Download - Public matters newsletter, March 2014
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www.brownejacobson.com 1
Index
2 – 3 New public procurement regime
Steven Brunning
4 – 6 Procurement policy and guidance 2014
Anja Beriro
7 – 10 Tenant in administration - where do I stand on rent?
Neil Walker
11–14 Public procurement – recent case on lifting the automatic suspension
Steven Brunning
15–17 Don’t worry, it’s guaranteed. Or is it?
Neil Walker
Peter Ware | 0115 976 6242 | [email protected]
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The Cabinet Office has just announced that the 2014 EU Procurement Directives which were approved by the
EU Council on 11 February 2014, will be published in the Official Journal of the European Union (OJEU) on 28
March 2014. They will come into force on 17 April 2014 and EU member states will have 24 months to
implement the new directives into national legislation. The UK is aiming to complete implementation much
sooner than this. The Cabinet Office is currently consulting on several of the optional provisions set out in
the directives with a view to issuing draft regulations for consultation as soon as possible. Once in force, the
new regulations will replace the existing Public Contracts Regulations 2006 and Utilities Contracts
Regulations 2006.
The main objectives of the new regime are to simplify the rules, introduce greater flexibility and efficiency
and foster innovation in the procurement process. The new regime is also aimed at increasing small and
medium enterprises (SME) access to public procurement and enabling sustainability and other societal goals
to be incorporated into the procurement process.
Focusing on the public sector directive, the main changes arising from the directive include:
• abolition of distinction between Part A and Part B services and the introduction of a special ‘light
touch’ regime for contracts for social, health and other specified services
• less onerous regime for non-central government bodies
• clarification of pre-OJEU notice market engagement rules
• revised and new procurement procedures including reduced timescales and the new ‘innovation
partnership’ procedure
• new rules on evaluation criteria including the introduction of ‘lifecycle costing’
• new grounds for exclusion at selection stage (e.g. tax evasion) and self-cleaning provisions allowing
mitigating circumstances to be taken into account
• mandatory use of electronic procurement (with extended timetable for implementation allowed)
• incorporation of public-public contract exemptions (covering in-house awards and co-operation
between public bodies)
• mutuals exemption allowing the award of certain contracts to be reserved to mutual organisations
satisfying particular criteria
• codification of material change rules clarifying when a contract change triggers a duty to put the
contract back out to competitive tender.
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We will continue to monitor the progress of the new regime. Watch out for our future articles and training
sessions where we will delve into the detail of the new rules and highlight the practical implications for both
contracting authorities/utilities and bidders.
Steven Brunning | 0115 934 2056 | [email protected]
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Since the beginning of 2014 the Cabinet Office has been keen to continue its promotion of procurement best
practice with a number of new Policy Procurement Notes (‘PPNs’). Some of these do not relate to local
authorities but the guidance may still be useful. The main aims are improving the sharing of information
within government and continuing to support the inclusion of SMEs. So, in order of appearance:
• PPN 01/14 covers the sharing of confidential information. This PPN only affects central government
which includes executive agencies and non-departmental public bodies. This requires drafting in
contracts which allows information that the economic operator has reasonably designated as
confidential to be shared with other parts of central government. Procurement law states that such
information must be kept confidential by the contracting authority (Regulation 43 of the Public
Contracts Regulations 2006 (as amended) (the ‘Regulations’). It is an interesting interpretation of the
definition of ‘contracting authority’ that is used by the Cabinet Office which is usually very keen to
stress the independence and autonomy of executive agencies and non-departmental public bodies
• PPN 02/14 extends the mystery shopper service. This affects all public sector bodies. As well as
continuing to respond to requests to investigate procurement processes, Cabinet Office will
undertake random spot checks on procurement processes, usually via portals where procurement
documents are published. Again, the main aim is to challenge what are believed to be unnecessary
barriers to SME participation in procurement exercises and to promote good practice. The PPN
doesn’t say what will happen if, during a procurement process, the mystery shopper scheme
challenges the approach of a public body. Experience of our clients shows that even the previous
mystery shopper scheme had the potential to put the brakes on a procurement exercise because of
the time it took for discussion with Cabinet Office. Further detail needs to be given by Cabinet
Office so that public bodies are able to manage any spot check appropriately
• PPN 03/14 is an updated version of PPN 06/13 and relates to using procurement processes to
promote tax compliance. It only affects central government departments, their executive agencies
and non-departmental bodies and requires specific Pre-Qualification Questionnaire (PQQ) questions
to be used during a procurement exercise
• PPN 04/14 specifies a new model services contract for central government to use for IT services
valued at more than £10million. We assume only for those contracts not procured under a framework
• PPN 05/14 sets out the new fair deal pension arrangements which relate to central government,
executive agencies, non-departmental bodies, NHS bodies, maintained schools and academies (for
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the last two, only for staff in the Teachers Pension Scheme). Staff that are compulsorily transferred
to a private sector provider as part of an outsourcing (and arguably these days as part of a public
sector mutual) will be able to decide whether they want to stay with their existing public sector
pension or not. Previously it was at the discretion of the new employer to set up a broadly
comparative scheme. The PPN clearly states that it doesn’t apply to procurement exercises that are
already underway.
