The Two Towers: Land Transactions and Concessions - Public Procurement

07 November 2018

The two towers on either side of the Hammersmith Flyover as the A4 enters west London are not the stuff of the shire and the imagination of JRR Tolkien. On the contrary they were the focus of a dispute before the Technology and Construction Court about the application of the public procurement regime to a lease of a site which had been developed for use for the display of electronic adverts.

In dismissing the claim against the Council Mrs Justice Holgate analyses the nature of services, concession contracts and the boundaries between such contracts and land transactions which fall outside the scope of the public procurement regime.

Our public procurement and real estate experts consider the key issues addressed in the judgement.



The facts of the case

In 2009 Ocean Outdoor UK Ltd ("Ocean") constructed two towers to support digital advertising screens and their operating software on land owned by Hammersmith and Fulham LBC ("the Council") on either side of the Hammersmith Flyover in London.

In 2010 the Council granted Ocean a lease in respect of each plot of land ("the Original Leases"). The permitted use was "the installation, maintenance and operation of the Two Towers for the display of electronic advertisements of two plots of land and operation of two metal towers, with media screens and supportive software, one on each plot, in West London." After an extension granted in 2012 the leases expired on 20 June 2017.

After a tender process on 30 June 2017 the Council granted new leases for 10 years to Outdoor Plus Limited ("Outdoor") who submitted the highest financial offer. Ocean submitted a lower bid and challenged the grant of the leases under the remedies provisions of the Concession Contract Regulations 2017 ("CCR") claiming a declaration of ineffectiveness, penalty and damages. They alleged a failure to comply with the CCR 2016 and/or the Concessions Directive and/or general principles of EU law. Ocean also sought permission for a judicial review.

Both claims were heard together and failed. Mrs Justice Holgate held that the leases were not concession contracts for the purposes of the CCR. Even if they were concession contracts they were excluded from its ambit because of the land transaction exemption in the CCR itself.

In her judgement Mrs Justice Holgate analysed a number of issues before the Court.

The character of a services concession

The CCR reg 3 states that a services concession contract is a contract "for pecuniary interest concluded in writing by means of which one or more contracting authorities or utilities entrust the provision and the management of services (other than the execution of works) to one or more economic operators, the consideration of which consists either solely in the right to exploit the services that are the subject of the contract or in that right together with payment"; and

  1. the award of the contract involves the transfer to the concessionaire of "an operating risk in exploiting the services encompassing demand or supply risk or both". For this purpose operating risk is transferred to the economic operator where, under normal operating conditions, it is not guaranteed to recoup the investments made or the costs incurred in operating the services; and
  2. the part of the risk transferred to the concessionaire involves "real exposure to the vagaries of the market, such that any potential estimated loss incurred by the concessionaire shall not be merely nominal or negligible".

The leases reserved annual rents for the Council of £1.7 million with annual increases and a market review in year 5. The Court accepted that Outdoor enjoyed the right to exploit the advertising potential of the two sites and the leases transferred operational risk to Outdoor. However Mrs Justice Holgate said the advertising services were not provided for the benefit of the Council. The Council had no duty to provide such services. In the words of her judgement:

"The Council derives income from the rent paid under the New Leases but such income is consideration for possession and use of the land. The Council does not dictate the content of the advertising and the advertising is not designed to support the objectives of the Council or in discharge of its statutory obligations."

The leases "do not provide a service for the benefit of the Council or its residents. Advertising is a commercial venture. There is no public benefit to the community from commercial advertising. The Council does not derive any benefit from the advertising at the Two Towers."

Contrast other scenarios which would require further examination:

  • An agreement for lease with an operator for the construction of advertising towers and the grant of a lease following completion. This might be a works concession depending on the commitment, if any, to construct the towers. The commitment issue is considered below. Works need not be for the benefit of the contracting authority or have some public benefit for a works concession to exist. Development agreements for housing and commercial property are potentially within the scope of the CCR (see the CLEU decision in Aurox (C-220/05) and cases in domestic law such as R(Faraday Development Limited) v West Berkshire Council [2016] EWHC 2166). Such works do typically support the planning or housing objectives of the local authority;
  • A lease with an operator of advertising space outside a local authority venue inclusive of a commitment to carry adverts for the entertainments to be held at the venue for a specified number of days. Here there is an element of benefit for the Council; and
  • A lease of a care home to a private provider as part of the discharge of the adult care duties of a local authority under the Care Act 2014. In this case much will depend on how far the local authority uses the tenant covenants in the lease to dictate the scope of the services offered by the care provider as part of the wider delivery of the authority's adult care strategy.

