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Select or award: how to get it right

Anja Beriro

2 - 4

Duty to investigate abnormally low tenders?

Alex Kynoch

5 – 6

Case management and the courts

Nichola Evans

7 – 11

Take a dip in the pool?

Neil Walker

12 – 24

A salutary state aid story for Santa

Sharon Jones

25 - 27

Peter Ware | +44 (0)115 976 6242 | Peter.Ware@brownejacobson.com

2

“A criterion based on the tenderers’ experience concerns the tenderers’ ability to perform a contract and

therefore does not constitute an award criteria.” So said the European General Court (the Court) when

giving its reasons not to annul a contract entered into by the Council of the European Union with Alfastar

Benelux SA (Case T-394/12 Alfastar Benelux SA v European Commission) for IT services.

This claimant raised a number of issues common to a lot of procurement challenges:

1. the obligation to state reasons;

2. the infringement of tender specifications by misunderstanding what the bidders needed to

demonstrate;

3. manifest errors of assessment;

4. confusion between the use of selection and award criteria;

5. inconsistencies and inaccuracies in the Pre-Qualification Questionnaire (PQQ) documents; and

6. breach of Article 11(2) of the Financial Regulations (only relevant to central EU bodies).

All of these were rejected by the court. In this article we will focus on issues raised under points 3 and 4.

Facts of the case

Briefly, the claim was actually the second claim brought by the applicant in relation to the same tender

exercise! The tender exercise started in 2008 and the original decision was annulled by the Court due to the

Council of the European Union (the Council) failing to state reasons. The Council then re-ran the tender

exercise and the same bidder won. Alfastar challenged again. Alfastar was the incumbent service provider.

Manifest errors of assessment

Alfastar claimed a number of manifest errors, all of which were rejected by the Court. Of particular interest

in the facts set out in this limb of the claim, was that Alfastar, as the incumbent, believed that it should

have been given a higher mark in relation to knowledge transfer because it was the incumbent and all the

current staff would remain should it be re-awarded the contract. The Court held that the fact that the

successful bidder had shown a stronger and clearer understanding of the requirements in its tender response

meant that the Council was within its rights to award a higher mark. The Court also noted that the Council’s

new requirements were slightly different to those under the current contract and that this was also a good

reason for the Council to award marks based on something other than current knowledge.

One of the members of the team put forward by the successful bidder had worked previously for Alfastar and

had been dismissed for alleged incompetence. The Court held that this knowledge of Alfastar did not mean

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that the incompetence had been objectively confirmed and that it did not mean that the person in question

was not able to provide the services required as part of the successful bidder’s proposal.

Selection versus award

This judgement confirms a number of cases that have previously looked at the question of what constitutes a

selection criterion and what is an award criterion. In particular, it is another example of a case reassuring

contracting authorities that, in the right context, it is acceptable to include requirements around the

experience and qualifications of staff as part of the award criteria. This builds on probably the most famous

case in this area, Emm.G. Lianakis AE and others v Dimos Alexandroupolis and others (C-532/06).

As people know, in England and Wales, selection criteria as based on those set out in regulations 24, 25 and

26 of the Public Contracts Regulations 2006 (as amended). This includes technical and professional capacity

and is the usual place to look at the experience of the organisation with similar projects and contracts.

Award criteria, on the other hand, as set out in regulation 30, should allow the contracting authority to

award the contract to the most economically advantageous tender (MEAT). The criteria for awarding the

contract can include price and the service offer, as against the requirements set out by the contracting

authority.

We often advise clients to consider the difference between selection and award criteria as being backward

and forward looking, respectively. At the first stage, you are checking that a provider has the experience,

technical ability and the financial standing to deliver services similar to those that you are wishing to

procure. The second stage is a process by which the bidders must give their response to the actual

requirements and how they will carry out the contract over its term.

The Court held that it is not always fatal to the compliance of a tender exercise that, as part of the award

criteria, the professional experience of members of the proposed team is evaluated. The difference at this

stage is that the experience must only be for those employees definitely involved in the service provision

and that it must be part of ensuring the quality of the services. There must be a direct link between the

services required and the evaluation of individuals’ skills and experience. In this case the submission, and

subsequent evaluation, of information about the technical ability of certain team members was perfectly

acceptable when looking at the roles being proposed by the successful bidder.

