Public Law Issues in Public Authority Land Disposal:

Best Value, State Aid, Procurement

Tim Buley

Overview

1. Best Value

A. Sources of the obligation to obtain best value

B. Exceptions to the obligation to obtain best value

C. The nature of the obligation to obtain best value

2. State aid and the obligation to obtain best value

A. Definition of State aid

B. European Commission Communication 97/C 209/03

C. Do State aid principles add anything to domestic law obligations in relation to best value?

Overview

3. Public procurement

A. Legislative framework

B. Potential application in the land disposal context

1. Best value

A. Sources of the obligation to obtain best value

Best value

Section 123 of the Local Government Act 1972

Provides that local authorities may (with a minor exception relating to playing fields in Wales) dispose of land as they see fit, but:

(2) Except with the consent of the Secretary of State, a council shall not dispose of land under this section otherwise than by way of a short tenancy, for a consideration less than the best that can reasonably be obtained.”

Best value

Section 127 of the Local Government Act 1972

• Makes identical provision to section 123 LGA 1972 in respect of parish or community councils, or the parish trustees of a parish

Section 233 Town and Country Planning Act 1990

• Section 233(8): section 123 LGA 1972 does not apply to land which has been acquired or appropriated for planning purposes and is for the time being held for those purposes

• Instead:

Best value

“233.— Disposal by local authorities of land held for planning purposes.

(1) Where any land has been acquired or appropriated by a local authority for planning purposes and is for the time being held by them for the purposes for which it was so acquired or appropriated, the authority may dispose of the land to such person, in such manner and subject to such conditions as appear to them to be expedient...

...

(3) The consent of the Secretary of State is also required where the disposal is to be for a consideration less than the best that can reasonably be obtained and is not—

(a) the grant of a term of seven years or less; or

(b) the assignment of a term of years of which seven years or less are unexpired at the date of the assignment...”

Best value

HM Treasury guidelines: “Managing Public Money” (July 2013)

Annex 4.15: Asset management

Box A4.15D: protocol for disposal of land, property and other assets

“Value assets at market prices using Royal Institute of Chartered Surveyors’ Red Book”

• An example of how that approach has been adopted in practice:

Best value

Ministry of Defence / Defence Infrastructure Organisation: “Defence Infrastructure Interim Land and Property Disposal Strategy” (October 2011)

“3. Development and land disposal principles

...

Over-riding Principle

[24] ...DIO sells its surplus land and property in accordance with Treasury Guidelines (Managing Public Money) which requires us to get the best price reasonably obtainable...

[25] ...We will seek market value for land according to the planning situation.”

Best value

Crichel Down Rules (Circular 06/2004):

• Apply to surplus Government land which was acquired by, or under a threat of, compulsion

“Terms of resale

26. Disposals to former owners under these arrangements will be at current market value...

27. As a general rule, departments should obtain planning consent before disposing of properties which have potential for development. Where it would not be practicable or appropriate for departments to take action to establish the planning position at the time of disposal, or where it seems that the likelihood of obtaining planning permission (including a more valuable permission)...

Best value

...is not adequately reflected in the current market value, the terms of sale should include clawback provisions in order to fulfil the Government’s or public body’s obligation to the taxpayer to obtain the best price....”

B. Exceptions to the obligation to obtain best value

Best value

Short tenancies: the obligation to obtain best value contained in sections 123 and 127 LGA 1972 does not apply to disposals of land by way of a “short tenancy” i.e. by (a) the grant of a term not exceeding seven years or (b) the assignment of a term which has not more than seven years to run

With the consent of the Secretary of State:

• Both section 123 LGA 1972 and section 127 LGA 1972 provide for an exception to the obligation to secure the best consideration that can reasonably be obtained, where the Secretary of State consents

Best value

• The Local Government Act 1972: General Disposal Consent 2003 (“the Consent”)

– Annexed to Circular 06/03

– Removes the requirement for authorities to seek specific consent from the Secretary of State for any disposal of land where:

• the local authority considers that the purpose for which the land is to be disposed is likely to contribute to the achievement of any one or more of:

– i) the promotion or improvement of economic well-being;

– ii) the promotion or improvement of social well-being;

– iii) the promotion or improvement of environmental well-being; and

Best value

• the “undervalue” (i.e. the difference between the unrestricted value of the interest to be disposed of and the consideration accepted) is £2,000,000 or less

• Where the case does not fall within the terms of the Consent: an application to the Secretary of State for a specific consent is required

• Following amendment by the Growth and Infrastructure Act 2013, section 233 TCPA 1990 now empowers the Secretary of State to give “general” consent in relation to land held for planning purposes: see section 233(3A) TCPA 1990. Specific consents were previously required.

