Throwing a spanner in the works

The High Court's recent dismissal of a claim that a council's sale of a community facility site breached the Public Contracts Regulations is welcome news for local authorities, writes Anna Sweeney.

The case of R (on the application of Midlands Co-Operative Society) v Birmingham City Council and Tesco Stores Ltd [2012] EWHC 620 (Admin) concerned Birmingham City Council’s wanting to redevelop a site just outside Birmingham. The site in question comprised various parcels of land, with different owners, including an indoor bowling and community centre (the Community Facility) owned by the Council. The Council accepted that if the site were developed the Community Facility would need to be relocated.

Both Midlands Co-Operative Society (the Co-Op) and Tesco were granted planning permission to develop the site, and both signed section 106 agreements that they would replace the Community Facility as part of the planning permission.

The Council decided to initiate a competitive tender process between the Co-Op and Tesco to select a development partner for the site. The invitation to tender included obligations to replace the Community Facility and develop the site within a prescribed timescale. These obligations went beyond mere planning requirements. Tesco were chosen but the Co-Op raised objections claiming that those obligations meant the contract was a public works contract and so the Public Contracts Regulations 2006 applied. The Council took legal advice on the public procurement issue and decided to terminate the tender process.

A new tender process was started under which Tesco and the Co-Op were invited to bid for the Community Facility as a pure land sale. The Co-Op did not submit a bid. Tesco did, but it was not compliant.

A third tender process was started, this time an open process. Tesco were the winning bidder and were granted new planning permission for the site, with a new section 106 agreement. The wording of this one was slightly different to the previous one, although it still continued to impose obligations on Tesco – but only if Tesco chose to implement the planning permission and develop the site.

Procurement Challenge

On hearing that Tesco were the successful bidder, the Co-Op sought judicial review of the Council's decision to sell the Community Facility to Tesco, claiming that the sale would contravene the Public Contracts Regulations 2006 as it was a public works contract that should have been properly procured.

Judgment

The judge considered the definition of a "public works contract" in Regulation 2(1).  An essential characteristic of a public works contract is a binding and legally enforceable obligation on the contractor to execute relevant works as specified by the contracting authority. Authority and principle support that as a proposition, as does OGC Guidance. The judge also considered the Müller case[1] which said that a public works contract required the contractor to assume a legally enforceable obligation to perform the works and that this was "an essential element".

So the issue in this case was whether the arrangements between the Council and Tesco imposed a legally enforceable obligation on Tesco to carry out works as specified by the Council. The judge concluded that they did not. He took into account the following factors, amongst others:

• The arrangements must be looked at as a whole and in particular whether there is in reality a multi-stage award procedure which is in substance a unity that includes an obligation to perform works. For example, what looks like an award of a land contract and a separate award of a works contract but in reality the authority and contractor are legally committed to the land contract at the time of the works contract, the two stages might be considered as one transaction to which the procurement rules apply. It is insufficient that at the time of the land transaction, the authority merely intends, or is very likely, to enter into a works contract with the contractor, short of a formal, legally enforceable commitment.
• When the section 106 agreement is triggered (by Tesco starting the development) then Tesco will have legally binding obligations to perform public works (the fitting out and relocation of the Community Facilities). However, Tesco are free to choose whether they start development or not – it is more likely than not that it will, but it is under no legal obligation to do so. This is the key point.

To procure or not?

The Co-Op claimed that the Council had tried to get around the procurement provisions of the Public Contracts Regulations 2006 when it abandoned the first tender process and re-tendered the land divorced from the development obligations. The judge felt that was not a fair way of putting it. The Council had to choose between following the procurement provisions and having a developer with development obligations, or avoiding a lengthy procurement process but losing the ability to require the developer to develop the site. The Council could not be criticised for formulating a strategy with regard to the development of the site that avoided the onerous obligations of the 2006 Regulations, particularly as the Council's primary objective was of a planning nature – to develop the site – rather than replacing the Community Facility.

Good news for councils

Building on the Müller and Commission v Spain[2] cases, this case is welcome reassurance for councils seeking to develop sites without having to go through a full procurement, that a section 106 agreement in itself will not make the deal a public works contract. It is however necessary to examine the deal in the round and be comfortable that there is nothing in any of the contracts that would legally oblige the developer to carry out public works.

Anna Sweeney is a professional support lawyer at Walker Morris. She regularly contributes articles and updates to reach... ®, the free Walker Morris knowledge database and alerter service.

[1] Helmut Müller GmbH v Bundesanstalt für Immobilienaufgaben [2010] 3 CMLR 18

[2] Case C-306/08 European Commission v Kingdom of Spain, judgment of 26 May 2011