Development Agreements and local authorities: Variations and the Competition Trap

03 March 2015


Developers have sought to vary development agreements with local authorities for town centre schemes to restore viability ever since the 2008 property crash. Even in more benign times changes are inevitable as occupier requirements change during the lengthy period needed to secure planning permission and complete site assembly often following a compulsory purchase order. What is the risk such changes will lead to the need for another developer competition?

Silver Hill Winchester

In R (on the application of Gottlieb) v Winchester City Council [2015] EWHC 231 (Admin) Mrs Justice Lang considered this issue in relation to a development agreement entered into by Winchester City Council and Thornfield Properties (Winchester) Limited. The agreement was made on 22 December 2004 for a mixed-use development comprising residential, retail, car parking, a replacement bus station, a civic square, a CCTV office, shop mobility and Dial-a-Ride service, and a market store.

On 9 February 2009, the Council granted planning permission for the redevelopment scheme. The proposals included approximately 95,000 sq ft of retail space (of which 25,000 sq ft was a food store), 287 residential units with 122 car spaces, 20 live work units with car parking, 330 public car parking spaces, a new bus station, a small quantity of office space and extensive proposals for public realm improvements.

An accompanying section 106 agreement dated 28 January 2008 secured affordable housing of 35% - 40% of housing units (or an equivalent financial contribution) to be provided. Thornfield Properties entered administration in early 2010 and the developer was acquired from the administrator.

Variations to the agreement had already been made on 22 October 2009, on 10 December 2010 and on 30 January 2014 before the Council approved further variations on 6 August 2014. These variations were successfully challenged in judicial review proceedings by a member of the Council who is also a chartered surveyor and a director of a small private property company.

Mrs Justice Lang held that the variations amounted to the award of a new public contract being "materially different in character from the original contract and, therefore, such as to demonstrate the intention of the parties to renegotiate the essential terms of that contract" as explained in the leading case before the Court of Justice of the European Union of Pressetext Nachrichtenagentur GmbH v. Republik Österreich [2008] ECR I-4401. The Council was therefore required advertise the development contract with the proposed variations under the Public Contracts Regulations 2006.

The original development agreement and the August 2014 changes

The changes proposed in August 2014 included:

  • an increase in retail provision from 95,000 sq ft to around 148,000 sq ft along with one shop unit of up to 60,000 sq ft thus permitting the inclusion of an anchor store;
  • a reduction in the number of residential units to 177;
  • the replacement of the bus station with an on-street bus interchange;
  • the deletion of the Shop Mobility Centre, Dial A Ride premises and market store;
  • a reduction in the number of public car parking spaces from 330 to 279;
  • substitution of the affordable housing with a financial contribution to be assessed on the basis of the future viability of the scheme up to the equivalent of 40% affordable housing provision;
  • extension of the site to include 153 High Street;
  • permission for the developer to procure the construction of the whole scheme by a construction company with a house building subsidiary as opposed to going to competitive tender;
  • improvements to the financial terms to reflect the additional retail space.

Comment

The outcome may be unsurprising on the particular circumstances of the case but observations made by Mrs Justice Lang in the course of the judgement have wider implications:

  • She characterised the development agreement as a public works concession contract "because it provided for the developer to be paid a majority share of the profits of the development, and to be granted a lease of the site under which tenants occupying the site would then pay rent to the developer". This allows for a more flexible procurement method suited to the development industry. Although the Public Contracts Regulations come into force generally on 26 February the existing arrangements relating to public works concession contracts remain unchanged pending the separate enactment into domestic law of Directive 2014/23/EU relating to concessions.
  • Given the characterisation of the agreement as a concession it was also material to consider the changes against the impact on the potential profitability of the development to the developer.
  • The changes were considered against the 2004 development agreement scheme not against the development agreement as subsequently varied and immune from challenge. It is not clear why this particular comparison was made.
  • The claimant need only show a realistic hypothetical bidder would have applied for the contract, had it been advertised, but he is not required to identify actual potential bidders. The failure to comply with the EU procurement regime in 2004 when the original development agreement was entered into weighed against the Council.
  • The postponing of the Council's right to terminate through an extension to the pre-development period was not a variation leading to a requirement to re-procure.
  • The variation clause in the 2004 agreement was so broad and unspecific that it did not meet the EU requirement of transparency. A right for the developer to vary with the Council's approval not to be unreasonably withheld without any specific criteria will not defeat a Pressetext-type challenge. This is a sentiment now echoed by Regulation 72 of the Public Contracts Regulations 2015 - in force from 26 February 2015 - which applies to contract variations made on or after that date and which, in line with the 2014 EU public procurement directive, allows variations to public contracts to be made without fresh procurement where (inter alia) the modifications have been provided for in in the initial procurement documents in clear, precise and unequivocal review clauses which set out their scope and nature and the conditions under which they may be used (and which would not alter the overall nature of the contract in question).

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