Best value

• However: even where the Secretary of State consents to a disposal at less than the best consideration that can reasonably be obtained, the disposal must still comply with EU State aid rules

– When a public authority disposes of land at less than best consideration, it provides a subsidy to the purchaser. The public authority must therefore ensure that the nature and amount of subsidy complies with the rules in relation to State aid, particularly if there is no element of competition in the sale process

– Failure to comply with the State aid rules will mean that the subsidy is unlawful, and may result in the benefit being recovered (with interest) from the recipient

– (Discussion of the State aid rules follows below)

Best value

• POLICY CASES / CENTRAL GOVERNMENT

– Where the obligation to obtain best value comes from published policy , rather than statute, the principle that a public body is entitled to depart from published policy for good reason ought to mean that the public body may be entitled to sell for other than best value.

– BUT this again must be subject to compliance with State Aid rules

C. The nature of the obligation to obtain best value

Best value

What does “the best consideration that can reasonably be obtained” mean?

R (Midlands Co-operative Society Ltd) v Birmingham CC [2012] EWHC 620 (Admin) (Hickinbottom J)

[124] In considering whether a particular price is the best price reasonably obtainable, the best price achievable in the open market is likely to be relevant. In many cases, they will be the same. It is intrinsic to the concept of open market value that it takes into account all potential bidders, including any special bidders, to avoid a speculator buying property and selling it on to someone with a special interest at a higher price (Commissioners of Inland Revenue v Clay [1914] 3 KB 466)

Best value

NB see also Annex A to the Crichel Down Rules:

Annex: Guidance for departments:

“Market value and the date of valuation (Rule 26)

[18] For the purposes of the Rules, ‘market value’ means ‘the best price reasonably obtainable for the property’. This is equivalent to the definition of ‘market value’ in the RICS Appraisal and Valuation Manual (the ‘Red Book’), but including any ‘Special Value’ (i.e. any additional amount which is or might reasonably be expected to be available from a purchaser with a special interest like a former owner).”

Best value

For the purposes of section 123, the only consideration to which regard may be had is that which consists of those elements of the transaction of commercial or monetary value, capable of being assessed by valuers: R v Pembrokeshire CC ex p Coker [1999] 4 All ER 1007; R v Hackney LBC ex p Lemon Land [2001] EWHC Admin 346 [2002] JPL 405

Best value

RELEVANCE OF OPEN MARKET SALE

Although there is no particular prescribed route to achieve the best price reasonably obtainable, there may be circumstances in which an actual sale to the market is the only way to achieve it as opposed to one particular sale at a price according to an independent valuation: Salford Estates at [98] with reference to Tomkins v Commissioner for New Towns [1989] 1 EGLR 24 (CA)

Best value

GROUNDS OF CHALLENGE LIMITED TO PUBLIC LAW

The purported discharge by a local authority of its section 123 LGA 1972 duty can only be impugned by a court on the usual public law grounds: R v Essex County Council ex p Clearbrook Contractors Ltd (3 April 1981, unreported); Salford Estates at [95] (approved by Hickinbottom J in Midlands Co-operative at [122])

Best value

Duty to achieve an outcome, not conduct a process

Section 123 LGA 1972 imposes a duty to achieve a particular outcome (namely the best price reasonably obtainable): it is not a duty to conduct a particular process (e.g. to have regard to particular factors: R (Salford Estates) v Salford CC [2011] EWHC 2135 (Admin) at [95] (HHJ Waksman QC, approved by R (Midlands Co-operative Society Ltd) v Birmingham CC [2012] EWHC 620 (Admin) - Hickinbottom J at [122])

