West Berkshire’s lack of procurement process for Newbury development ruled unlawful

A local authority acted unlawfully when it entered a development agreement with a private developer without running a procurement process, the Court of Appeal has ruled.

The ruling clarifies the law of public procurement governing local authorities which are seeking to bring about the development of land in their ownership, according to experts.

It overturns a 2016 High Court judgement which found West Berkshire Council had not broken public contract rules when it appointed St Modwen Developments to carry out a mixed-use regeneration scheme on a former industrial site in Newbury.

The Court of Appeal ruling published last week said: “The development agreement constitutes a procurement in its result, and a procurement without a lawful procurement procedure under the 2004 directive and the 2006 regulations.

“The procurement crystallizes when St Modwen draws down the land.”

In 2015, the council issued a notice which said it believed that the development agreement fell outside of the scope of two European directives which would have made it a “public works contract” for which a procurement would have been required.

It said that this was because the agreement placed no binding obligation on St Modwen to undertake any development, that the council had not specified requirements for future works and the council would not exert influence on the design of future works.

However, the Court of Appeal ruling found that the ground lease entered into by St Modwen would contain an unqualified obligation to carry out works, and a corresponding obligation will also be brought into effect in the development agreement itself.

It said: “The development agreement made that commitment on the part of the council final and provided also for a reciprocal commitment on the part of St Modwen.

“It did so without a public procurement process, and without affording any opportunity for such a process to be gone through before the “public works contract” materialises.

“At that stage it would be too late.

“Thus a ‘public works contract’ will have come into being without a lawful procurement process.”

However, the court ruled that there was no suggestion of the council acting in bad faith, “or with any motive to create a mistaken understanding of its objectives in entering into the development agreement or of the ‘economic and commercial reality’ of the transaction”.

Kathrine Eddon, legal director at law firm Womble Bond Dickinson, told Room151 that the decision was important “for local authorities and developers alike”.

She said: “The reversal of the earlier court decision has caused a fair amount of concern for some authorities, as they grapple with what this means for their development plans.

“It’s likely to lead to a more cautious approach by authorities on regeneration projects which are felt to be ‘close to the line’, or are particularly complex, meaning more put out to tender under the procurement rules.

Authorities will be concerned to avoid the risk of a proposed deal being declared to be ineffective, and a penalty imposed, if they are challenged by someone who thinks they have made the wrong call on procurement.”

However, she added that each development will still need to be judged on its own merits.

Reacting to the verdict in a blog posting, Dan Crayford, commercial solicitor at Forbes Solicitors, said the decision confirms that build contracts entered into as a condition of a land contract are still works contracts.

This means that if they are above the relevant threshold for public works contracts – currently £4,551,413 – a council has a duty to carry out a procurement process.

He said: “Contractors have for years been persuading housing associations and other public contracting authorities that land-plus-building package deals are above board.

“Of course, it is in contractors’ best interests for this to be deemed to be the case, given that the contractor who owns the land would thereby be able to hold contracting authorities over a barrel in terms of appointing them to develop said land as a condition to the land contract.

“This is a common tactic for contractors who would ordinarily be unable to win a proper procurement process, by reason of being disqualified for previous failings in public contracts, for example.”

Crayford predicted that “we are now likely to see increased craftiness in the drafting of options and conditions to carry out above-threshold works, with nebulous semi-commitments replacing bold obligations…”

The case was brought by rival developer Faraday Development, which lost out to St Modwen for the right to be awarded the development contract.

The parties agreed, following judgement, that the regulations made it mandatory for the court to order the payment of a civil financial penalty by the council.

The amount of that penalty was fixed at £1.

A statement by the council said that it was “disappointed” by the Court of Appeal’s decision and that it is considering an appeal to the Supreme Court.

Council leader Graham Jones, said: “The regeneration of the London Road Industrial Estate remains a core part of our vision for Newbury. It is frustrating that this decision pauses our plans to bring new homes, affordable accommodation and high quality office to the area.

“It will delay our plans but not deter us from the ambitious, exciting redevelopment which we remain committed to delivering for people in Newbury and beyond.”