In addition to Cabinet Office continuing to promote good public procurement practice, the House of
Commons, Community and Local Government Committee published the ‘Local government procurement’
report (the ‘Report’) on 24 February 2014. This is the product of an inquiry launched in July 2013 to
determine whether policies from both central and local government, the Local Government Association’s
(LGA) ‘Procurement Pledge for Local Authorities’ from 2012, for example, were having a positive effect. The
conclusion is that some authorities not still not doing enough to try and reduce public spending. In addition
to this, collaborative procurement could save an additional £1.8 billion, should be the default option and the
LGA should review how collaborative procurement is undertaken and produce best practice guidance.
However, collaboration shouldn’t come at the expense of procuring services to deliver local priorities.
Other recommendations include:
• recommending that the government review the Social Value Act 2012 and the Community Right to
Challenge provisions of the Localism Act 2011 to see whether they could be revised or better
guidance given which would enhance the social value of contracts
• encouraging central government to do more to highlight best practice and to give guidance and
training, both around procurement skills generally and the new EU procurement directive. The latter
is certainly already being done with the Cabinet Office arranging a number of training days for the
public sector in June and July of this year (insert link to registration page). One of the reasons to
highlight best practice is improving the accessibility of tender opportunities to SMEs
• local authorities taking a proportionate approach and not ‘gold plating’ procurement processes which
increase costs and time and disadvantage SME and Voluntary Service Overseas (VSOs)
• outsourcing exercises ensuring that employees do not receive lower quality pay and pension provision
in the private sector and that contracts are used to enhance social value which can include the living
wage
• acknowledging that there must be more investment in procurement skills across local authorities so
that knowledge isn’t held by a select few. As lawyers, we would hope that this includes client teams
being encouraged to use the legal department of the local authority more proactively and as a
‘critical friend’
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• improving the management of contracts, particularly complex, long-term, high value ones. The
report was clear that local authorities must do more to ensure that fraud doesn’t become
widespread. Currently fraud is not a big issue but there is a concern that it will become more likely,
particularly around price fixing, as more services are outsourced. To support this, more needs to be
done to allow whistleblowing when necessary.
The recommendations in the Report bring to the surface some of the tensions that local authorities are
currently facing. The increased pressure on budgets means that it is absolutely essential that procurement
processes are streamlined and undertaken in the most cost effective fashion and that high value contracts
are managed more proactively to ensure best value. At the same time, the training which the Report
recommends requires upfront investment and in a time of austerity it is hard to focus on long term benefits.
However, many of the recommendations show that there is already best practice in some local authorities. It
is really important that this is brought together to ensure that local authorities don’t have to reinvent the
wheel.
Anja Beriro | 0115 976 6589 | [email protected]
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Where do I stand on rent?
Apart from their numerous other functions and roles, most local authorities and other public sector clients
are property landlords of one form or another.
They may let property such as shopping centre, business parks or industrial estates for long term investment
purposes but might have become ‘accidental’ landlords having become the proud owners (perhaps through
cost cutting, downsizing or merger) of surplus property which might need to be let pending a longer term
sale when the market improves
They may be short term landlords of older property intended in the longer term for development purposes.
