Birmingham Exeter London Manchester Nottingham. 1

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1 Birmingham Exeter London Manchester Nottingham 1

2 Page Select or award: how to get it right Anja Beriro Duty to investigate abnormally low tenders? Alex Kynoch Case management and the courts Nichola Evans Take a dip in the pool? Neil Walker A salutary state aid story for Santa Sharon Jones Peter Ware +44 (0) Peter.Ware@brownejacobson.com Birmingham Exeter London Manchester Nottingham 1

3 A criterion based on the tenderers experience concerns the tenderers ability to perform a contract and therefore does not constitute an award criteria. So said the European General Court (the Court) when giving its reasons not to annul a contract entered into by the Council of the European Union with Alfastar Benelux SA (Case T-394/12 Alfastar Benelux SA v European Commission) for IT services. This claimant raised a number of issues common to a lot of procurement challenges: 1. the obligation to state reasons; 2. the infringement of tender specifications by misunderstanding what the bidders needed to demonstrate; 3. manifest errors of assessment; 4. confusion between the use of selection and award criteria; 5. inconsistencies and inaccuracies in the Pre-Qualification Questionnaire (PQQ) documents; and 6. breach of Article 11(2) of the Financial Regulations (only relevant to central EU bodies). All of these were rejected by the court. In this article we will focus on issues raised under points 3 and 4. Facts of the case Briefly, the claim was actually the second claim brought by the applicant in relation to the same tender exercise! The tender exercise started in 2008 and the original decision was annulled by the Court due to the Council of the European Union (the Council) failing to state reasons. The Council then re-ran the tender exercise and the same bidder won. Alfastar challenged again. Alfastar was the incumbent service provider. Manifest errors of assessment Alfastar claimed a number of manifest errors, all of which were rejected by the Court. Of particular interest in the facts set out in this limb of the claim, was that Alfastar, as the incumbent, believed that it should have been given a higher mark in relation to knowledge transfer because it was the incumbent and all the current staff would remain should it be re-awarded the contract. The Court held that the fact that the successful bidder had shown a stronger and clearer understanding of the requirements in its tender response meant that the Council was within its rights to award a higher mark. The Court also noted that the Council s new requirements were slightly different to those under the current contract and that this was also a good reason for the Council to award marks based on something other than current knowledge. One of the members of the team put forward by the successful bidder had worked previously for Alfastar and had been dismissed for alleged incompetence. The Court held that this knowledge of Alfastar did not mean 2

4 that the incompetence had been objectively confirmed and that it did not mean that the person in question was not able to provide the services required as part of the successful bidder s proposal. Selection versus award This judgement confirms a number of cases that have previously looked at the question of what constitutes a selection criterion and what is an award criterion. In particular, it is another example of a case reassuring contracting authorities that, in the right context, it is acceptable to include requirements around the experience and qualifications of staff as part of the award criteria. This builds on probably the most famous case in this area, Emm.G. Lianakis AE and others v Dimos Alexandroupolis and others (C-532/06). As people know, in England and Wales, selection criteria as based on those set out in regulations 24, 25 and 26 of the Public Contracts Regulations 2006 (as amended). This includes technical and professional capacity and is the usual place to look at the experience of the organisation with similar projects and contracts. Award criteria, on the other hand, as set out in regulation 30, should allow the contracting authority to award the contract to the most economically advantageous tender (MEAT). The criteria for awarding the contract can include price and the service offer, as against the requirements set out by the contracting authority. We often advise clients to consider the difference between selection and award criteria as being backward and forward looking, respectively. At the first stage, you are checking that a provider has the experience, technical ability and the financial standing to deliver services similar to those that you are wishing to procure. The second stage is a process by which the bidders must give their response to the actual requirements and how they will carry out the contract over its term. The Court held that it is not always fatal to the compliance of a tender exercise that, as part of the award criteria, the professional experience of members of the proposed team is evaluated. The difference at this stage is that the experience must only be for those employees definitely involved in the service provision and that it must be part of ensuring the quality of the services. There must be a direct link between the services required and the evaluation of individuals skills and experience. In this case the submission, and subsequent evaluation, of information about the technical ability of certain team members was perfectly acceptable when looking at the roles being proposed by the successful bidder. So, what can we gain on a practical level from this case? Firstly, as you will have advised evaluation team many times before, prior knowledge of the bidder in question cannot be taken into account when checking a bidder s response against the requirements. All information against which a criterion is scored must be set out in the tender documents. 3

5 Secondly, when devising a two-stage procurement process, take time to review the PQQ and Invitation to Tender (ITT) criteria and ensure that the right questions are in the right place. The Court here made it clear that there were definitely times when a mistake in doing this could be fatal. Anja Beriro +44 (0) Anja.Beriro@brownejacobson.com 4

