The Procurement Act 2023 and development agreements

October 17, 2024

How will the Procurement Act 2023 change development agreements and land transactions? Christopher Brennan, Alison Richards and Alexi Markham explain.

There has been long-running uncertainty as to whether some types of land development agreements could fall within the public procurement regime, requiring a public sector authority (as employer) to put the project out to tender, rather than engaging a chosen developer directly.

When the Procurement Act 2023 (the Act) comes into effect in February 2025, there will be a number of key changes in how public procurement in England, Wales and Northern Ireland is regulated. In this article, we outline the key features of the Act that may impact land development agreements and consider whether or not the Act has made it any easier to work out whether a development agreement - or an arrangement that might look like a pure land deal - must be competitively procured under the regime, or is exempt.

In short, we think that the Act will have little impact on that thorny question. The actual procurement of any such contract may be governed by the Act if it classifies as a "works contract" under the Act; however, distinguishing a works contract from a "pure" land or property transaction may not be straightforward.

The Act's exemption of contracts for the acquisition of land and buildings

The "land and buildings" exemption is essentially retained from the current public procurement regime and is set out at paragraph 8 of Part 2 of Schedule 2 of the Act. This provides that a contract for land and buildings is a "subject-matter exempted" contract, and describes such a contract as one:

for the acquisition, by whatever means, of land, buildings or any other complete work, or of an interest in or right over any of them, or
which concerns an interest in or right over any of them.

This, therefore, exempts "pure" land transactions (transfers of land and buildings, and the granting or assignment of leases or other interests in land) from the scope of the Act, just as Regulation 10(1)(a) of the Public Contracts Regulations 2015 (PCR) does in the current public procurement regime.

There are some limited - and subtle - differences between the wording of the Act's exemption of contracts for land and buildings, and the equivalent exemption in the PCR. These differences include the following:

The Act's exemption refers merely to a "contract" (for the acquisition of land etc), whereas the PCR exempts a "public service contract" (for the acquisition of land etc). This change is essentially a clarification - the PCR's reference to a land transaction as a "public service contract" was always somewhat jarring.
The Act exempts a contract for the acquisition of land, etc, "by whatever means". In the PCR, the equivalent wording is "by whatever financial means". In the PCR, contracts for the rental of land were also specifically referred to, whereas the Act does not refer to rental. Therefore, despite the Act's lack of reference to rental, any leasehold (or rental) acquisition will still be exempted by the Act.
The Act specifically exempts the acquisition of a complete work (defined in Schedule 1 as a "functioning structure that results from the carrying out of works"). This means that a contract is exempt even where the building being acquired might be the product of a recent development project.

Recently, the case of Ocean Outdoor [1] held that the land exemption in the PCR applies to both the acquisition of land by a contracting authority and from a contracting authority. In that case, the contracting authority was disposing of land by way of a lease.

Development agreements - what's in or out of scope of the Act?

For nearly two decades, there has been uncertainty as to the precise circumstances in which the public procurement regime applies to development agreements. The tendency of contracting authorities has sometimes been to treat development agreements as exempt land transactions or, alternatively, as direct awards justifiable by the fact that there is only one possible candidate for the contract (namely, the developer holding the land interest in the relevant site). Over the years, the case law around development agreements has tended to seesaw between more liberal interpretations of the procurement rules, and more restrictive ones. The job of interpreting the case law has been made more difficult by the fact that in no two cases has the particular nature of the transaction been exactly the same.

Most recently, the 2018 case of Faraday [2] - noteworthy as it not only related to a scheme of interconnected development transactions triggered by the exercise of options on the part of the developer, but also gave rise to one of very few declarations of ineffectiveness handed down by the domestic courts in a procurement case - provided more of a steer to contracting authorities on when the procurement regime properly applies, and when not. It clarified that an enforceable legal obligation to execute works is a necessary ingredient of a public works contract, and that such an arrangement can be caught by the procurement regime, even if it is contingent or conditional on something else happening: in Faraday itself, a development obligation in respect of a given site would only arise if the developer exercised an option to develop that site. However, if the developer did so, an enforceable legal requirement to develop the site would arise.

Helpfully, the decision in Faraday followed that of the European Court of Justice in Helmut Müller [3], in which it was found that:

where there is a contract between an authority and a developer in which the developer is required to execute or to design and execute works, or to carry out works meeting requirements specified by the authority, then provided there is some form of pecuniary interest, a public works contract exists;
in order to be caught by the procurement rules, the authority need not ultimately acquire the works - provided that they confer an immediate economic benefit on the authority; and
in order to be caught by the procurement rules, the contract must impose enforceable direct or indirect works obligations on the developer.