Issues facing private sector clients can be just as relevant in the public sector. Tenant insolvency is of course
an occupational hazard to landlords of commercial property, but in relation to tenant administration many
think that the law had swung too far in favour of administrators and given them an unfair tactical advantage
and a means of avoiding paying rent.
The ‘current law’… until very recently
Until earlier this year the 2009 case of Goldacre (Offices) v Nortel Networks UK and the 2012 case of Leisure
(Norwich) v Luminar Lava Ignite represented the established ‘current law’:
In Goldacre, the lease provided that the rent was (as it so often is, even with modern leases) payable
quarterly in advance on the usual quarter days.
The tenant went into administration before the relevant quarter day but the company did not vacate until
later (it had though vacated before the end of the relevant quarter).
The High Court held that the rent which fell due on the relevant quarter day was payable by the
administrators as an expense of the administration (and was therefore payable in full by the administrators)
even though they may cease to use the premises before the end of the period to which the payment relates.
Sounds like good news for landlords doesn’t it?
Yes, but for the fact that in the Luminar case, the High Court held that rent payable in advance and falling
due before the administration of a tenant could not be payable as an expense of the administration even if
the administrator might retain the property for the purposes of the administration for some or all of the
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period to which the advance payment related (leaving the landlords able only to claim that rent as
unsecured creditors in the administration)
As a result of these decisions it became common practice for administrations to be ‘managed’ to take effect
after a rent payment date… to give administrators an effective rent free quarter.
Not such good news for landlords then.
It is worth pointing out here that the decisions in these cases can apply to liquidations as well as
administrations.
The latest ‘current law’
The pendulum may have swung back as the Court of Appeal case (Jervis and others v Pillar Denton Ltd and
others [2014] EWCA Civ 180) relating to the administration of Game Group provides some welcome relief for
landlords, at least for the time being.
As always the specific circumstances are relevant, and in insolvency cases the facts are not always entirely
straightforward, but here goes…
The Game Group case
Game Stores Group Ltd went into administration on 26 March 2012, having failed to pay the March quarter’s
rent (due on 25 March) on 425 leases that it held as tenant (approximately £10m).
Some of the stores were closed, but others were sold to Game Retail Ltd (‘New Game’) on 1 April 2012
pursuant to a business sale agreement.
Under that agreement, New Game was given a licence to occupy the stores by the administrators (pending
the negotiation of new deals with the landlords).
Approximately £3m worth of rent remains outstanding in respect of these stores.
Based on the Goldacre and Luminar cases, directions were agreed between the parties that:
1. The rent which fell due on 25 March was not payable by the administrators as an expense of the
administration (leaving the landlords to claim that rent as unsecured creditors in the administration
process).
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2. Rent that fell due after the administrators’ appointment (when the administrators were using the
premises for the purposes of the administration) would be treated as an expense of the
administration (and was therefore payable in full by the administrators) even though the
administrators may cease to use the premises before the end of the quarter.
Given the importance of the matter, the landlords (Hammerson, British Land, Land Securities and Intu
Properties) appealed these directions (in relation to four representative leases) on the basis that the courts
had taken a “wrong turn” in the past, leading to a result that did not reflect commercial sense.
The administrators adopted a neutral stance (having the benefit of an indemnity for the unpaid rent from
New Game should the Court of Appeal rule in the landlords’ favour).
The issue to be determined was as simple as this: is the ‘current law’ correct?
The Court of Appeal overruled the Goldacre and Luminar cases and held that administrators and liquidators
must pay rent for any period during which they retain possession of property for the benefit of an
administration or a liquidation.
For these purposes, rent is treated as accruing from day to day and it makes no difference when the rent
days actually occur.
This will be welcomed by landlords in both public and private sectors and appears to apply (at least for the
time being) a hefty dose of common sense and fairness which ought to prevent abuse by administrators.
Is this the end of the story?
New Game was refused permission to appeal to the Supreme Court but it should be noted that it is likely to
ask the Law Lords directly for leave to take the case further. So watch this space
More detail for the keener student (!)…
As a result of this decision, administrators/liquidators will be liable to pay rent as an expense of the
administration/liquidation for the period that they use property for the purposes of the
administration/liquidation (or, to quote Lewison LJ, for the “period of beneficial retention”).
