The problem
Local Authorities are often desperate to facilitate the delivery of new homes. Housing supply and new build housing development agreements have, for the last decade or more, been structured as 'package deals'. This involves a separation of the land sale or land supply part of the bargain from a public works contract to build new homes on the land.
There were sound commercial reasons for using this structure for Local Authorities and other public bodies (including some Registered Providers of Social Housing, which are often bodies governed by public law):
- the total package price (land and completed dwellings) could be split between the undeveloped land value (plus the value of works to golden brick stage) and the build costs for construction of dwellings;
- build costs are payable either against milestones or monthly valuations, which improves cash flow for the development partner (as opposed to 10% on exchange, 90% on practical completion, or a '10/90' deal);
- the cash flow benefits flow back to the public body by way of a better overall package price (compared to a '10/90' deal);
- the public body gets a secure land interest at an earlier stage, meaning they can more easily "step in" in the event of developer insolvency;
- in the case of Registered Providers with poor VAT recovery, it is tax efficient (as taking the land supply at or after golden brick - when HMRC accept the land is now a dwelling - leads to a zero rated supply of land); and
- where other exemptions are not available (such as planning obligations or public subsidy), the prudential SDLT treatment means the public body can pay SDLT on the value of the undeveloped land and not on the total package price (as might otherwise be the case in a '10/90' deal).
The issue for Local Authorities previously was that the direct award of a public works contract to a developer to construct the dwellings would be an above threshold construction contract, meaning it was vulnerable to procurement proceedings on the grounds of an unlawful direct award.
Equally, it did not make sense for anyone to suggest that a developer would sell the land to a public body and then allow them to run a competition to award a public works contract – which that developer might not have won.
Instead, the developer made it a condition of selling the land that the Local Authority simultaneously awarded them a public works contract. This meant either a separate land sale contract and build contract or a combined new build housing development agreement, which dealt with both of those issues in turn.
The solution
The Procurement Act 2023 came into force on 24th February 2025, and the Government published guidance on how to make a direct award in January 2025.
Section 41 of the Procurement Act 2023 allows Local Authorities to make direct awards, providing the facts align with a justification in Schedule 5. Paragraph 5 of Schedule 5 provides that direct awards can be made when a developer has an exclusive right, which means that only that supplier can provide the works required, and that there are no reasonable alternatives to these works. So far, so good.
What has changed the legal landscape is that Paragraph 22 of the Government guidance on direct awards states:
"Exclusive rights can include ownership of land which means that the owner of the land has the right to determine which supplier can deliver the works on that land."
The second limb of Paragraph 5 (articulated in Paragraph 24 of the Government guidance) will be satisfied if the Local Authority considers that there are no reasonable alternatives to the works which the developer intends to deliver.
Conclusion
The Procurement Act 2023 and the statutory guidance brings important clarity to this area of law and facilitates Local Authorities' ability to enter into direct public works contracts to facilitate the delivery of new homes - which can only be a good outcome for all of us.
Contact Colin Murray or Lee Pickett or Shaun Gamble for further information or to revisit any previous advice this guidance might alter
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