So, what can we gain on a practical level from this case? Firstly, as you will have advised evaluation team

many times before, prior knowledge of the bidder in question cannot be taken into account when checking a

bidder’s response against the requirements. All information against which a criterion is scored must be set

out in the tender documents.

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Secondly, when devising a two-stage procurement process, take time to review the PQQ and

Invitation to Tender (ITT) criteria and ensure that the right questions are in the right place.

The Court here made it clear that there were definitely times when a mistake in doing this

could be fatal.

Anja Beriro | +44 (0)115 976 6589 | Anja.Beriro@brownejacobson.com

5

NATS (Services) Ltd v Gatwick Airport Ltd [2014] EWHC 3728 (TCC), judgment of 12 November

2014

We last commented on the NATS (Services) Limited v Gatwick Airport Limited dispute in the October edition

of Public Matters in the context of an application for the automatic suspension on the award of the contract

to be lifted.

The later judgement of 12 November dealt with the NATS’ particulars of claim. NATS obtained permission to

amend its particulars of claim, which Gatwick Airport Limited (GAL) applied to strike out parts of and NATS

then applied to re-amend.

Failure to investigate abnormally low tenders

One of NATS’ claims was based on the assertion that the successful bidder’s tender was an abnormally low

tender. NATS claimed that a failure to investigate this represented a breach of the principles of equal

treatment, transparency and non-discrimination and also represented a manifest error. NATS’ original

particulars of claim simply stated that NATS was “concerned that the price submitted…may have been

abnormally low” with no explanation of why this and the requested amendment sought to expand on why

this would represent a breach.

The court found that this aspect of the claim had no realistic prospect of success but was also inadequately

pleaded given that the amendment was made only a few weeks before trial. In reaching this conclusion the

court confirmed that there is no positive duty on contracting authorities (or utilities) to investigate or

reject abnormally low tenders, save in extreme circumstances where not to do so would represent a

manifest error. Even then, it would have to be determined that it was an error which no reasonable

contracting authority or utility could have made. As such the court took the view that no cause of action

was actually pleaded as Gatwick owed no such duty to NATS.

Manifest error on scoring: timing of amendment

NATS’ assertions that Gatwick had made manifest errors in scoring did demonstrate a cause of action but

the court did not allow this to be further particularised. NATS sought to include a schedule providing some

17 items relating to quality in which NATS claimed it was manifestly wrongly marked down. Gatwick stated

that these items could have been pleaded at the time of the original particulars of claim and the court was

sympathetic to this view. NATS argued that the information required to make this pleading only arose later

but the court disagreed, stating that the pleading could still have been made and then minor amendments

made when the information was made available. This demonstrates that, particularly where an automatic

suspension remains in place, the courts will take a strict view of amendments to pleadings.

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This is reflected in paragraph 34 of the judgement in which Mr Justice Akenhead stated:

“The fact that a trial on liability is being brought on within a short time is not a factor which should

excuse (even if on occasion it may explain) any delay in making amendments”

It is important to note that while NATS may not have considered it had sufficient

information to properly investigate and formulate its pleadings the court took into account

the impact of amendments to pleadings shortly before trial. There is a tension between

allowing claimants sufficient time to prepare claims and giving defendants sufficient time

to address them prior to trial. This tension is heightened in procurement challenges so

while it is clearly always advisable for pleadings to be as precise as possible this is of even

greater importance in these cases as the courts appear reluctant to permit amendments as

the trial date draws nearer.

Alex Kynoch | +44 (0)115 976 6511 | Alex.Kynoch@brownejacobson.com

7

In his report Lord Justice Jackson said that courts had become too tolerant of delays and non-compliance

with orders and that the balance needed to be addressed. As a result CPR 3.9 was given teeth so that when

considering the general management of cases judges were obliged to consider the need “for litigation to be

conducted efficiently and at proportionate cost” and “to enforce compliance with rules, practice

directions and orders”. Further courts were to monitor compliance with directions.

The courts initially took a mixed stance on how these new provisions ought to be interpreted. Then in

November 2013 the Court of Appeal, staffed with judges specifically tasked with dealing with Jackson

matters, provided guidance as to how the new provisions ought to be interpreted.

The case was Mitchell v News Group Newspapers Limited, a case dealing with the claimants’ failure to lodge

a cost budget pursuant to a pilot cost budgeting scheme for defamation proceedings within the prescribed

time limit. The budget was filed late and the claimants’ representatives applied for relief from sanction.

