Public matters newsletter, March 2014

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  1. 1. Birmingham Exeter London Manchester Nottingham0121 237 3900 01392 458 800 020 7337 1000 0161 300 8100 0115 976 6000www.brownejacobson.com1Index2 3 New public procurement regime Steven Brunning4 6 Procurement policy and guidance 2014Anja Beriro7 10 Tenant in administration - where do I stand on rent?Neil Walker1114 Public procurement recent case on lifting the automatic suspensionSteven Brunning1517 Dont worry, its guaranteed. Or is it?Neil WalkerPeter Ware | 0115 976 6242 | Peter.Ware@brownejacobson.com
  2. 2. 2The 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.
  3. 3. 3We 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 | steven.brunning@brownejacobson.com
  4. 4. 4Since 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 doesnt 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
  5. 5. 5the 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 doesnt 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 Associations (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 shouldnt 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 isnt 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
  6. 6. 6 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 doesnt 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 dont have to reinvent the wheel.Anja Beriro | 0115 976 6589 | Anja.Beriro@brownejacobson.com
  7. 7. 7Where 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 improvesThey 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 recentlyUntil 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 doesnt 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
  8. 8. 8period 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 lawThe 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 goesThe Game Group caseGame Stores Group Ltd went into administration on 26 March 2012, having failed to pay the March quarters 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).
  9. 9. 92. 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 spaceMore 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 quarters rent falls due prior to the administration/liquidation taking effect. The same principle applies to the quarters 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
  10. 10. 10expenses 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. Its the common law rule which means, for example, that a tenant has to pay the full quarters 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 | Neil.Walker@brownejacobson.com
  11. 11. 11Recent case on lifting the automatic suspensionIn 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 claimants 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 claimants 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 claimants 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
  12. 12. 12The 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 claimants caseIn considering the strength of the claimants 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 claimants 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 law3 Strabag Benelux NV v EU Council [2003] ECR II-1384 Lion Apparel Systems Ltd v Firebuy Ltd [2007] EWHC 2179
  13. 13. 13Whilst the court rejected an overly narrow interpretation of the term manifest error, it didnt 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 claimants 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 claimants 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 claimants 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 claimants 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 interestThe 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 councils 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
  14. 14. 14claim 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.CommentThis 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 | steven.brunning@brownejacobson.com
  15. 15. 15Leases and guaranteesLocal 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 tenants 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 landlords 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 tenants 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 Civ18The 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.
  16. 16. 16These 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 tenants 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 its 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 executionHarvey v Dunbar Assets Plc Court of Appeal [2013] EWCA Civ 952A 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.
  17. 17. 17This 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. Youve been warned!Neil Walker | 0115 908 4127 | Neil.Walker@brownejacobson.com