6 NATS (Services) Ltd v Gatwick Airport Ltd [2014] EWHC 3728 (TCC), judgment of 12 November 2014 We last commented on the NATS (Services) Limited v Gatwick Airport Limited dispute in the October edition of Public Matters in the context of an application for the automatic suspension on the award of the contract to be lifted. The later judgement of 12 November dealt with the NATS particulars of claim. NATS obtained permission to amend its particulars of claim, which Gatwick Airport Limited (GAL) applied to strike out parts of and NATS then applied to re-amend. Failure to investigate abnormally low tenders One of NATS claims was based on the assertion that the successful bidder s tender was an abnormally low tender. NATS claimed that a failure to investigate this represented a breach of the principles of equal treatment, transparency and non-discrimination and also represented a manifest error. NATS original particulars of claim simply stated that NATS was concerned that the price submitted may have been abnormally low with no explanation of why this and the requested amendment sought to expand on why this would represent a breach. The court found that this aspect of the claim had no realistic prospect of success but was also inadequately pleaded given that the amendment was made only a few weeks before trial. In reaching this conclusion the court confirmed that there is no positive duty on contracting authorities (or utilities) to investigate or reject abnormally low tenders, save in extreme circumstances where not to do so would represent a manifest error. Even then, it would have to be determined that it was an error which no reasonable contracting authority or utility could have made. As such the court took the view that no cause of action was actually pleaded as Gatwick owed no such duty to NATS. Manifest error on scoring: timing of amendment NATS assertions that Gatwick had made manifest errors in scoring did demonstrate a cause of action but the court did not allow this to be further particularised. NATS sought to include a schedule providing some 17 items relating to quality in which NATS claimed it was manifestly wrongly marked down. Gatwick stated that these items could have been pleaded at the time of the original particulars of claim and the court was sympathetic to this view. NATS argued that the information required to make this pleading only arose later but the court disagreed, stating that the pleading could still have been made and then minor amendments made when the information was made available. This demonstrates that, particularly where an automatic suspension remains in place, the courts will take a strict view of amendments to pleadings. 5

7 This is reflected in paragraph 34 of the judgement in which Mr Justice Akenhead stated: The fact that a trial on liability is being brought on within a short time is not a factor which should excuse (even if on occasion it may explain) any delay in making amendments It is important to note that while NATS may not have considered it had sufficient information to properly investigate and formulate its pleadings the court took into account the impact of amendments to pleadings shortly before trial. There is a tension between allowing claimants sufficient time to prepare claims and giving defendants sufficient time to address them prior to trial. This tension is heightened in procurement challenges so while it is clearly always advisable for pleadings to be as precise as possible this is of even greater importance in these cases as the courts appear reluctant to permit amendments as the trial date draws nearer. Alex Kynoch +44 (0) Alex.Kynoch@brownejacobson.com 6

8 In his report Lord Justice Jackson said that courts had become too tolerant of delays and non-compliance with orders and that the balance needed to be addressed. As a result CPR 3.9 was given teeth so that when considering the general management of cases judges were obliged to consider the need for litigation to be conducted efficiently and at proportionate cost and to enforce compliance with rules, practice directions and orders. Further courts were to monitor compliance with directions. The courts initially took a mixed stance on how these new provisions ought to be interpreted. Then in November 2013 the Court of Appeal, staffed with judges specifically tasked with dealing with Jackson matters, provided guidance as to how the new provisions ought to be interpreted. The case was Mitchell v News Group Newspapers Limited, a case dealing with the claimants failure to lodge a cost budget pursuant to a pilot cost budgeting scheme for defamation proceedings within the prescribed time limit. The budget was filed late and the claimants representatives applied for relief from sanction. The key points arising out of that judgment are: relief from sanction would be granted less sparingly than before an application for an extension of time made before the expiry of the deadline would be looked on more favourably there was to be a shift away from doing justice as justice in the individual case is now only achievable through the proper application of the CPR consistently with the overriding objective. courts should look at the non-compliance and if it could properly be said to be trivial then the court will probably grant relief if application was made promptly If it is not trivial then the court will ask the defaulting party to persuade the court to grant relief. There would have to be a good reason for the default and that good reasons are likely to arise from circumstances outside the control of the party in default. Lord Dyson explained that once lawyers got used to the new culture of compliance there would be less satellite litigation. 7

9 The impact of this case was dramatic. Courts generally moved on to a zero tolerance approach and only the most trivial of breaches resulted in relief from sanction so: SC DG Petrol SRL v Vitol Broking Limited (Queens Bench Division) an application for an extension of time was refused where there had been a failure to provide security for costs and where there had been a strike out sanction. Durrant v Chief Constable of Avon and Somerset (Court of Appeal) defendants attempted to serve 6 witness statements out of time and applied for relief. The application was refused. Lakatamia Shipping Co Limited v Nobu Su (Commercial Court) disclosure was to be provided by 4:30pm and was provided at 5:16pm. Relief from sanction granted. The Mitchell case led to lawyers point-scoring. It led to a level of litigiousness not seen for a number of years. Reforms which were meant to reduce the level of costs incurred in litigation were having the opposite effect. There was a high level of satellite litigation which is in neither party s interest. For instance, in Greater Manchester a 20% rise in applications for permission to appeal was predicted in Many commentators and practitioners suggested that either the Rules needed amending or that full judicial guidance needed to be given to set out clearly what was regarded as permissible behaviour. The Court of Appeal, in an unusual step, listed three appeals together so that full and proper guidance could be given on the issue (Utilise TDS Limited v Davies Decadent Vapuors Ltd v Bevan & Ors and Denton & Ors v TH White Ltd & Anr [2014] EWCA Civ 906). The Court of Appeal has given guidance by way of a three stage test for applications for relief from sanction. The three cases So what were the three cases about and what was the behaviour complained about? Utilise TDS Ltd v Davies and Another [2014] EWHC in this case a cost budget was filed 41 minutes late and there was a breach of an order to inform the court as to the outcome of settlement discussions between the parties. These two breaches were held to constitute a non-trivial breach by Judge Hodge QC and relief from sanction was not granted to the claimant. Denton and Anothers v TH White Ltd and another (unreported) - in this case a claimant was granted permission to adduce an additional six witness evidence out of time and which resulted in a nine day trial being adjourned. 8