Best value

R v Darlington BC ex parte Indescon [1990] 1 EGLR 278 (Kennedy J)

The "Indescon principles": "...a court is only likely to find a breach or an intended breach by a

council of the provisions of section1 23(2) of the [LGA] 1972 if the council has (a) failed to take proper advice or (b) failed to follow proper advice for reasons which cannot be justified or (c), although following proper advice, followed advice which was so plainly erroneous that in accepting it the council must have known, or at least ought to have known, that it was acting unreasonably" (282H)

Best value

Indescon (guidance):

(1) … the public authority may pray in aid "the common-sense rule underlying the

old proverb: "A bird in the hand is worth two in the bush"": Indescon (see also R (Lidl (UK) GmbH) v Swale Borough Council [2001] EWHC Admin 405 (Morison J))

Public authority was therefore entitled to conclude sale notwithstanding possibility arising at late stage of higher offer.

(2) … the public authority does not enjoy the benefit of hindsight, thus: "although there is a duty to probe and to explore any offer that may be made there may also be a danger that too much probing or indecisiveness may lead to the loss of a bargain …“

2. State aid and the obligation to obtain

best value

A. Definition of State aid

State aid

Article 107(1) of the Treaty on the Functioning of the European Union (“TFEU”):

"Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market."

State aid Thus, four criteria must be satisfied before the aid in question will

(unless another Treaty provision provides to the contrary) be prohibited by Article 107(1) as incompatible with the internal market:

• there must be an "aid" in the sense of an economic advantage;

• that aid must be granted, directly or indirectly, "by a Member State or through State resources";

• it must confer an advantage on the recipient by favouring certain undertakings or the production of certain goods (the "selectivity condition"); and

• it must be liable to distort competition and affect trade between Member States.

B. European Commission Communication 97/C 209/03

State aid

European Commission Communication on State aid elements in sales of land and buildings by public authorities (97/C 209/03) ("the Commission Guidance")

• Describes "a simple procedure that allows Member States to handle sales of land and buildings [by public authorities] in a way that automatically precludes the existence of State aid"

State aid

STATUS OF GUIDANCE:

… The Commission has drawn up general guidance to Member States in order to make its general approach with regard to the problem of State aid through sales of land and buildings by public authorities transparent and to reduce the number of cases it has to examine.

Not a source of “hard” law – guidance issued by the Commission as to how it will exercise its own discretion. Main effect to create expectations binding on Commission itself, albeit may be looked as persuasive on general law.

State aid

PURPOSE OF GUIDANCE: This guidance takes account of the fact that in most Member States budgetary

provisions exist to ensure that public property is in principle not sold below its value. Therefore, the procedural precautions recommended to avoid State aid rules coming into play are formulated in a way that should normally allow Member States to comply with the guidance without changing their domestic procedures. [Emphasis added]

C-239/09 Seydaland Vereinnigte Agrabetriebe GmbH & Co KG v BVVG Bodenverwertungs-und-verwaltungs GmbH

39. … while it is clear that the best bid or an expert report are likely to provide prices corresponding to actual market values, as the Commission states in Title II, points 1 and 2(a), it cannot be ruled out that other methods may also achieve the same result.

State aid

The procedure:

“A sale of land and buildings following a sufficiently well-publicized, open and unconditional bidding procedure, comparable to an auction, accepting the best or only bid is by definition at market value and consequently does not contain State aid”

• The Commission Guidance defines "sufficiently well-publicised" and "unconditional"

State aid

The Commission Guidance also makes provision for an alternative to the unconditional bidding procedure: independent expert evaluation:

“If public authorities intend not to use the [unconditional bidding procedure], an independent evaluation should be carried out by one or more independent asset valuers prior to the sale negotiations in order to establish the market value on the basis of generally accepted market indicators and valuation standards. The market price thus established is the minimum purchase price that can be agreed without granting State aid”

State aid

• The Commission Guidance defines "asset valuer", "independent" and "market value". The latter means:

