Timely delivery for regeneration projects

The Winchester Silver Hill scheme was based on a development agreement between Winchester City Council and a developer for a mixed-use retail and residential scheme in the city centre, with a development value of £130m, which was awarded in 2004.

While the principle of regeneration for Silver Hill was widely agreed, this scheme was bitterly opposed by some residents (and local businesses and landowners), primarily on the grounds that the design and mass of the development was inappropriate for the historic setting of Winchester's city centre.

This opposition resulted in successful judicial review proceedings being brought by Councillor Gottlieb against his own city council when the council and the developer tried to renegotiate the terms of the agreement. Ultimately, the agreement was terminated by the city council, leaving the developer with unrecoverable historic costs of at least £5.4m.

Public procurement

Nine years ago, the European Court of Justice (CJEU) case of C-220/05 Roanne caused shock waves in the world of local authority development and regeneration projects.

Prior to this case, compliance with the EU procurement rules among local authorities was patchy. Indeed, there was UK case law from the 1990s which suggested development agreements in certain circumstances fell outside of the scope of the procurement rules entirely. The initial impact of the Roanne ruling was that a number of 'un-procured' schemes collapsed in the face of challenges from disgruntled rival bidders.

For councils looking to undertake development schemes now, the position in relation to the application of the procurement rules is much clearer. The helpful CJEU judgment in C-451/08 Helmut Müller laid out useful guidelines on the characteristics needed to be procured. Essentially, where a local authority has a role in specifying the works (which goes beyond exercising its planning function) and an economic interest in the development being carried out (this could mean contributing to the cost, taking an ownership interest, or sharing risk in the scheme), the requirements set out in the Public Contracts Regulations 2015 or the Concession Contracts Regulations 2016 will apply, assuming the value exceeds the relevant thresholds.

However, this leaves quite a lot of scope for local authorities to structure transactions so that the requirement to undertake a procurement is not engaged.

A common approach (especially where the authority has an ownership interest that it wishes to retain) is to avoid a positively expressed obligation to carry out development. Instead, an obligation could be included, stipulating that unless development is carried out within a certain time period, the developer could be obliged to return the land to the local authority. Helmut Müller confirmed that development agreements based on this type of delivery mechanism do not require a procurement procedure.

But does this type of approach help councils that are trying to secure regeneration? Or see houses built? In many cases, councils emphatically want their counterparties to be obligated to deliver the project to a specified timetable. Financial constraints also mean that very often the authority is retaining an economic interest in the scheme, looking to share in the profits. In this type of situation, EU procurement is necessary.

In R (Gottlieb) v Winchester City Council [2015] EWHC 231 (Admin), the judicial review relating to the Silver Hill scheme, the judge ruled that the Silver Hill development agreement contained all the elements of a public contract but noted that no procurement actually took place when the contract was originally awarded in 2004. However, as the limitation period for challenging the award of the original contract had long passed, this was not relevant to the outcome of the decision.

Compulsory purchase orders

Councils often take on the burden of the land assembly necessary to facilitate a regeneration scheme or a large housing project, very often through the promotion of compulsory purchase orders (CPO). In the main, the developer selected to undertake the scheme will fund the council's costs of making the CPO, which can be considerable. A council will then typically lease (or grant the freehold of) the acquired land to the developer for the delivery of the scheme.

Of course, CPOs can be controversial in themselves, both because they affect individuals' dwellings and also because of their effect on investors. A CPO which is made during a market downturn, on the basis of a 'no-scheme world' valuation, can mean that the property is valued at a low point in the property cycle, a point at which no long-term investor would choose to sell.

Indeed, the Winchester Silver Hill scheme featured a bitterly opposed CPO procedure where a number of novel grounds of opposition were argued against the making of the order. The opponents of the scheme raised the arguments that the secretary of state should not make a CPO where the beneficiary of the CPO is a developer selected as a result of an unlawful public procurement procedure.

Further arguments were made that the CPO would involve unlawful state aid to the developer on the basis that it would be allowed to purchase the land at a 'no-scheme world' valuation, but would yield the benefit of the 'marriage value' of these land interests (that is to say, the increase in value that results from a single large, developable landholding as compared to a multiplicity of small land interests which cannot be developed).