This is the case even where a quarter’s rent falls due prior to the administration/liquidation taking effect.
The same principle applies to the quarter’s rent falling due prior to administrators/liquidators ceasing to use
property (so they will not be liable for any rent that relates to a period after they have ceased to use it).
This decision is based on what is known as the ‘salvage principle’. This comes from a 19th century case
called Re Lundy Granite Co ex parte Heavan. The principle allows pre-insolvency debts to be elevated to
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expenses of the insolvency to the extent that they relate to property used for the benefit of the insolvency
process.
This is an equitable principle and is not affected by the common law rule that rent payable in advance
cannot be apportioned under the Apportionment Act 1870. It’s the common law rule which means, for
example, that a tenant has to pay the full quarter’s rent to exercise a break clause which falls between
quarter days (where the break clause is conditional on the tenant paying all rent due up to the break date).
Other sums payable in advance under a lease (e.g. service charge and insurance) will also be payable as
expenses of the administration/liquidation for the period that a property is used for the purposes of the
administration/liquidation.
Neil Walker | 0115 908 4127 | [email protected]
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Recent case on lifting the automatic suspension
In a recent Scottish case1 the Court of Session granted an application by South Lanarkshire Council to lift a
prohibition on entering into a contract for municipal waste services. In considering whether to lift the
prohibition, the court applied the principles that have been established in both the English and Scottish
courts. The case is therefore relevant for authorities both above and below the Scottish border.
The contract was split into two lots worth £9.5 million in total and had a target commencement date of 1
April 2014. The claimant’s tender for both lots was unsuccessful having been rejected at the quality
threshold stage. The claimant received debrief letters disclosing the names of the successful bidders for
each lot and including tables showing individual scores against the award criteria for both the claimant’s
tender compared to the scores of the successful bidder for each lot. The tables contained some erroneous
figures and the claimant complained that the letters also did not contain all of the information required
under the Public Contracts (Scotland) Regulations 2006 (‘Regulations’). In particular, the claimant alleged
that the debrief letter did not contain (i) a summary of reasons why the bid was unsuccessful or (ii) an
explanation of the characteristics and relative advantages of the successful tenderers. It was also asserted
that a full breakdown of the scores against each criterion and sub-criterion had to be provided together with
a narrative explanation of why the winner scored more heavily in the relevant areas.
The council subsequently sent an expanded version of the debrief letter to the claimant including a full
breakdown of scores, corrections of errors and a detailed evaluation summary. The claimant complained that
the second letter still failed to include all of the required information. Whilst the council corrected further
errors in the table of scores that had been identified it rejected the claimant’s assertion that it had failed to
comply with its obligations under the Regulations.
On 31 December 2013 the claimant commenced proceedings alleging a breach of the Regulations which
resulted in an automatic suspension being placed on the award of the contract. The council then applied to
the court for the suspension to be set aside.
1 Patersons of Greenoakhill Ltd v South Lanarkshire Council [2014] ScotCS CSOH_21
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The court adopted the approach taken by Lord Glennie in Elekta v Common Services Agency2 when
considering the relevant test to apply to the application for the suspension to be set aside. In that case, Lord
Glennie stated:
“It seems to me that what requires to be considered is the strength of the parties' cases, the balance of
convenience having regard, but not overwhelming regard, to the question of whether damages might be an
adequate remedy, and the public interest.”
Strength of claimant’s case
In considering the strength of the claimant’s case the court referred to the Strabag3 case in which it was
stated that the duty to state reasons involved a duty on the authority to disclose its reasoning:
“In a clear and unequivocal fashion so as, on the one hand, to make the persons concerned aware of the
reasons for the measure and thereby enable them to defend their rights and, on the other, to enable the
Court to exercise its supervisory jurisdiction.”
In the present case, the court did not agree with the claimant’s assertion that the reasoning provided by the
council was vague or incomprehensible and considered that the council had provided the claimant with the
characteristics and relative advantages of the successful tenders. The court took into account the fact that
the council had placed considerable weight, throughout its evaluation, on its judgment that the successful
bidders had provided better and more comprehensive supporting evidence for their tender. It considered
that this provided adequate and understandable reasoning for awarding higher scores to the successful
bidders than to the claimant.