“the price at which land and buildings could be sold under private contract between a willing seller and an arm's length buyer on the date of valuation, it being assumed that the property is publicly exposed to the market, that market conditions permit orderly disposal and that a normal period, having regard to the nature of the property, is available for the negotiation of the sale”

State aid

• The Commission Guidance also addresses:

– the permissible margin in the event that the value set by the valuer cannot be obtained;

– special obligations; and

– the relevance of the primary cost to the public authority of acquiring land/buildings

State aid

Notification to the Commission

The Commission Guidance explains that the following cases of sale of land / buildings by public authorities should be notified to the Commission so that it can assess (i) whether or not the transaction constitutes "aid" and (ii) if so, whether that aid is compatible with the common market:

• any sale that was not concluded on the basis of an open and unconditional bidding procedure, accepting the best or only bid; and

• any sale that was, in the absence of such procedure, conducted at less than market value as established by independent valuers.

State aid

Exception to notification requirement: de minimis aid

“De minimis” aid need not be notified to the Commission

• “De minimis” aid is aid granted to a single undertaking up to a ceiling of 200,000 EUR over a rolling three year period: Commission Regulation 1407/2013

• Note however that the Regulation does not apply to undertakings in all sectors: see Article 1

State aid

• Assessing the value of the aid: Case T-366/00 Scott v Commission [2007] ECR II 797:

“[105] …when assessing the value of an aid in the form of a sale of property at an allegedly preferential price, the principle of the private investor operating in a market economy applies. Therefore, the value of the aid is equal to the difference between what the recipient in fact paid and what it would have had to pay in an arm’s length transaction on the open market to buy an equivalent property from a vendor in the private sector at the time of the relevant transaction”

State aid

Failure to notify the Commission as a ground for seeking judicial review

R v Commissioners of Customs & Excise, ex p Lunn Poly [1998] EuLR 438:

• State aid is unlawful because not notified to (and cleared by) the Commission

• Court finds that that illegality in itself results in the application for judicial review succeeding

• Upheld by the Court of Appeal ([1999] EuLR 653)

C. STATE AID AND JUSTIFICATION / COMPATIBLE STATE AIDS

When is a State aid not a state aid: (2) Measures justified by the nature or scheme of the system

• Something otherwise meeting Art. 107(1) criteria;

• Outside State aid if advantage conferred justified by “the nature or general scheme” of the system in question; other cases refer to justification from “nature or structure” or the “logic” of the relevant system;

• Court developed concept: see e.g. Case 173/73 Italy v Commission [1974] ECR 709, para. 15;

• Burden on Member State; must be proportionate also;

• Case C-279/08 P Commission v Netherlands - General Court rules Dutch NO2 emissions trading scheme for large industrial facilities so justified, CJEU disagreed.

Compatible aids: Art. 107 (2) and (3)

• Art. 107(2) “shall be compatible with the internal market”

– (a) aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned;

– (b) aid to make good the damage caused by natural disasters or exceptional occurrences;

• Art. 107(3) “may be considered to be compatible with the internal market” (emphasis added):

– (a) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment;

– (b) aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State;

– (c) aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest;

– (d) aid to promote culture and heritage conservation where such aid does not affect trading conditions and competition in the Union to an extent that is contrary to the common interest;

– (e) such other categories of aid as may be specified by decision of the Council on a proposal from the Commission

Compatible aids: Art. 107(3)

• Confers a discretion on Commission to approve State aid via:

– (i) Block exemptions; or

– (ii) Outside block exemption on case-by-case basis.

• (1) BLOCK EXEMPTIONS under s. 107(3):

– Most important: the General Block Exemption Regulation (“GEBR”)(2008)

– If covered by block exemption: no need for notification; GBER: a number of block exemptions: including environmental;

– Current GBER in force until June 2014 (extended);

– GBER under review; consultation – new GBER anticipated for 2014

– GBER covers some forms of environmental aid;

Art 107(3) cont.