10 Decadent Vapours Ltd v Bevan and Others (Cardiff District Registry of the Chancery Division, 18 February 2014) - in which late payment of court fees was deemed to be a non-trivial breach. The Court of Appeal The Court of Appeal concluded that Mitchell had not been incorrectly decided the problem was the way in which the decision was being interpreted. We had all misunderstood what was being said! The three stage test is described at paragraph 24 of the judgment as follows: A judge should address an application for relief from sanctions in three stages. The first stage is to identify and assess the seriousness and significance of the failure to comply with any rule, practice direction or court order which engages rule 3.9(1). If the breach is neither serious nor significant, the court is unlikely to need to spend much time on the second and third stages. The second stage is to consider why the default occurred. The third stage is to evaluate all the circumstances of the case, so as to enable [the court] to deal justly with the application including [factors (a) and (b)]. Stage 1 The court said that the word trivial had given rise to some difficulty and said it has given rise to arguments as to whether a substantial delay in complying with the terms of a rule or order which has no effect on the efficient running of the litigation is or is not to be regarded as trivial. Going forward rather than looking at the triviality of a breach the courts are to look at whether a breach is serious or significant. The court also said that when considering the first stage the court should not look at previous breaches and that this should be done at Stage 3 (see below). Stage 2 The court should then look at the reason for the delay. The court declined to give a list of excuses that may allow an application for relief from sanctions. However it did refer to paragraph 41 of the Court of Appeal judgment in Mitchell where it was suggested that a debilitating illness might constitute a good reason but that being over-worked or over-looking a deadline would not. 9

11 Stage 3 Paragraph 31 of the judgment sets out Stage 3: The important misunderstanding that has occurred is that, if (i) there is a non-trivial (now serious or significant) breach and (ii) there is no good reason for the breach, the application for relief from sanctions will automatically fail. That is not so and is not what the court said in Mitchell: see para 37. Rule 3.9(1) requires that, in every case, the court will consider all the circumstances of the case, so as to enable it to deal justly with the application. We regard this as the third stage. Therefore the courts need to consider the effect of the breach but weigh it up against the need for the parties to abide by the Rules, Practice Directions and Orders. The three cases appealed. So what happened in the cases appealed? Utilise TDS Ltd v Davies and Another relief from sanctions granted. Denton and Anothers v TH White Ltd and Another a refusal to grant relief from sanctions. Decadent Vapours Ltd v Bevan and Others granted relief from sanctions. This is perhaps not the definitive guidance we were after but the three stage test should clarify matters somewhat. Hopefully we will now see greater consistency between the courts. The Court of Appeal also makes it very clear that it does not expect to see opportunism from lawyers and that if needs be that kind of behaviour would be penalised. Hopefully we will see less satellite litigation going forward. But what is the correct action to take if there is a breach? Whilst it is clear that action should be taken promptly, the Court of Appeal has not made that clear. Can the parties agree what should happen if one party needs relief from sanction? Does this in fact require an application to the court (even if the parties also submit a consent order)? Best practice would appear to be to make an application to the court in any event and file the consent order. If the court is not happy with the consent order it can always list a hearing to decide the matter. It is anticipated that following this judgment that contested hearings for relief from sanction will be rare. The cost warnings given are enough to put off most lawyers: who wants unnecessary cost wars? However the Court of Appeal has not set out in clear terms, save for a few examples from the Mitchell case, what set of facts would allow relief from sanction. We therefore face the situation where there will be cases testing out the judgment to give us a set of guidelines as to what kind of failure to comply is regarded as being so serious or so significant that a party will not be permitted relief from sanction. 10