Secondly, the claimant asserted that the council had made a manifest error in evaluating the successful
bidders’ tenders. A key aspect of the quality criteria in the ITT was the recycling of contract waste and
bidders were required to provide a Guaranteed Recycling Percentage (‘GRP’), i.e. the minimum percentage
of waste delivered by the council that the bidder undertook to recycle during the relevant contract year. It
was alleged that the GRPs proposed by the successful bidders must have been too high to be practically
sustainable. The ‘manifest error’ test was clearly articulated in the Lion Apparel4 case in which it was
stated:
“In relation to matters of judgment, or assessment, the Authority does have a margin of appreciation so
that the court should only disturb the Authority's decision where it has committed a 'manifest error.”
2 Which in turn was based on an analysis of English case law 3 Strabag Benelux NV v EU Council [2003] ECR II-138 4 Lion Apparel Systems Ltd v Firebuy Ltd [2007] EWHC 2179
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Whilst the court rejected an overly narrow interpretation of the term ‘manifest error’, it didn’t consider
that the claimant had made a very strong case that the council had committed a manifest error. In
particular, the court highlighted that the claimant’s argument in relation to the GRPs was based merely on
the opinions of its senior managers.
Thirdly, the claimant alleged the council had consistently differentiated between the claimant’s tender on
the one hand and the successful bidders' tenders on the other on the ground that the latter had been
supported by evidence or by a higher standard of evidence. It was argued that it was not apparent from the
Invitation to Tender (ITT) that evidence required to be submitted in support of tenders unless expressly
requested. Accordingly, it was argued, the procedure had not been transparent because in evaluating the
bids the council had applied a criterion not disclosed to bidders. The court considered that this argument
had very little prospect of success. It identified that the ITT stated expressly that higher scores would be
awarded to proposals which were supported by a high standard of evidence and that the highest scores
would be given to proposals supported by "comprehensive and robust evidence". The court held that it
would be wrong to read too much into the use of words such as "evidence", "information" and "details" where
they appeared elsewhere in the ITT.
The court also rejected that the claimant’s argument that the two stage evaluation process undertaken by
the council (by which the quality criterion was assessed first with price being assessed subsequently) was
flawed.
The court therefore concluded that it was appropriate to take strength of the claimant’s case into account
that the effect of so doing favoured the making of an interim order bringing the prohibition on the council
entering into the contract to an end. This was because (a) the negative consequences of such an order are
not likely to outweigh the benefits if the action is ultimately going to fail, and (b) the probable
consequences of making an interim order were likely to be beneficial to those who would be adversely
affected by leaving the prohibition in place pending the outcome of an unsuccessful challenge.
Balance of convenience and public interest
The court held that the balance of convenience and the public interest favoured the granting of an order
bringing the suspension to an end. It was considered that there were clear advantages to the council and to
the public in the certainty of having in place, with effect from the expiry of the current arrangements, a
contract on the terms desired by the council when it invited tenders. The court noted that for various
reasons, not least the council’s quality assessment, it would be difficult for the council to enter into a
temporary contract with the claimant, and accordingly the defendant would be put in the position of having
to purchase the services it required in the market, with consequent uncertainty and risk of additional cost.
The court considered that the remedy of damages would provide the claimant with an adequate remedy if its
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claim succeeded. Whilst noting that proof of loss may not be straightforward, the court asserted that it
accustomed to undertaking the task of quantifying loss of a chance and so was not deterred by this point.
Comment
This case continues the growing line of case law that has seen many automatic suspensions set aside. The
court was clearly not impressed with the weak arguments put forward by the claimant and the case
reiterates the very high threshold that needs to be met for a claim to succeed on the ‘manifest error’
argument. Strong objective evidence is likely to be required to stand any chance of meeting this threshold.
Conversely, the threshold for a contracting authority succeeding in arguing that the public interest favours
the setting aside of a suspension order appears to be very low. In the present case, the court felt this
threshold was met due to the need for certainty in having a contract in place and the risk of the contracting
authority incurring additional costs.
The case is also interesting in confirming that a court will not be deterred from holding that damages would
be a sufficient remedy even where the calculation of the amount of such damages might be a difficult
exercise.