• (2) OTHER CASES (outside block exemption):

– Require notification and assessment

– Case by case decision/balancing exercise either for individual aid or a scheme of aid;

– But many Commission Guides, even if meet guidance must notify and be approved see e.g. Environmental Protection 2008/C 82/01;

• Example of approved scheme: State aid No. N 356/2006 – United Kingdom Historic Environment Regeneration Scheme

– aims at promoting heritage conservation;

– the authorities charged with the implementation of the scheme include: English Partnerships, Local Government Offices in England

– eligible objects are ancient scheduled monuments, registered historic parks and gardens, listed historic buildings and designated, conservation areas

– The aid takes form of a direct grant for the repair, restoration and rehabilitation of an eligible object of up 100% of the eligible costs

– Currently runs to June 2014 (been extended).

3. Public procurement

A. Legislative framework

New public procurement directive:

• Directive 2014/24/EU on public procurement

• Came into force on 17 April 2014 – EU member states have 2 years to implement it in national legislation

• The government is aiming to transpose the new directive “quickly”

• The new directive repeals Directive 2004/18/EC ("the Directive")

Public procurement

Aim of the Directive: to co-ordinate procedures for the award of public works contracts, public supply contracts and public service contracts

• Risk Management Partners Ltd v London Borough of Brent [2011] UKSC 7 [2011] 2 AC 34: the object of the Directive is “...to ensure that public bodies award certain contracts above a minimum value only after fair competition, and that the award is made to the person offering the lowest price or making the most economically advantageous offer...”(at [10] per Lord Hope)

• Midlands Co-operative: the Directive "requires contracting authorities to treat potential contractors equally and non-discriminatorily, and to act in a transparent way” (at [29]).

Public procurement

The Directive is implemented domestically by the Public Contracts Regulations 2006 ("the Regulations")

"Public contract“ is defined by Regulation 2(1): “a public services contract, a public supply contract or a public works contract”

Of most relevance to the present context is the definition of a “public works contract” (also Regulation 2(1)):

Public procurement

““public works contract” means a contract, in writing, for consideration (whatever the nature of the consideration)—

(a) for the carrying out of a work or works for a contracting authority; or

(b) under which a contracting authority engages a person to procure by any means the carrying out for the contracting authority of a work corresponding to specified requirements”

“Works” means any of the activities specified in Schedule 2, i.e. “construction of new buildings and works, restoring and common repairs” (see further definition in Schedule 2)

Public procurement

“Contracting authorities” are defined by Regulation 3 and include Ministers, government departments, Parliament and the devolved administrations, and local authorities

Pursuant to Regulation 8, the Regulations do not apply to the seeking of offers in relation to a proposed public contract where the estimated value of the contract (net of VAT) at the relevant time is less than the relevant threshold

• Regulation 8(7): the estimated value is the total consideration (net of VAT) which the contracting authority expects to be payable

• Factors to be taken into account in determining the above: set out in Regulation 8(8)

Public procurement

Current thresholds:

• Supplies & Part A Services (except R&D, and certain telecom services):

– £111,676 for Schedule 1 bodies

– £172,514 for other bodies

• Part B Services, subsidised services contracts under Regulation 34, R&D, and certain telecom services: £172,514

• Works: £4,322,012

• Small Lots: £66,672 for Supplies & Services; £833,400 for Works

Public procurement

Where the Regulations apply, specific procedures have to be followed before a public contract is awarded: see Part 3 of the Regulations.

Note particularly:

“[Regulation] 12.— Selection of contract award procedures

(1) Subject to paragraph (2), for the purpose of seeking offers in relation to a proposed public contract, a contracting authority shall use—

(a) the open procedure in accordance with regulation 15; or

(b) the restricted procedure in accordance with regulation 16; in all circumstances, except where it may use—

• (i) the negotiated procedure in accordance with regulation 17 in the circumstances referred to in regulations 13 and 14; or

• (ii) the competitive dialogue procedure in accordance with regulation 18.”

Public procurement

Also Regulations 30 and 31:

“30.— Criteria for the award of a public contract

(1) Subject to regulation 18(27) and to paragraphs (6) and (9) of this regulation, a contracting authority shall award a public contract on the basis of the offer which—

(a) is the most economically advantageous from the point of view of the contracting authority; or

(b) offers the lowest price.”