12 There have been two reported decisions post Denton on this subject: NNN v D1 the defendant applied to set aside a default judgment entered following a failure to comply with an unless order relating to disclosure. The judge thought that the defendant had done his best and allowed relief from sanction. However it should be noted that the defendant was a self-represented person. Yeo v Times Newspapers failure to serve notice of a new CFA was not regarded as serious or significant so relief granted. In addition we have anecdotal evidence that parties are working together more cohesively on cases. In terms of extensions Lord Justice Jackson in his paper for the Civil Justice Council conference earlier this year suggested that the parties ought to be able to agree sensible extensions (subject to the overall timetable not being disrupted). There is now a new CPR 3.8 buffer rule where parties can agree extensions of time up to 28 days provided that it does not put a hearing date at risk. Therefore whilst we still do not have perfect guidance we are now in a better position with guidance to the effect that litigation should be conducted more sensibly and this will cut down the satellite litigation we have seen. Nichola Evans +44 (0) nichola.evans@brownejacobson.com 11

13 Local authorities and land collaboration/joint venture agreements There are reports of renewed activity with public sector regeneration and joint venture deals. Local authorities and their private sector developer partners are revisiting development agreements on schemes mothballed during the recession and considering whether their regeneration aspirations can be revived, in some cases requiring substantial variations to previously agreed terms, in others starting with a clean slate. We are also seeing signs of a growing appetite for local authority landowners to collaborate (or enter into joint venture arrangements) with private sector developers (or landowners) in combining or pooling land interests for promotion, development and sale. The appetite for private sector developers for new development land, particularly for residential development, appears to be healthier now than it has been for a number of years. Local authorities of course have their own agendas in releasing land for development, generally geared to any one or more of the following: achieving housing targets; securing regeneration; creating jobs; realising capital receipts from the disposal of surplus land and buildings. There are a number of ways in which local authorities and the private sector can collaborate with each other (or form a joint venture), but there are also issues and pitfalls which need to be carefully considered. This is the first of three articles on this theme and looks at some of the issues that need to be identified and thought through at an early stage. In later editions of Public Matters our second article will look at some typical collaboration/joint venture structures, and whether land pooling is the right way to go, and a third will deal with disposal and promotion structures. But first let s consider the basics Heads of terms - a good place to start Heads of terms will often be the starting point for the drafting of any legal documents, and are important in setting out the agreed basis of the deal, the objectives of the parties and the key terms. 12

14 Clear comprehensive heads of terms can get the legal drafting and negotiations off on the right foot, and ultimately should reduce legal spend. It s worth taking particular care with heads of terms that cover collaboration/joint venture arrangements before they are signed off at company board or local authority cabinet/committee/executive level to head off any potential pitfalls which might otherwise throw a spanner in the works later down the line with what can sometimes be rather complicated arrangements. Unless the parties have properly considered the key issues that might arise (whether for them or the other party or parties) there are risks that heads of terms assembled in haste, perhaps for political or target driven reasons, might need substantial revision (or in extreme cases for the parties to go back to the drawing board ) before the parties can contractually commit to the joint venture. This can lead to additional legal and other professional consultant and in house time, and project delay, all of which can carry significant cost: if this can be avoided with a little more thought at the outset, so much the better. Tax, procurement and other public law issues (e.g. best value, state aid etc) can present particular issues for the parties to local authority joint venture arrangements, and these do need to be considered early on. How then can this risk be minimised? Addressing the following simple questions may help: 1. Objectives: what do the parties want to achieve? 2. Status quo: what is the current position? 3. Investment: what are the parties able/prepared to do in order to meet the objectives? 4. Okay, we admit, a bit of a cop out (!), but what else do we need to think about? All deals are different. Answers to these questions will in our view help in guiding the parties to an agreed basis of their joint venture, settling a clear and comprehensive set of heads of terms, and flushing out any issues that may arise. Time can then be focussed on how best to address those issues. Objectives: what do the parties want to achieve? Setting the scene Let s start with a simple scenario (and we ll use this again). Brownshire Metropolitan Borough Council (the Council) owns 40 acres of greenbelt land on the outskirts of Brownville (a sizeable town in Brownshire). 13

15 Jacobsons Strategic Land (Brownville) Limited (the Developer) are house builders owning 60 acres of land adjoining the Council s land as part of their strategic land bank. The Developer approaches the Council with a view to collaborating in the promotion and development of the Council s land and the Developer s land for residential development. Of course the Developer might not own the land at the moment, but have options over it - this can be significant, and raise further issues as we will explain in later articles. The Developer believes that the combined land (the Site) will support a new urban extension Brownville Village - of approximately 1,500 dwellings. Significant infrastructure works would need to be carried out in order to fully unlock the Site involving the construction of a new distributor road and service media, some off-site works (including the building of a bridge over a railway) and substantial S.106 commitments (affordable housing, transport and education contributions) would be required according to current planning policy. The Developer s suggestion is that a joint venture agreement is entered into and that the contract documents will contain equalisation provisions. The Council and the Developer start initial discussions. Objectives: what do the parties want to achieve? Frankly, the information set out in the Scenario is not massively helpful. As a starting point, it s worth getting down to basics and considering the following: 1. Scope: planning we ll assume that one of the basic objectives of the parties is to obtain planning permission for a residential development on the Site, but is any old residential consent required or do we need to think about this more carefully? For example, would a development or a sale of the Site be viable (commercially and politically) if it enabled only 1,000 dwellings to be constructed? This could dent the anticipated residual land value of the Site (and/or disposal proceeds) below viable levels. What if the planning permission could only be obtained following the completion of a Section 106 agreement imposing the local planning authority s full policy requirements? A full policy requirement of say 50% affordable housing might reduce the parties anticipated land values to a level which would not support any sale or development. It s likely that one or both of the parties may need to agree minimum criteria for the quality of the 14