Steven Brunning | 0115 934 2056 | [email protected]
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Leases and guarantees
Local authorities are often keen for job creation, regeneration and innovation purposes, to attract newly
formed ventures and small and medium enterprises (SMEs) to take up space in their buildings.
Whatever the circumstances for the letting, like their private sector landlord counterparts, securing the
income stream from regular and punctual rent payments and compliance with tenant covenants is always
important to local authorities and other public sector bodies.
Whether the tenant is a newly formed entity, has a short and relatively untried and un tested track record,
or if there are other concerns over covenant strength, a prudent landlord will often require the tenant’s
lease obligations to be secured, most commonly by way of rent deposit deed, or by a parent company
guarantee (if there is a parent company) or personal guarantee, and sometimes (although rarely in our
experience) a combination of the two.
Where an existing tenant requests landlord’s licence/consent to assign, a landlord will, depending upon the
terms of the lease and the provisions of the Landlord and Tenant (Covenants) Act 1995, often be entitled to
call for the outgoing tenant to enter into an authorised guarantee agreement, or AGA , to provide a degree
of security against incoming tenant default.
The outgoing tenant stands as guarantor of the incoming tenant’s liabilities under the lease until the next
lawful assignment.
Sometimes the guarantees are obtained from two or more individuals or companies - their liabilities may be
joint and several.
But just how secure are those guarantees and AGAs?
A couple of recent Court of Appeal cases dealing with lease variations and forged signatures highlight some
of the potential pitfalls which could apply to parent company, personal or AGA guarantees.
What is the effect of a lease variation on guarantors?
Topland Portfolio No 1 Ltd v Smiths News Trading Ltd [2014] EWCA Civ18
The Court of Appeal upheld a first instance decision and confirmed the long-standing principle of guarantee
law that a guarantor is discharged from liability where the parties to the principal contract agree to vary it,
unless the guarantor has consented to the variation or the variation is patently insubstantial or incapable of
adversely affecting the guarantor or the guarantee agreement provides to the contrary.
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These principles are sometimes referred to as the rule in Holme v Brunskill, a less than recent case (from
1878) which also establishes that the person seeking to enforce the guarantee has the burden of proving that
a variation is insubstantial, or not prejudicial to a guarantor.
This is a complicated case but the basic facts involved a lease with an absolute prohibition against tenant’s
alterations and a licence for alterations, to which a guarantor was unusually not a party, and which
increased the liability of the tenant under the lease in relation to repair and reinstatement.
Most modern leases will deal specifically with circumstances that might otherwise release a guarantor, and
most landlords will join guarantors into supplemental leasehold documentation such as licences for
alterations and deeds of variation.
The belt and braces approach is often best.
This case concerned a lease granted in 1981 with wording which would be considered inadequate in the
present day. However if you hold leasehold property in your portfolio whatever the date of the lease it’s
well worth checking how robust the guarantee provisions really are and whether anything might have
happened in the past which would have inadvertently released any guarantors.
Joint and several guarantees… and proper execution
Harvey v Dunbar Assets Plc – Court of Appeal [2013] EWCA Civ 952
A case involving a joint and several guarantee clause made by four guarantors, albeit in a banking case
rather than in relation to a lease.
Unfortunately the signature of one of the proposed guarantors was alleged to have been forged – this matter
has not yet been fully determined. The court was asked to decide whether one of the guarantors would be
relieved of liability if one of the other signatures proved to be forged.
The court held that the guarantee was a single composite guarantee under which all four guarantors would
be jointly and severally liable and so in the absence of any clear language to the contrary all four signatures
were an essential pre-condition to the liability of each individual guarantor who signed the document.
In this case modern drafting did not work. The deed contained a clause which attempted to preserve the
liability of each individual guarantor where the obligations of any co-guarantor were invalid or
unenforceable but the court held that the wording was not sufficient on the facts of this case.
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This is likely to increase lenders’ caution in the banking world in particular in relation to establishing that
each co-guarantor has received independent legal advice and has properly executed the guarantee
documentation.
The problem with lack of proper execution could be equally applicable to a guarantee agreement in respect
of a lease where there are co-guarantors. You’ve been warned!
Neil Walker | 0115 908 4127 | [email protected]