The key points arising out of that judgment are:

relief from sanction would be granted less sparingly than before

an application for an extension of time made before the expiry of the deadline would be looked on

more favourably

there was to be a shift away from ‘doing justice’ as “justice in the individual case is now only

achievable through the proper application of the CPR consistently with the overriding objective”.

courts should look at the non-compliance and if it could properly be said to be ‘trivial’ then the

court will probably grant relief if application was made promptly

If it is not trivial then the court will ask the defaulting party to persuade the court to grant relief.

There would have to be a ‘good reason’ for the default and that “good reasons are likely to arise

from circumstances outside the control of the party in default”.

Lord Dyson explained that once lawyers got used to the new culture of compliance there would be less

satellite litigation.

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The impact of this case was dramatic. Courts generally moved on to a zero tolerance approach and only the

most trivial of breaches resulted in relief from sanction so:

SC DG Petrol SRL v Vitol Broking Limited (Queens Bench Division) – an application for an extension

of time was refused where there had been a failure to provide security for costs and where there

had been a strike out sanction.

Durrant v Chief Constable of Avon and Somerset (Court of Appeal) – defendants attempted to

serve 6 witness statements out of time and applied for relief. The application was refused.

Lakatamia Shipping Co Limited v Nobu Su (Commercial Court) – disclosure was to be provided by

4:30pm and was provided at 5:16pm. Relief from sanction granted.

The Mitchell case led to lawyers point-scoring. It led to a level of litigiousness not seen for a number of

years. Reforms which were meant to reduce the level of costs incurred in litigation were having the

opposite effect. There was a high level of satellite litigation which is in neither party’s interest. For

instance, in Greater Manchester a 20% rise in applications for permission to appeal was predicted in 2014.

Many commentators and practitioners suggested that either the Rules needed amending or that full judicial

guidance needed to be given to set out clearly what was regarded as permissible behaviour.

The Court of Appeal, in an unusual step, listed three appeals together so that full and proper guidance

could be given on the issue (Utilise TDS Limited v Davies Decadent Vapuors Ltd v Bevan & Ors and Denton &

Ors v TH White Ltd & Anr [2014] EWCA Civ 906).

The Court of Appeal has given guidance by way of a three stage test for applications for relief from

sanction.

The three cases

So what were the three cases about and what was the behaviour complained about?

Utilise TDS Ltd v Davies and Another [2014] EWHC 834 - in this case a cost budget was filed 41 minutes

late and there was a breach of an order to inform the court as to the outcome of settlement discussions

between the parties. These two breaches were held to constitute a non-trivial breach by Judge Hodge QC

and relief from sanction was not granted to the claimant.

Denton and Anothers v TH White Ltd and another (unreported) - in this case a claimant was granted

permission to adduce an additional six witness evidence out of time and which resulted in a nine day trial

being adjourned.

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Decadent Vapours Ltd v Bevan and Others (Cardiff District Registry of the Chancery Division, 18 February

2014) - in which late payment of court fees was deemed to be a non-trivial breach.

The Court of Appeal

The Court of Appeal concluded that Mitchell had not been incorrectly decided – the problem was the way in

which the decision was being interpreted. We had all misunderstood what was being said!

The three stage test is described at paragraph 24 of the judgment as follows:

“A judge should address an application for relief from sanctions in three stages. The first stage is to

identify and assess the seriousness and significance of the “failure to comply with any rule, practice

direction or court order” which engages rule 3.9(1). If the breach is neither serious nor significant, the

court is unlikely to need to spend much time on the second and third stages. The second stage is to

consider why the default occurred. The third stage is to evaluate “all the circumstances of the case, so as

to enable [the court] to deal justly with the application including [factors (a) and (b)].”

Stage 1

The court said that the word ‘trivial’ had given rise to ‘some difficulty’ and said “… it has given rise to

arguments as to whether a substantial delay in complying with the terms of a rule or order which has no

effect on the efficient running of the litigation is or is not to be regarded as trivial.”

Going forward rather than looking at the triviality of a breach the courts are to look at whether a breach is

‘serious’ or ‘significant’.

The court also said that when considering the first stage the court should not look at previous breaches and

that this should be done at Stage 3 (see below).

Stage 2

The court should then look at the reason for the delay. The court declined to give a list of ‘excuses’ that

may allow an application for relief from sanctions. However it did refer to paragraph 41 of the Court of

Appeal judgment in Mitchell where it was suggested that a debilitating illness might constitute a good

reason but that being over-worked or over-looking a deadline would not.

