin LJ noted that the situation might be different where the public asset transferred represented a “ransom strip” or similar asset, without which other assets held, or to be transferred, would be of much reduced value. There, the valuation of the public asset transferred would have to address the value unlocked by the transfer, rather than an artificial value ignoring such consequences. In this case, however, the lease extension added to the value of other assets held, or to be held, by Wasps, the value of which was not negligible. There was no undervalue of the public assets transferred here.

Paul O’Sullivan is a Partner in the Competition team at Sharpe Pritchard.