Public procurement

“31.— Contract award notice

(1) Subject to paragraphs (2) and (3), a contracting authority which has awarded a public contract … shall, not later than 48 days after the award or conclusion, send to the Official Journal a notice, in the form of the contract award notice in Annex III to Commission Regulation (EC) No 1564/2005 as amended from time to time including the information therein specified”

B. Potential application in the land disposal context

Public procurement

Regulation 6(2)(e):

“6. General exclusions

…

(2) These Regulations do not apply to the seeking of offers in relation to a proposed public contract…

…

(e) for the acquisition of land, including existing buildings and other structures, land covered with water, and any estate, interest, easement, servitude or right in or over land…”

Public procurement

However it should not be assumed that the Regulations are therefore irrelevant in the context of public authority land disposal:

The first question: is there a legally enforceable obligation to carry out the relevant works? Case C-451/08 Helmut Müller GmbH v Bundesanstalt für Immobilienaufgaben [2010] 3 CMLR 18 at [63]:

“... [T]he concept of ‘public works contracts’, within the meaning of [the Directive], requires that the contractor assume a direct or indirect obligation to carry out the works which are the subject of the contract and that that obligation is legally enforceable in accordance with the procedural rules laid down by national law”

Public procurement

Midlands Co-operative at [107]:

“...in considering whether the procurement provisions apply, one must have look [sic] at the whole of the arrangements between the contracting authority and the contractor; and, in particular, whether there is in reality a multi-stage award procedure which comprises in substance a unity which includes an obligation to perform works and is consequently subject to the procurement rules. For example, there may be an award of a land contract by the authority to the contractor, with a separate award of a contract involving works...

Public procurement

…Where the authority and contractor are legally committed to the works contract at the time of the land contract, then the two stages might of course be considered as a single transaction, to which the procurement provisions apply. However, as Helmut Müller [...] make[s] clear, at the time of the land transaction, it is insufficient that the authority merely intends to, or is very likely to, enter into a works contract with the contractor, short of a formal legally enforceable commitment...”

Public procurement

As Midlands Co-operative intimates: if there is a legally enforceable obligation to perform works, a further question arises: are the Regulations inapplicable on the ground that the main purpose of the arrangement is not the procurement of works?

Public procurement

Case C-331/92 Gestion Hotelera v Comunidad Autonoma de Canarias

“[25] The question which arises for the national court is whether a mixed contract relating both to the performance of works and to the assignment of property falls within the scope of Directive 71/305.

[26] The answer must be that, where the works to be carried out in the hotel and the casino are merely incidental to the main object of the award, the award, taken in its entirety, cannot be characterized as a public works contract within the meaning of Directive 71/305.

[27] …[F]or a contract to be a public works contract, its object must be the achievement of a work and… insofar as those works are incidental rather than the object of that contract, they do not justify treating the contract as a public works contract”

Public procurement

Case C-306/08 Commisson v Spain

“[90] It is clear, moreover, from the case law of the Court that, where a contract contains elements relating both to a public works contract and another type of contract, it is the main object of the contract which determines which body of EU rules on public contracts is to be applied in principle (see, to that effect, Auroux [2007] E.C.R. I-385 at [37]).

[91] That determination must be made in the light of the essential obligations which predominate and which, as such, characterise the transaction, as opposed to those which are only ancillary or supplementary in nature and are required by the very object of the contract (Commission of the European Communities v Italy (C-412/04) [2008] E.C.R. I-619 at [49])”

Public procurement

See also: Case C-576/10 European Commission v Netherlands

Note finally: the Public Services (Social Value) Act 2012 (entered into force on 31 January 2013):

• Obligation on all public authorities which are subject to the Regulations to consider, at the pre-procurement stage:

– How what is proposed to be procured might improve the economic, social and environmental well-being of the area;

– How, in conducting the process of procurement, it might act with a view to securing that improvement

• Cabinet Office guidance: PPN 10/12 (December 2012)

Public Law Issues in Public Authority Land Disposal:

Best Value, State Aid, Procurement

Tim Buley