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Stage 3

Paragraph 31 of the judgment sets out Stage 3:

“The important misunderstanding that has occurred is that, if (i) there is a non-trivial (now serious or

significant) breach and (ii) there is no good reason for the breach, the application for relief from sanctions

will automatically fail. That is not so and is not what the court said in Mitchell: see para 37. Rule 3.9(1)

requires that, in every case, the court will consider “all the circumstances of the case, so as to enable it to

deal justly with the application”. We regard this as the third stage.”

Therefore the courts need to consider the effect of the breach but weigh it up against the need for the

parties to abide by the Rules, Practice Directions and Orders.

The three cases appealed.

So what happened in the cases appealed?

Utilise TDS Ltd v Davies and Another – relief from sanctions granted.

Denton and Anothers v TH White Ltd and Another – a refusal to grant relief from sanctions.

Decadent Vapours Ltd v Bevan and Others – granted relief from sanctions.

This is perhaps not the definitive guidance we were after but the three stage test should clarify matters

somewhat. Hopefully we will now see greater consistency between the courts. The Court of Appeal also

makes it very clear that it does not expect to see ‘opportunism’ from lawyers and that if needs be that kind

of behaviour would be penalised. Hopefully we will see less satellite litigation going forward. But what is

the correct action to take if there is a breach? Whilst it is clear that action should be taken promptly, the

Court of Appeal has not made that clear. Can the parties agree what should happen if one party needs relief

from sanction? Does this in fact require an application to the court (even if the parties also submit a

consent order)? Best practice would appear to be to make an application to the court in any event and file

the consent order. If the court is not happy with the consent order it can always list a hearing to decide the

matter.

It is anticipated that following this judgment that contested hearings for relief from sanction will be rare.

The cost warnings given are enough to put off most lawyers: who wants unnecessary cost wars? However the

Court of Appeal has not set out in clear terms, save for a few examples from the Mitchell case, what set of

facts would allow relief from sanction. We therefore face the situation where there will be cases testing out

the judgment to give us a set of guidelines as to what kind of failure to comply is regarded as being so

serious or so significant that a party will not be permitted relief from sanction.

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There have been two reported decisions post Denton on this subject:

NNN v D1 – the defendant applied to set aside a default judgment entered following a failure to comply

with an unless order relating to disclosure. The judge thought that the defendant had done his best and

allowed relief from sanction. However it should be noted that the defendant was a self-represented person.

Yeo v Times Newspapers – failure to serve notice of a new CFA was not regarded as serious or significant so

relief granted.

In addition we have anecdotal evidence that parties are working together more cohesively on cases.

In terms of extensions Lord Justice Jackson in his paper for the Civil Justice Council conference earlier this

year suggested that the parties ought to be able to agree sensible extensions (subject to the overall

timetable not being disrupted). There is now a new CPR 3.8 ‘buffer rule’ where parties can agree

extensions of time up to 28 days provided that it does not put a hearing date at risk.

Therefore whilst we still do not have perfect guidance we are now in a better position with

guidance to the effect that litigation should be conducted more sensibly and this will cut

down the satellite litigation we have seen.

Nichola Evans | +44 (0)161 300 8021 | nichola.evans@brownejacobson.com

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Local authorities and land collaboration/joint venture agreements

There are reports of renewed activity with public sector regeneration and joint venture deals.

Local authorities and their private sector developer partners are revisiting development agreements on

schemes mothballed during the recession and considering whether their regeneration aspirations can be

revived, in some cases requiring substantial variations to previously agreed terms, in others starting with a

clean slate.

We are also seeing signs of a growing appetite for local authority landowners to collaborate (or enter into

joint venture arrangements) with private sector developers (or landowners) in combining or ‘pooling’ land

interests for promotion, development and sale.

The appetite for private sector developers for new development land, particularly for residential

development, appears to be healthier now than it has been for a number of years.

Local authorities of course have their own agendas in releasing land for development, generally geared to any

one or more of the following: achieving housing targets; securing regeneration; creating jobs; realising

capital receipts from the disposal of surplus land and buildings.

There are a number of ways in which local authorities and the private sector can collaborate with each other

(or form a joint venture), but there are also issues and pitfalls which need to be carefully considered.

This is the first of three articles on this theme and looks at some of the issues that need to be identified and

thought through at an early stage.

