27 November 2018 #Public Procurement
The Court of Appeal has handed down its judgment in the case of R (Faraday) v West Berkshire Council  EWCA Civ 2532, which has important consequences for local authorities and developers entering into development agreements.
The Public Contracts Regulations 2015 oblige public bodies to go through a highly regulated competitive tender process when awarding contracts over a certain financial threshold. Land transactions are not covered by the Regulations, and so a straightforward sale of land by a local authority to a developer would fall outside of the public procurement regime. Typically though, local authorities enter into more complex development agreements with developers, which may involve not just a sale of or various rights being granted over land, but also for example specifically building to a local authority’s specification, or the provision of community buildings or services. There has been some confusion in the courts in recent years over whether these agreements fall within the Regulations.
The Faraday case concerned a complicated agreement for the redevelopment and regeneration of an industrial site in Newbury. West Berkshire Council (WBC) had entered into the agreement after a tender process, but not one which complied with the Regulations.
The developer in question was obliged by the agreement to undertake certain preliminary planning services, and then had an option to acquire the land in question and undertake development works. There was however no obligation to undertake the work, unless the developer chose to exercise the option. This, the High Court considered, meant the agreement was not a public works contract falling within the Regulations.
The Court of Appeal disagreed. It said that once the developer exercised the option and became obliged to undertake the development work, the contract would at that stage become a public works contract which WBC would be obliged to procure in accordance with the Regulations. By entering into the development agreement, the WBC had therefore effectively agreed to act unlawfully in the future.
The Court of Appeal went onto to make a declaration of ineffectiveness in relation to the contract WBC had entered into with the developer – the first one ever made by an English court since the remedy was introduced in 2009. The making of this declaration meant that WBC were liable to pay a fine; however, the Court of Appeal decided that because there had been no deliberate avoidance of the Regulations by WBC, they should only pay a nominal fine of £1.
Although it may still be possible to structure a development agreement in a way which falls outside the Regulations, local authorities should be wary about doing so. In light of this judgment, it seems that the safest course of action will be for authorities to comply with the Regulations and carry out a regulated tender before entering into any development agreement in future.