Jonathan Branton and Lee Pickett look into some of the ways State aid issues can arise in public sector property transactions, the ramifications and ways to proceed within the rules.
As the full economic impact of the COVID-19 lockdown becomes apparent, local authorities, such as Spelthorne Council, are entering into rent deferral agreements with commercial tenants. Other public bodies are responding by buying and selling land.
EU State aid rules regulate how public sector bodies, including local authorities, can use the assets and powers at their disposal to support businesses. Unlawful State aid can result in the European Commission ordering recovery of the State aid from the beneficiary and carries significant reputational issues for public bodies.
There are three main ways in which State aid issues can arise in property transactions:
- where the State purchases / leases property and pays above the market rate;
- where the State sells / leases its property for below the market rate; or
- where the State amends an existing (land and property) deal in a way that benefits a third party undertaking.
The long-standing practice around this (set by a European Commission Notice in 1997 and through case law) has been that provided the State can be shown to have interacted at arm's length and for open market value, no aid shall be conferred. Open market value is assured either by reference to an open competition such as a public procurement process, or by reference to independent expert opinion (which may make reference to a benchmarking procedure. This is in effect a reflection of the market economy investor principle (MEIP) in State aid whereby, provided the State behaves as an ordinary market investor in the same or similar circumstances might reasonably be expected to do, it shall confer no State aid.
State aid when the State buys or leases property from a third party above the market rate
State aid can be conferred upon the seller of a property if the State pays a purchase price which exceeds the market rate. This was the subject of a long running case concerning a series of land transactions between Madrid City Council and Real Madrid Football Club. In 2016, the European Commission decided the council had overcompensated the club for land, resulting in the repayment of the State aid with compound interest. Although this case was overturned in 2019 by the General Court, after it was found that the Commission had not proven to the requisite standard that the measure conferred an advantage on Real Madrid, it nevertheless serves as a reminder that State aid can be found in property transactions where the State overcompensates a third party seller.
State aid when the State sells or leases its property for below the market rate
The State can also confer State aid upon purchasers of property, if it allows its property to be sold or leased below the market rate. This is sometimes a consideration in regeneration projects. It may be dealt with in State aid terms via any discount from market value being assessed and determined as a "grant equivalent" (ie. the value of the benefit conferred), provided that grant equivalent may be placed reliably within a valid State aid exemption, such as the General Block Exemption Regulation (GBER) or the De Minimis block exemption.
- In January this year, the European Commission found that an agricultural land lease agreement from 2000 between the Estonian Ministry of Rural Affairs and AS Tartu Agro (a company that produces dairy, meat and cereals) was in breach of the EU State aid rules. The Commission found that the rent payable to Estonia was below the market price and, therefore, provided an undue, selective advantage to AS Tartu Agro over its competitors. The Commission ordered Estonia to recover €1.2m in unlawful aid from AS Tartu Agro in order to restore equal treatment with its competitors. The case highlights the potential serious consequences of State aid rulings and the importance of careful consideration of State aid at the outset of a transaction.
- In a similar case, the Commission found in 2012 that the Municipality of Vänersborg had sold public property below market value to Hammar Nordic Plugg and that the difference between the market value and the price paid by Hammar Nordic constituted State aid. Sweden was consequently ordered to recover the State aid amounting to SEK 14.5m. While Hammar Nordic later appealed the Commission's decision, this was dismissed in its entirety by the General Court.
- In another high profile matter, a complaint was made that Celtic Football Club had received unlawful State aid after Glasgow City Council had allegedly sold land at an undervalue. However this claim was firmly dismissed after the European Commission investigated and found the allegations to be baseless. Costs incurred by Glasgow City Council in defending themselves against the allegation reportedly came to over £280,000.
To ensure that a public property is sold at 'best market value', and therefore to avoid conferring State aid, best practice is to sell the property on the open market or obtain an independent valuation to show that the sale is in line with market values.
State aid where the State amends an existing deal in a way that benefits another party
State aid can also arise where a public body varies the terms of an existing agreement with a business in a way that creates an advantage which would not be found in a commercial market.
An example of a transaction which would need to be assessed for the presence of State aid is Spelthorne Borough Council's reported amendment to a lease which has created an 18-month rent deferral for WeWork, a property management company renting offices from the council.The deal will amount to a £4.5m short-term loss for the council.
Such a transaction can be free from State aid under EU rules, provided it can be demonstrated to have been carried out conformity with the market practice (ie. by reference to MEIP as noted above). In the case of Spelthorne Borough Council, councillors have admitted that they would struggle to find another tenant to replace WeWork, and that they would face significant costs if the company had to leave the building. Also, in exchange for the rent deferral, WeWork is reported to have agreed to extend its 20-year lease by a further five years. These factors would appear to suggest the measure may conform with market practice and an MEIP approach, however, to make such a case it would first be necessary to show such actions are market-driven and to collect appropriate evidence. From a risk perspective, the more dramatic the revision and apparently beneficial to a third party undertaking it is, the more important it will be to secure appropriate evidence that the measure has been duly considered for State aid compliance.
The aforementioned cases of Hammar Nordic Plugg, AS Tartu Agro and Real Madrid serve as a pertinent reminder of the importance of considering State aid in property transactions including sales, purchases and leases. Even where State aid recovery is ultimately not ordered, the process of responding to investigations can be resource-intensive for the public bodies providing the funding and the companies involved.
We recommend that public bodies review the State aid risk before or alongside considering substantive amendments to existing property agreements. If transactions are taken forward on the basis of conforming with market practice then appropriate evidence must be collected. We can assist you with putting in place appropriate records to quickly and decisively respond to any challenge.