16 required planning permission and/or for minimum residual land values to be achieved. What if the planning application is refused or granted on unacceptable terms? A few issues merit consideration here: a. should the parties be entitled to-or required to-appeal? b. should either party be entitled to determine the joint venture? c. if the joint venture is determined, are non-implementation provisions required, or is one party entitled to go it alone on its own land? d. who has copyright or licence to use the copyright in any plans drawings etc obtained so far? 2. Outline or detailed: are the parties going to seek an outline consent first or might they consider seeking a full detailed application? The parties would be well advised to seek valuation and planning advice on this as a balancing act may need to be carried out to compare the costs and time of proceeding to a detailed application (rather than an outline permission), and the likely uplift in land values from the grant of a detailed or outline permission. There should be some uplift in value when moving from outline to full (via reserved matters) planning permission but will this outweigh the additional cost, time and other aggravation of getting there? Are the parties clear at this stage on what they would need detailed consent for? If seeking outline consent, will the parties seek reserved matters approval themselves or leave this to ultimate purchasers (or promoters) to obtain? 3. Planning consultants: will planning (and other e.g. highways, flood risk etc.) consultants be jointly appointed, or appointed by one on behalf of all-to advise the parties on planning issues and prepare the planning applications to be made? Unless there is a joint appointment, the non-appointing party is likely to need collateral warranty or other third party rights protection. The local authority will need to consider the public contracts procurement regime and act in accordance with it if party to the appointments, or paying for services under them. Are there any established frameworks that can be used in order to avoid a stand-alone procurement exercise? Alternatively might the parties take their own planning advice and agree the form of planning application between themselves without appointing external consultants? 15

17 4. Scope: post planning do the parties intend to collaborate any further once a satisfactory planning permission is obtained, or is the intention simply for the parties to go their separate ways or to proceed jointly - to market the Site for disposal in the open market or appoint a promoter to further promote and market the Site for their joint benefit? We ll look at the differences between promotion and option agreements in later articles but it will be beneficial for the parties to consider their preferred exits at this stage. Is it feasible for the parties joint venture to proceed on this narrow basis - surely they need to be tied more closely than this? It will depend. If each party or its successor - could develop its own land pursuant to the planning permission independently of the other it might be possible for the joint venture to be very narrowly drawn. In many cases though, ongoing cooperation (between the parties or their successors) will be required (or desirable) in matters such as approval of reserved matters and discharge of planning conditions which are site-wide, the construction of shared roads sewers and services, the sharing of certain costs, the equalisation of land values (see point 6 below), or the phasing of development/release of land for sale. Releasing all land for sale at once may not be conducive to maximising receipts-a carefully phased release of land is likely to generate, at least in a rising market, sales at a more palatable land value. Advice from qualified valuers and land marketeers is essential. 5. Infrastructure provision: do the parties envisage that an ultimate buyer of the Site will at its own cost carry out the required core infrastructure works necessary to open up the Site for development or will the parties agree to (jointly) fund and procure those infrastructure works? If the former, the achievable sale price for the land within the Site is likely to be reduced to reflect the cost and risk to the buyer in delivering the infrastructure. Alternatively might the provision of infrastructure be one of the roles to be performed by a promoter? Care needs to be taken here as the undertaking of works obligations by a promoter may radically alter the tax treatment of the promotion agreement - we ll look at this in our third article. 16

18 Promoters do not work for free. The more risk they are asked to accept, the more services they are asked to provide and the more works they are required to undertake, the higher their promotion fees are likely to be. The parties should consider whether the added value that the promoter may deliver (and a promoter may well have greater expertise than the parties themselves, and the incentive, to deliver added value) can be justified by the cost of engaging their services. 6. To develop or not to develop, that is a further question. Collaborations between two landowners or two developers are relatively straightforward as the parties are more likely to have shared aspirations (for example enabling a sale of land at a level which maximises their respective receipts, at lowest possible cost, or in developing out and disposing of the land for maximum profit). Hybrid collaborations between landowners and developers can be more troublesome in that commercially the developer may be keener to reduce the land value for joint venture document (and option agreement) purposes in order to maximise its return from the actual development of the land and the sale of houses or other buildings. This can create tension and what might be viable for one party may not be viable for the other. Fundamentally then it s helpful to identify whether the parties are landowners looking to sell land only or whether either one or more of the parties may have different and development orientated intentions and viability requirements. 7. Equalisation - what is it that the parties intend to equalise? Equalisation is a term used often in joint ventures but can mean a number of things. There are two clear alternatives here (although there are other alternatives, which can be subtly different): a. Costs in some circumstances the parties may simply agree to equalise, or share, certain types of costs ( shared costs ) in agreed proportions e.g. the cost of obtaining the required planning permission, the cost of installing shared infrastructure etc; b. Costs and receipts equalisation here is the process through which the parties will agree to share receipts and certain costs (in essence then to equalise land value), in agreed proportions, irrespective of which parcels of land are disposed of, and which parcels of land the costs in question relate to. So, for example, on the basis of the proportions referred to in a. and b. above: 17

