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Under the influence: New European caselaw on the line between a land deal and "public works contract"

02 June 2021
 In this article, our UK Public Sector team summarises the key aspects of European Commission v Republic of Austria (Case C‑537/19), sets out the legal context and provides important practical advice for both private and public sector bodies who face this predicament.
This article summarises key aspects of the recently decided case of European Commission v Republic of Austria (Case C‑537/19), in which the European Court of Justice ("ECJ") examined how much influence a public body may control over works for a new building without being required to conduct a competitive procurement to select the developer. We set out the legal context as well as important practical advice for both private and public sector bodies who face this predicament.  Although no longer a member of the EU, the UK rules in this area via the Public Contracts Regulations 2015 remain (for the time being at least) based on the corresponding EU Directive which forms the basis for the ECJ's analysis. Accordingly this case should still be of valuable guidance in UK proceedings notwithstanding that it has been decided only recently and after the UK's formal EU departure.

Before launching into the facts and analysis for this case, it is useful to remember that:

  1. public bodies are required to conduct a competitive procurement in respect of "public works contracts" which have a value which exceeds the current threshold of £4.7 million;
  2. a "public works contract" covers a contract through which a public body "exercises a decisive influence on the type or design of works" which a developer/contractor is contractually obliged to undertake; and
  3. a public body is not required to conduct a competitive procurement for a simple "land deal" where it acquires or disposes of property and its control over a development is limited to the exercise of planning powers, desirable outcomes and negative controls but stops short of allowing a public body to oblige developers to deliver works over which the public body has exerted a decisive influence the type or design of the development.

Facts

This case concerned a dispute between the European Commission ("the Commission") and the Republic of Austria ("Austria") as to whether Austria had failed to fulfil its coordination of procedure obligations when an Austrian municipal (public) authority housing manager, Wiener Wohnen ("WW") and developer, Vectigal Immobilien ("the Landlord") concluded a long-term lease ("the Lease") of an office building ("Gate 2") prior to its construction. 

While a public body is not usually required to procure a lease, the Commission claimed the conclusion of the Lease constituted the award of a "public works contract" which should have been competitively procured due to WW:

  • influencing the design and construction of parts of Gate 2 including bridges between certain floors and the construction of additional floors; and
  • overseeing "the execution of the construction of the Gate 2 building in the same way…a developer would" which "went well beyond the usual requirements of the tenant of a new building".

In addition, the Commission asserted the following features suggested the presence of a public works contract: 

  • Gate 2 was not subject to "an enforceable building permit" on the day the lease was concluded; 
  • the lease was for a long period and only provided WW with the right to terminate after 25 years; and
  • the work specified by WW "was overly specific".

Decision 

Judgment was handed down on 22 April 2021 and the ECJ rejected all of the Commission's arguments. The ECJ held that the Lease "provided for an option… for the lease of additional space" but not for its construction ("the Option") and the design of the 6th to 8th floors and connecting bridges had already been envisaged in plans drawn up by the Landlord prior to WW entering into negotiations in respect of the Lease. Accordingly, WW could not be said to have influenced the construction work and nor was the work planned "to meet a need specified by [WW]".  The ECJ further held that WW's exercise of its use of the Option did not demonstrate that it had "exercised a decisive influence on the design of the work in question". 

Other helpful guidance from the ECJ included that a public body would be exercising a "decisive influence" in situations where it influences the architectural structure of a building (e.g. its size and the external walls of a building); or its stipulations in respect of the interior of the building are particularly specific and detailed. Where a public body's stipulations for the interior are not particularly specific and detailed, it is unlikely that the public body will be exercising a "decisive influence".

The ECJ also held that the absence of the building permit accorded with "standard commercial practice" on the basis that "large-scale architectural projects are [often] let well before the detailed construction plans are finalised" and before formal permits are obtained.  Furthermore, the conclusion of the Lease for a lengthy period was "not in itself unusual" and it was entirely normal for a tenant "to make its wishes clear as to the specifications" of a building "whether in respect of a building…yet to be constructed or a change of tenant where upgrade" works are required.

The ECJ concluded that the Commission had "not established that the stipulations made by [WW], in its capacity as future tenant….did not exceed what a tenant may normally require" and the conclusion of the Lease for Gate 2 did not therefore constitute an illegal direct award of a public works contract. 

Comment

It is common for public bodies to want to exercise a degree of control in respect of a development, following engagement from a developer, without being required to procure the developer through a competitive procurement.  This situation is often encountered in the context of public authorities selling or leasing the relevant land to a developer.  It has often meant that public bodies are faced with the dilemma of balancing the convenience of not being required to undertake a competitive procurement with the commercial risk of entering into a lease of a building over which the public body has been unable to exercise a decisive influence on the specification and design.

This case provides useful guidance for public bodies in that they should be able to influence the specification of works for developments which they have not procured so long as this influence does not exceed the normal requirements of a typical tenant and generally relates to the interior layout of the building as opposed to the architectural structure of a building (e.g. its overall size and external walls).

In justifying the level of influence a public body exercises, it will be helpful for public bodies to engage independent property professionals who will be able to confirm that a public body's input into the works is within the parameters of what a typical tenant would require.  In addition to providing comfort to public bodies that their requirements are within this acceptable parameter, such evidence will be useful for audit purposes in assisting a public body to justify why it has taken a particular approach in respect of any new development which it has not competitively procured. 

Overall, this case has demonstrated that the reach of the procurement is not without limits and that the practice of "land deals" can still be safely undertaken provided due care is taken. 

If you are a public body considering how the issues in this article may affect your procurement, please contact a member of our UK public sector team to discuss your options and next steps.

Authors: Jonathan Branton, Colin Murray, Bradley Martin and Alex Eaton

Further Reading