In the Silver Hill CPO inspector's report, the arguments relating to procurement and state aid were not accepted. The report suggests that the inspector did not consider that a CPO inquiry was the correct forum for such arguments to be heard.

In the High Court proceedings, it was suggested that the council was not likely to receive best consideration for the land interests it already owned or those being compulsorily acquired. This argument was not pursued. However, best consideration, state aid, and procurement points are raised increasingly frequently in CPO inquiries, and eventually a High Court challenge on the question of state aid in the CPO process looks likely.

Modifications to a scheme

It is a fact of life that major development schemes change between the time they are planned and the point at which they are actually built. However, if a development agreement falls within the ambit of the public procurement rules (whether or not it was actually procured under either of the regulations), the lawfulness of any variations will need to be considered.

In public procurement law terms, the law is clear: if the change to the awarded contract is material in nature, then the change will not be lawful and could be open to challenge. Materiality is determined by a number of factors, such as whether the changes benefit the developer, whether the scope of the contract has changed, and whether the changes, had they been made at the time of the contract award, might have attracted other or different bids.

Gottlieb turned on the lawfulness of proposed changes to the development agreement. Winchester City Council and the developer agreed a number of changes: removing a bus station, removing affordable housing obligations, and adding additional sites into the scheme, among others. The court held that these changes were material insofar as they provided the developer with an economic benefit which was not anticipated at the outset of the scheme.

The judge was also satisfied that there would have been sufficient interest from other market participants had the changes been made at the time of the original award. On this basis, she ruled that the proposed changes to the contract were unlawful, although the agreement itself survived.

One of the reasons that the judge ruled that the changes were not permissible was because the variations clause was too 'broad and unspecific' to be transparent. It is established case law, and now reflected in the regulations, that where a variation provision makes 'clear, precise, and unequivocal provision' (regulation 72 of the Public Contracts Regulations 2015) for a change then it will be permissible (but note that the Supreme Court
in Edenred UK Group Ltd and another v Her Majesty's Treasury and others [2015] UKSC 45 raised some concerns about the proper interpretation of
this term).

Our advice to councils which are aware that their development scheme may be subject to change is to do as much as they can to anticipate the impact of those changes. For example, in the Silver Hill scheme, if provision had been made for the removal of the bus station, with a contractual mechanism to resolve issues relating to the use of the site, there would have been a far greater chance that the change would have been permitted.

Timely delivery?

As previously noted, one of the key reasons why development agreements are used is because of the perception that they give a local authority a degree of control over the delivery of a project. However, in many cases the obligation to start work is dependent on the satisfaction of a number of conditions (e.g. funding, planning, pre-lets, etc.), and control of the satisfaction of those conditions is largely in the hands of the developer, albeit with a longstop date by which all conditions must be met (with a right of termination arising if they are not).

In many cases, local authorities will be sympathetic with some causes for delay. In the Winchester case, the original developer went into administration during the financial crisis, and it took some time for the market to recover. Nevertheless, the fact that a development agreement could be awarded in 2004 and construction not have started by 2016 shows that having an obligation to deliver works to a specified timetable is not always going to guarantee that a project will come forward as planned.

So, what happens if there is no progress? The ultimate backstop is that a local authority has to 'pull the plug' on the agreement and terminate for failure to satisfy the conditions by the specified longstop date. This decision will nearly always be difficult to take, as it involves a difficult judgement as to whether it will be 'quicker' to wait for the developer to get to a stage where the conditions can be met or start again with a new procurement process for a developer. In many cases, local authorities will delay this difficult decision for as long as possible.

This is certainly what happened in the Silver Hill project. After the variations to the agreement were declared unlawful, Winchester City Council lost confidence in the ability of the developer to meet the conditions and commence the development, and so terminated the agreement. The developer was understandably deeply concerned at the prospect of the development agreement being terminated (given that it had invested £5.4m into the project to date) and threatened to judicially review the council's decision, on the grounds that it was irrational and disproportionate. Fortunately for Winchester City Council, the threat of a challenge was lifted a few weeks later.

Winchester City Council is now back at the beginning of the process, trying to establish how to take forward the regeneration scheme that everyone agrees is necessary for the city. SJ

Mark Bassett is a partner at Dentons UKMEA LLP