19 a. each party would be entitled to all sale receipts derived from the sale of its land and would be required to account to the other Party only for its 40/60% share of any shared costs; and b. for each acre of land sold from the Site, and whether it be sold from the Council land or the Developer s land, the Council would receive 40% of the sale proceeds and the Developer would receive 60% of the sale proceeds. Similarly, all shared costs such as planning promotion, infrastructure, joint marketing costs, would also be borne in those agreed proportions. Care needs to be taken such that the parties are not inadvertently agreeing to share profits or the tax burden from land sales or development profits (which could be wildly different). Where equalisation features in discussions the parties need to be clear from the outset what their joint objectives are. The heads of terms is the point at which a council really ought to start to consider its public law position - is the equalisation going to present it with any Section 123 or state aid issues? Also see points 9 and 10 below. 8. Staging - if the parties intend a broad/comprehensive joint venture, so from planning all the way through infrastructure, through to disposal, it s vital that they don t overcommit at day one, whether in liability for costs, or obligation to proceed to full implementation without suitable checks and balances. It would be sensible to map out the likely stages in the process and identify what criteria need to be achieved or when decisions to proceed to the next stage (or not) need to be made. 9. Decision-making - if objective criteria can be set (e.g. residual land value not less than x per developable acre, infrastructure costs no more than Y) then the joint venture can set out a mechanism for the criteria to be agreed, or determined, at appropriate stages in the event of a dispute by an independent expert. Deemed agreement might be appropriate in some cases but needs to be considered with care. Some decisions might, in a joint venture involving three or more parties lend themselves to majority rule. 18

20 However a local authority may need to have the ability at certain key stages to say no on public law grounds e.g. it should not accept an obligation to sell land at less than required by it pursuant to Section 123, or to commit to fund/provide infrastructure or other works in a non-state aid compliant way. If there are public law lines that a local authority cannot cross then the heads of terms and the resulting documentation should recognise these. 10. Land value all parties must be concerned about ultimate land values and must take appropriate professional advice. This is of course particularly important for any local authority party who will be concerned to ensure that it meets its statutory obligations to dispose of land at best value under S.123. Matters for early consideration are: a. what is the value of the respective land holdings in the Site for current use? b. does the land have a negative current use value because of e.g. contamination issues? c. what are the anticipated land values post (outline and detailed) planning? And post installation of infrastructure (and what are the anticipated costs of providing that infrastructure)? d. based upon those land values, and given that it is unlikely that all of the parties land will be developable and sellable at those market rates, what would the parties anticipated receipts be? e. when are sales likely to occur-best value will be determined at the date of disposal not the date of the joint venture agreement. Will the Council need additional safeguards? Should the parties consider specifying a minimum required land value, and consider indexing this to future proof it? f. can either or any of the parties achieve a better outcome by going it alone i.e. in the case of the local authority is it feasible for the local authority to promote, infrastructure and dispose of its land and make more via that route than it is likely to make through a joint venture with an adjoining landowner/developer. Status quo: what s the current position? 1. Planning: does the Site figure in any core strategy and if so, is that emerging or adopted? Is the Site allocated for residential development? Has the six weeks judicial review period expired if not, that core strategy might be vulnerable to challenge. 19

21 Is there already an outline planning permission (with Section 106 agreement) in place? The parties may have been collaborating for some time and the planning position may already be settled if so, all well and good but, are there any significant reserved matters or other planning requirements that need to be overcome before the parties are prepared to proceed further? If the Site is not currently allocated what can the parties agree to do to promote it - this may present governance issues for the Council if it is also the local planning authority, and legal issues in terms of capacity to enter into required Section 106 (or highways infrastructure agreements). What are the policy requirements for Section 106 agreements e.g. affordable housing provision, education/transport/other contributions etc? 2. Who owns what? Whilst full title due diligence could be undertaken further down the line, it would certainly be helpful to establish at an early stage the extent of the parties ownership in basic terms whether freehold or leasehold, whether there are any gaps in the title, the nature and extent of any occupational interests. Are all parties owners of land within the Site or do some have options over third party land i.e. rights to acquire it? Developers often secure options to acquire land as part of their strategic land function and approach local authority clients with a view to collaborating over land that is not theirs. Do we understand the duration and structure of those option agreements and the Developer s proposals from drawing down land under them? Whilst the financial arrangements between the landowners and option holder Developers may be commercially sensitive before too long it will be necessary to get to grips with the terms of the options. Can redacted copies be obtained so that these can be reviewed? If the parties do not yet own or control all required land for development of the Site (e.g. land required for infrastructure on or to serve the Site) what do the parties propose in terms of securing that land or rights over it? Will each party be tasked with securing vacant possession of its own land, and at its own cost, or are vacant possession costs (compensation, release fees, professional fees etc) to be shared in the agreed proportions? 20