Faraday did not increase the scope or range of contract types that classify as public works contracts, but did help clarify the position on when a contract is caught by the regime. It also sent a clear message that care must be taken around contingency or conditionality in development agreements (and the decision also usefully clarifies how the courts will view the question of legally enforceable obligations to undertake works that might be triggered at a future point, as opposed to when the agreement is made). Following Faraday, the opportunity could have been taken to delineate the extent of regulated works contracts more clearly and by reference to the criteria from Helmut Müller, and to codify them in the Act. Currently, the Act refers to a public works contract as "any contract for the supply, for pecuniary interest, of… works to a contracting authority", which may mean further guidance will be required from the courts while the new regime beds in.

Can a direct award be made on the basis of exclusive rights?

In the past, contracting authorities have considered whether (assuming that a particular development agreement does fall within the scope of the regime) the fact that a developer holds a key land interest might allow a direct award of a contract under Regulation 32(2)(b) of the PCR. There, direct award is permitted where:

"the works… can be supplied only by a particular economic operator for… the protection of exclusive rights... but only… where no reasonable alternative or substitute exists and the absence of competition is not the result of an artificial narrowing down of the parameters of the procurement".

Reliance on Regulation 32(2)(b)(iii) would arguably allow the contracting authority and developer to proceed on the basis of a full development agreement (a works contract) without prior advertisement. However, this argument remains untested, and is not without potential flaws. It may be difficult, for example, to see how there might not be a reasonable alternative (for example, the acquisition of the interest by the contracting authority using compulsory purchase powers or the development of an alternative site). For that reason, contracting authorities and developers in this position have, in our experience, been more likely to concentrate on structuring their arrangements in such a way that they do not fall within the scope of the public procurement regime. Nevertheless, after Faraday, this is arguably harder to do.

The Act provides an equivalent direct award justification in situations where the contract can only be performed by one particular supplier [4]. This is the case where:

"(5) The following conditions are met in relation to the public contract -

(a) due to a particular supplier having intellectual property rights or other exclusive rights, only that supplier can supply the goods, services or works required, and

(b) there are no reasonable alternatives to those goods, services or works."

The fact that the Act incorporates both (a) the existing exemption of agreements for the acquisition of land and buildings, and (b) the exception from the need for a competitive tender in the case of contracts that can only be awarded to a particular supplier on the basis of exclusive rights, means uncertainty surrounding the application of the regime to development agreements may continue. As a result, we may see contracting authorities and developers take the risk of relying on the Schedule 5 exception (exclusive rights) in order to award a development agreement to a particular developer without a competitive procurement.

How should you adapt your approach to development agreements?

Given the continued uncertainty in this area, practitioners will need to continue to rely on cases such as Faraday when deciding whether development agreements can be treated as pure land transactions or fall within scope of the Act. Given the change in terminology that the Act will bring with it, there will continue to be a level of uncertainty as to the extent to which existing case law will prevail and how future development agreements might be treated by the courts.

In response to the 'Transforming Public Procurement Green Paper' (which paved the way for the Act), the submission from the group Lawyers in Local Government (LLG) [5] noted that comments had not been sought on land-based agreements and stated that:

"similarly to how Regulation 72 codified the Pressetext judgment on modifications (during the last procurement reform), we consider there is a similar opportunity to codify the rules here. This would provide increased certainty which would be welcomed by local authorities and third party contractors alike."

While the Act marks "one of the largest shake-ups to procurement rules in this country's history" [6], we await further clarity on the subject of land development agreements and what will be in or out of scope under the new regime.

Christopher Brennan is a Legal Director and Alison Richards and Alexi Markham are Partners at Gowling WLG.

To understand more about how the new regime will change the way procurements are carried out and managed, read Gowling WLG’s summary of the key things organisations need to know about the Procurement Act 2023 or contact a member of its Public Procurement team.

Footnotes:

[1] Ocean Outdoor Limited v London Borough of Hammersmith and Fulham [[2019] EWCA Civ 1642.
[2] Faraday Development Ltd v West Berkshire Council [2018] EWCA Civ 2532.
[3] Case C-451/08, Helmut Müller.
[4] See Schedule 5, paragraphs 4 to 6.
[5] Land-based Agreements and the Procurement Bill - LLG, 8 June 2022
[6] Cabinet Office Press Release - 27 October 2023