In later editions of Public Matters our second article will look at some typical collaboration/joint venture

structures, and whether land pooling is the right way to go, and a third will deal with disposal and promotion

structures.

But first let’s consider the basics…

Heads of terms - a good place to start

Heads of terms will often be the starting point for the drafting of any legal documents, and are important in

setting out the agreed basis of the deal, the objectives of the parties and the key terms.

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Clear comprehensive heads of terms can get the legal drafting and negotiations off on the right foot, and

ultimately should reduce legal spend.

It’s worth taking particular care with heads of terms that cover collaboration/joint venture arrangements

before they are ‘signed off’ at company board or local authority cabinet/committee/executive level to head

off any potential pitfalls which might otherwise throw a spanner in the works later down the line with what

can sometimes be rather complicated arrangements.

Unless the parties have properly considered the key issues that might arise (whether for them or the other

party or parties) there are risks that heads of terms assembled in haste, perhaps for political or target driven

reasons, might need substantial revision (or in extreme cases for the parties to go ‘back to the drawing

board’) before the parties can contractually commit to the joint venture. This can lead to additional legal

and other professional consultant and in–house time, and project delay, all of which can carry significant

cost: if this can be avoided with a little more thought at the outset, so much the better.

Tax, procurement and other public law issues (e.g. best value, state aid etc) can present particular issues for

the parties to local authority joint venture arrangements, and these do need to be considered early on.

How then can this risk be minimised? Addressing the following simple questions may help:

1. Objectives: what do the parties want to achieve?

2. Status quo: what is the current position?

3. Investment: what are the parties able/prepared to do in order to meet the objectives?

4. Okay, we admit, a bit of a cop out (!), but what else do we need to think about? All deals are

different.

Answers to these questions will in our view help in guiding the parties to an agreed basis of their joint

venture, settling a clear and comprehensive set of heads of terms, and flushing out any issues that may arise.

Time can then be focussed on how best to address those issues.

Objectives: what do the parties want to achieve?

Setting the scene

Let’s start with a simple scenario (and we’ll use this again).

Brownshire Metropolitan Borough Council (the Council) owns 40 acres of greenbelt land on the outskirts of

Brownville (a sizeable town in Brownshire).

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Jacobsons Strategic Land (Brownville) Limited (the Developer) are house builders owning 60 acres of land

adjoining the Council’s land as part of their strategic land bank. The Developer approaches the Council with a

view to collaborating in the promotion and development of the Council’s land and the Developer’s land for

residential development.

Of course the Developer might not own the land at the moment, but have options over it - this can be

significant, and raise further issues as we will explain in later articles.

The Developer believes that the combined land (the Site) will support a new urban extension – ‘Brownville

Village’ - of approximately 1,500 dwellings.

Significant infrastructure works would need to be carried out in order to fully unlock the Site involving the

construction of a new distributor road and service media, some off-site works (including the building of a

bridge over a railway) and substantial S.106 commitments (affordable housing, transport and education

contributions) would be required according to current planning policy.

The Developer’s suggestion is that ‘a joint venture agreement’ is entered into and that the contract

documents will contain ‘equalisation’ provisions. The Council and the Developer start initial discussions.

Objectives: what do the parties want to achieve?

Frankly, the information set out in the Scenario is not massively helpful. As a starting point, it’s worth getting

down to basics and considering the following:

1. Scope: planning – we’ll assume that one of the basic objectives of the parties is to obtain planning

permission for a residential development on the Site, but is any old residential consent required or do

we need to think about this more carefully?

For example, would a development or a sale of the Site be viable (commercially and politically) if it

enabled only 1,000 dwellings to be constructed? This could dent the anticipated residual land value of

the Site (and/or disposal proceeds) below viable levels.

What if the planning permission could only be obtained following the completion of a Section 106

agreement imposing the local planning authority’s full policy requirements?

A full policy requirement of say 50% affordable housing might reduce the parties anticipated land

values to a level which would not support any sale or development.

It’s likely that one or both of the parties may need to agree minimum criteria for the quality of the

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required planning permission and/or for minimum residual land values to be achieved.

What if the planning application is refused or granted on unacceptable terms? A few issues merit

consideration here:

a. should the parties be entitled to-or required to-appeal?

b. should either party be entitled to determine the joint venture?

c. if the joint venture is determined, are ‘non-implementation’ provisions required, or is one

party entitled to go it alone on its own land?

d. who has copyright or licence to use the copyright in any plans drawings etc obtained so far?