A legally enforceable obligation

A concession contract must be a contract for "pecuniary interest". It is implicit in such a contract that there must be a legally enforceable obligation to provide the services (see the CJEU in C-451/08 Helmut Muller [2010] 3 CMLR 18), and in the UK the line of authority culminating in R (Faraday Development Limited) v West Berkshire Council [2016] EWHC 2166)) all in relation to works). The Court found that the leases did not oblige Outdoor to use the towers for advertising at all. They included a reasonable endeavours obligation to market and promote the site to maximise revenue but the Court held that this did not amount to an obligation "to procure or carry out any particular scope, volume or value of advertising." There were no specific requirements defined by the Council that had to be satisfied by Outdoor. It was further held that Outdoor did not have to deliver any advertising at all.

The claim that the leases were concession contracts therefore failed on this ground as well. We may feel uneasy about the conclusion that a reasonable endeavours obligation to generate revenue from an advertising tower does not imply an obligation to deliver at least some advertising.

The scenario of the venue advertising contract described above would be likely to include an obligation to provide the advertising service on the specified days and on analysis may turn out to be a services concession.

The land transaction exclusion

The CCR reg 10(11)(a) excludes from the ambit of the regulations "the acquisition or rental, by whatever financial means, of land, existing buildings or other immovable property or which concern interests in or rights over any of them."

The Court accepted the argument that the leases were primarily land transactions which granted exclusive possession of the towers in return for the payment of rent. Even if they met the definition of a concession they would therefore be outside the scope of the regulations.

The parties agreed that the true test is what is the main object of the contract - for example the case of the concession for the installation and operation of a casino at the Hotel Santa Catalina in Las Palmas (C-331/92 Gestion Hotelera Internacional [1994] ECR I-1329) where the works to be carried out were found to be incidental to the main purpose of the transaction).

If the services meant to be carried out by a tenant are incidental to the main object of the contract ie the grant of a lease for a term at a rent then the lease is not a concession contract at all, just as the agreement in Gestion was not a works contract and outside the procurement directives.

Principles of general EU law

Article 56 of the Treaty on the Functioning of the European Union states that :

"Within the framework of the provisions set out below, restrictions on freedom to provide services within the Union shall be prohibited in respect of nationals of Member States who are established in a Member State other than that of the person for whom the services are intended".

Article 57 defines services which include services of a commercial character. Mrs Justice Holgate decided that Article 56 was not engaged - this was a land transaction and there was no cross-border interest. Both Ocean and Outdoor are UK companies and the properties are both within the UK. There was no interest in the tender opportunity from outside the UK.

Remedies

If the leases had amounted to services concession contracts then the Council would have been in breach of the CCR. Although the leases were exposed to competitive tender; the Council did not publish a contract notice in the OJEU, failed to give proper notice of a standstill period and awarded the contract without publication of a contract notice. As a result Ocean would have been entitled to a declaration of ineffectiveness and the Council would be required to pay a civil penalty.

In any event Ocean would not have been entitled to damages because the breaches of the CCR by the Council did not cause Ocean financial loss. Damages can only be awarded, in accordance with Francovich principles, if the breach of the CCR 2016 is sufficiently serious to merit an award and there is a direct causal link between the breach and the damage sustained (Nuclear Decommissioning Authority v Energy Solutions EU Limited [2017] 1 WLR 1373).

Taking into account that the Council did tender the opportunity, the breaches of the CCR 2016 and/or general EU principles would not have been sufficiently serious to give rise to an award of damages. Furthermore Ocean could not show it suffered loss through the identified breaches of the CCR. Subsequently, Ocean would not have been awarded the contract because the successful tender was more than £1 million per annum which was higher than its own bid.

What lessons can take from this?

  • Ocean lost a competitive tender and tried to overturn the award to their rival and higher bidder using the procurement regime. Such a claim was always going to be an uphill struggle and was coloured by other claims about breach of confidence involving the Council's advisers which coloured the dealings between the parties which in turn coloured the dealings between the parties. These claims also failed.
  • Transactions between landholding public sector bodies and developers or service providers are always likely to have the marks of a concession because of the transfer of risk and opportunity to exploit the property asset commonplace in such agreements and their related leases.
  • The circumstances where the land transaction (here the lease) is the main object of the contract and therefore potentially takes the contract outside the procurement regime altogether continues to be explored on a case by case basis.
  • The "no enforceable obligation" route remains the surest way of navigating a way entirely outside of the procurement regime.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.