22 3. Title issues in an ideal world all titles would be clean i.e. no impediments or constraints at all. The likelihood is that some or all of the titles will be affected by some or a few of the following: easements (adverse private rights), public rights of way, restrictive covenants etc. How do the parties envisage these will be dealt with? For example will the anticipated development scheme be designed around these, or will any need to be released or modified? If so, what is the strategy for dealing with these? It may involve a combination of negotiation, using established statutory regimes, or compulsory purchase/use of S.237 powers. In some cases defective title or restrictive covenant indemnity insurance may provide a more sensible solution. Who is going to take the lead on all of this and how are the costs to be funded? Will each party suffer its own costs or will some/all of these costs be shared as part of the equalisation process? Some of this might be parked for another (post planning) day but the joint venture documentation would then need to provide for the parties to agree a suitable strategy for dealing with these in the future. What if they can t or don t? Is it feasible to set out some parameters for such a strategy so that in the event of a dispute an expert might be able to provide a binding solution? 4. What are the physical constraints to development? There can be significant overlap here with legal constraints (title issues) in relation to flood risk areas, overhead power lines, watercourses and areas of land requiring remediation before development. Are the agreed proportions for the purposes of land equalisation to be determined on a gross area basis, or will each party suffer the consequences of having non developable land within its part of the Site, and agree that equalisation relates to net (developable) land areas only? 5. Based upon best estimates, and professional advice available to date, how much of the Site do the parties realistically expect to become development land, and how much of the Site do they expect to be required for infrastructure/open space/community facilities, or not developable at all? This can significantly dent the parties aspirations in terms of ultimate sales receipts, and could negate the viability of the joint venture altogether in some cases. 21

23 6. Tax - this can present its own challenges but what is the VAT position of the land and the collaborators themselves. Is all land opted for VAT purposes? Can the parties recover VAT if they are required to pay it? All parties will need to take detailed tax advice as to any other VAT, Stamp Duty Land Tax (SDLT) or (particularly for any developer or private sector landowner) direct tax implications of the proposed joint venture structure but also of the likely implications of the ultimate disposal/promotion route intended by the parties. Direct taxation may cause private sector parties particular problems. A little more on this in later articles. Investment: what else will the parties do to further their objectives? 1. This will of course depend upon the agreed scope of the agreed joint venture and the agreed objectives of the parties - how broad or narrow the initial joint venture, whether the project is to be staged, and whether the parties agree not to exceed a pre-set costs budget. 2. It will also depend upon whether the parties have agreed or are prepared to agree a particular exit/delivery route e.g. outright sale/appointment of promoter/own development 3. For example, with a narrowly scoped joint venture, the parties may intend to secure a planning permission and to sell on the open market. 4. That is seldom likely to maximise land values or receipts. Simplistically, a serviced site with planning permission should fetch more than an unserviced site. The parties would have to weigh the likely enhanced receipts against the additional costs (financial and time/other resources) of servicing the Site. 5. So what else are they prepared to do to further those objectives? Will they, for example, agree to: a. seek discharge of reserved matters/planning conditions? b. acquire additional land or rights over land - whether by negotiation or compulsory means? c. cleanse their titles, again through negotiation/compulsory means or by invoking statutory procedures? d. apply for sources of public funding (perhaps through a local enterprise partnership) for core infrastructure works? e. procure consultants and contractors to carry out core infrastructure works? 6. To what extent can the parties agree to further their objectives by undertaking any of these steps? The parties will need to consider the extent of the authorities they have been given by their board/cabinet/committee/executive and any costs budget agreed. 22

24 This may be helpful in determining whether the parties are bound to proceed to a next stage without reaching further agreement or obtaining further approvals. The local authority (and the private sector parties if receiving the benefit of public money) will again need to consider state aid rules in relation to the deployment of public money. What else should we think about? 1. Are there any sources of funding that might be obtained to assist with promotion of the site, for example in relation to infrastructure provision or is it feasible for core infrastructure be funded by Buyers on a land for infrastructure basis? Particular care needs to be taken when deploying public money-whether the Council s own or growth fund type monies-it can t be deployed in a manner that breaches state aid rules, otherwise the parties will run the risk of clawback, penalties and reputational damage. Sorry, state aid again: state aid is simply a fact of modern legal life for local authorities and the risks need to be identified and managed appropriately. 2. What and who need to be procured? Even with a narrow collaboration, unless one of the dispensations applies, the parties will need to consider the procurement regime and how it applies to procuring services from consultants, and works (and services) from contractors, promoters and buyers. Again the procurement regime is hard to escape, but it can be managed if the likely procurements are identified sufficiently early in the process. 3. Should the parties consider pooling their land more formally, by creating a trust under which they declare that all of their land within the Site is held on trust for themselves and the other parties? This can have some tax advantages in terms of direct tax consequences for some of the parties, but can create its own tax headaches in relation to SDLT and VAT. 4. Should the parties set up a new joint venture company and/or appoint a promoter? We ll look at some of these questions again in our later articles when we compare different joint venture and disposal structures. The more the parties can identify where they are at the moment, what their objectives are and what they will and won t be able to agree will help the proceed via heads of terms to a workable contractual framework to deliver their aspirations. 23