2. Outline or detailed: are the parties going to seek an outline consent first or might they consider

seeking a full detailed application?

The parties would be well advised to seek valuation and planning advice on this as a balancing act

may need to be carried out to compare the costs and time of proceeding to a detailed application

(rather than an outline permission), and the likely uplift in land values from the grant of a detailed or

outline permission.

There should be some uplift in value when moving from outline to full (via reserved matters) planning

permission but will this outweigh the additional cost, time and other ‘aggravation’ of getting there?

Are the parties clear at this stage on what they would need detailed consent for?

If seeking outline consent, will the parties seek reserved matters approval themselves or leave this to

ultimate purchasers (or promoters) to obtain?

3. Planning consultants: will planning (and other e.g. highways, flood risk etc.) consultants be jointly

appointed, or appointed by one on behalf of all-to advise the parties on planning issues and prepare

the planning applications to be made? Unless there is a joint appointment, the non-appointing party

is likely to need collateral warranty or other third party rights protection.

The local authority will need to consider the public contracts procurement regime and act in

accordance with it if party to the appointments, or paying for services under them. Are there any

established frameworks that can be used in order to avoid a stand-alone procurement exercise?

Alternatively might the parties take their own planning advice and agree the form of planning

application between themselves without appointing external consultants?

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4. Scope: post planning – do the parties intend to collaborate any further once a satisfactory planning

permission is obtained, or is the intention simply for the parties to go their separate ways – or to

proceed jointly - to market the Site for disposal in the open market or appoint a ‘promoter’ to

further promote and market the Site for their joint benefit?

We’ll look at the differences between promotion and option agreements in later articles but it will be

beneficial for the parties to consider their preferred ‘exits’ at this stage.

Is it feasible for the parties’ joint venture to proceed on this narrow basis - surely they need to be

tied more closely than this?

It will depend. If each party – or its successor - could develop its own land pursuant to the planning

permission independently of the other it might be possible for the joint venture to be very narrowly

drawn.

In many cases though, ongoing cooperation (between the parties or their successors) will be required

(or desirable) in matters such as approval of reserved matters and discharge of planning conditions

which are site-wide, the construction of shared roads sewers and services, the sharing of certain

costs, the ‘equalisation’ of land values (see point 6 below), or the phasing of development/release of

land for sale.

Releasing all land for sale at once may not be conducive to maximising receipts-a carefully phased

release of land is likely to generate, at least in a rising market, sales at a more palatable land value.

Advice from qualified valuers and land marketeers is essential.

5. Infrastructure provision: do the parties envisage that an ultimate buyer of the Site will at its own

cost carry out the required core infrastructure works necessary to open up the Site for development

or will the parties agree to (jointly) fund and procure those infrastructure works?

If the former, the achievable sale price for the land within the Site is likely to be reduced to reflect

the cost and risk to the buyer in delivering the infrastructure.

Alternatively might the provision of infrastructure be one of the roles to be performed by a promoter?

Care needs to be taken here as the undertaking of works obligations by a promoter may radically

alter the tax treatment of the ‘promotion agreement’ - we’ll look at this in our third article.

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Promoters do not work for free. The more risk they are asked to accept, the more services they are

asked to provide and the more works they are required to undertake, the higher their ‘promotion

fees’ are likely to be.

The parties should consider whether the added value that the promoter may deliver (and a promoter

may well have greater expertise than the parties themselves, and the incentive, to deliver added

value) can be justified by the cost of engaging their services.

6. To develop or not to develop, that is a further question. Collaborations between two landowners or

two developers are relatively straightforward as the parties are more likely to have shared aspirations

(for example enabling a sale of land at a level which maximises their respective receipts, at lowest

possible cost, or in developing out and disposing of the land for maximum profit).

Hybrid collaborations between landowners and developers can be more troublesome in that

commercially the developer may be keener to reduce the land value for joint venture document (and

option agreement) purposes in order to maximise its return from the actual development of the land

and the sale of houses or other buildings. This can create tension and what might be viable for one

party may not be viable for the other.

Fundamentally then it’s helpful to identify whether the parties are landowners looking to sell land

only or whether either one or more of the parties may have different and development orientated

intentions and viability requirements.