25 Having tentatively agreed to take a dip in the pool, how comfortable are the parties in swimming further and what direction should they take? More on this soon. Neil Walker +44 (0) neil.walker@brownejacobson.com 24

26 As is well known in the annals of childhood, Father Christmas lives at the North Pole. Well, he did live in the North Pole until a rural and large local authority in the North of Scotland, whom we will call Snowy and Mountainous Council (SMC), decided it would be a cracker of an idea to provide him with a whole host of financial incentives to relocate. Look at that mate of Santa s in Lapland, they thought. Look at the hordes of tourists who visit think how many more would come to the area. Think about the boost to the economy from the manufacturing and logistics facility and more SMC based elves are bound to be required think of the employment opportunities. So, SMC approached Father Christmas and made him a grant funding offer he really couldn t refuse. SMC, being a forward thinking authority, had heard of state aid and thought it should check out the position. So, it asked young Hamish, one of its junior lawyers to have a bit of a think. Hamish rightly thought that the first thing was to check out whether the grant would actually amount to state aid, so he went through the Article 107 tests: (a) Is the support granted by the state or through state resources? Yes the grant was coming from SMC, so that s easy enough. (b) Does the support confer a selective advantage to an undertaking? State aid rules only apply in respect of financial support to undertakings (which can include individuals). An undertaking is considered to be an entity which is engaged in economic activity - offering goods and/or services on a given market and it can include not for profit activities. Well, Hamish was a bit puzzled by that one until he asked older members of the legal team. As every parent knows, Father Christmas gets through a fair old amount of sherry and mince pies not to speak of food for the reindeers as consideration for his services (c) Does the support distort or have the potential to distort competition? Where activities are economic there may be state aid present, but there is still a requirement for competition to be distorted. Are there other undertakings offering the same or similar services as Father Christmas, on a commercial basis? If there are, then these may not be able to compete fairly if he s using resources obtained with public funding. Hamish quickly Googled the competition (that state aid compliant rural broadband programme did wonders for the internet speed at SMC). He was astonished at the numbers of international Christmas present providers with amazing logistics capabilities 25

27 (d) Does the support affect trade between member states? The Commission s interpretation of this is broad it is sufficient that a product or service is tradable between member states, even if the recipient of support does not itself export to other EU markets. This one was a no brainer. So, it was state aid. What to do? Could Hamish argue that Father Christmas was providing services of general economic interest (SGEI) and either rely on Altmark or the SGEI decision? Well, it s up to member states (within reason) to determine whether a service is an SGEI and he thought the chances of getting the Department for Communities and Local Government (DCLG) or the Department for Business, Innovation and Skills (BIS) to opine on whether Father Christmas was providing an SGEI were pretty remote. He wasn t going to them asking that one. It was clearly time to have a look through the General Block Exemption Regulation (GBER). Brilliant, thought Hamish. We re in an assisted area under Article 107(3)(c) and a sparsely populated one, to boot. Lots of opportunities there. Now, Father Christmas s undertaking is a small and medium-sized enterprise (SME), so we can take advantage of that. He ll be closing down his business in the North Pole, which is outside the European Economic Area (EEA), so we don t have to get approval from the Commission on those grounds. We re ok in terms of the amount of funding only 7.5 million and we ll make sure the aid intensity works that ll be 35%, given where we are. Let s go for a mixture of aid for initial investment and provide operating aid to compensate for the additional transportation costs of the presents which will be produced in the area that reindeer food is way more expensive here than at the North Pole. Young Hamish reckoned it was sorted. He drew up a grant funding agreement and thought he d better put a condition in the funding agreement that Father Christmas uses local products, or the members wouldn t be happy. Father Christmas quickly moved his establishment to the SMC area and the SMC started to promote the new arrangements. The tourists started flocking in, the local elves were accumulating their elvish gold and everyone was happy. And yet. And yet. Hamish was taken aback to receive a letter from the Commission. There had been a complaint. A Signora Befana, from Italy, (look her up, dear reader ) had lodged a complaint (and had been savvy enough to use the complaints form which had been mandatory since May). The Commission was investigating it. 26

28 To cut a long story short (and yes I know it would take longer than this for a normal complaint to be investigated but we are talking magic and stuff like that ), the Commission found that there had been illegal state aid provided by SMC to Father Christmas. Why? GBER doesn t allow aid to export related activities directly linked to the establishment and operation of a distribution network and doesn t allow aid contingent on the use of domestic over imported goods. Oops. SMC was required to recover the aid from Father Christmas and there was a distinct lack of good cheer in the air. So, if Santa is a little less generous this year, blame it on Hamish No elves or local authorities were harmed in the writing of this article. Sharon Jones +44 (0) Sharon.Jones@brownejacobson.com 27