7. Equalisation - what is it that the parties intend to equalise? Equalisation is a term used often in joint

ventures but can mean a number of things. There are two clear alternatives here (although there are

other alternatives, which can be subtly different):

a. Costs – in some circumstances the parties may simply agree to equalise, or share, certain

types of costs (‘shared costs’) in ‘agreed proportions’ e.g. the cost of obtaining the required

planning permission, the cost of installing shared infrastructure etc;

b. Costs and receipts – equalisation here is the process through which the parties will agree to

share receipts and certain costs (in essence then to equalise land value) , in agreed

proportions, irrespective of which parcels of land are disposed of, and which parcels of land

the costs in question relate to.

So, for example, on the basis of the proportions referred to in a. and b. above:

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a. each party would be entitled to all sale receipts derived from the sale of its land and would

be required to account to the other Party only for its 40/60% share of any shared costs; and

b. for each acre of land sold from the Site, and whether it be sold from the Council land or the

Developer’s land, the Council would receive 40% of the sale proceeds and the Developer

would receive 60% of the sale proceeds.

Similarly, all ‘shared costs’ such as planning promotion, infrastructure, joint marketing costs,

would also be borne in those agreed proportions.

Care needs to be taken such that the parties are not inadvertently agreeing to share ‘profits’ or the

tax burden from land sales or development profits (which could be wildly different).

Where equalisation features in discussions the parties need to be clear from the outset what their

joint objectives are.

The heads of terms is the point at which a council really ought to start to consider its public law

position - is the equalisation going to present it with any Section 123 or state aid issues? Also see

points 9 and 10 below.

8. Staging - if the parties intend a broad/comprehensive joint venture, so from planning all the way

through infrastructure, through to disposal, it’s vital that they don’t overcommit at day one, whether

in liability for costs, or obligation to proceed to ‘full implementation’ without suitable checks and

balances.

It would be sensible to map out the likely stages in the process and identify what criteria need to be

achieved or when decisions to proceed to the next stage (or not) need to be made.

9. Decision-making - if objective criteria can be set (e.g. residual land value not less than £x per

developable acre, infrastructure costs no more than £Y) then the joint venture can set out a

mechanism for the criteria to be agreed, or determined, at appropriate stages in the event of a

dispute by an independent expert.

Deemed agreement might be appropriate in some cases but needs to be considered with care.

Some decisions might, in a joint venture involving three or more parties lend themselves to majority

rule.

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However a local authority may need to have the ability at certain key stages to say no on public law

grounds e.g. it should not accept an obligation to sell land at less than required by it pursuant to

Section 123, or to commit to fund/provide infrastructure or other works in a non-state aid compliant

way.

If there are public law lines that a local authority cannot cross then the heads of terms and the

resulting documentation should recognise these.

10. Land value – all parties must be concerned about ultimate land values and must take appropriate

professional advice.

This is of course particularly important for any local authority party who will be concerned to ensure

that it meets its statutory obligations to dispose of land at ‘best value’ under S.123.

Matters for early consideration are:

a. what is the value of the respective land holdings in the Site for current use?

b. does the land have a negative current use value because of e.g. contamination issues?

c. what are the anticipated land values post (outline and detailed) planning? And post

installation of infrastructure (and what are the anticipated costs of providing that

infrastructure)?

d. based upon those land values, and given that it is unlikely that all of the parties land will be

developable and sellable at those market rates, what would the parties anticipated receipts

be?

e. when are sales likely to occur-best value will be determined at the date of disposal not the

date of the joint venture agreement. Will the Council need additional safeguards? Should the

parties consider specifying a minimum required land value, and consider indexing this to

‘future proof’ it?

f. can either or any of the parties achieve a better outcome by ‘going it alone’ i.e. in the case

of the local authority is it feasible for the local authority to promote, infrastructure and

dispose of its land and make more via that route than it is likely to make through a joint

venture with an adjoining landowner/developer.

Status quo: what’s the current position?

1. Planning: does the Site figure in any core strategy and if so, is that emerging or adopted? Is the Site

allocated for residential development? Has the six weeks judicial review period expired – if not, that

core strategy might be vulnerable to challenge.

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Is there already an outline planning permission (with Section 106 agreement) in place?

The parties may have been ‘collaborating’ for some time and the planning position may already be

settled – if so, all well and good but, are there any significant reserved matters or other planning

requirements that need to be overcome before the parties are prepared to proceed further?

If the Site is not currently allocated what can the parties agree to do to promote it - this may present

governance issues for the Council if it is also the local planning authority, and legal issues in terms of

capacity to enter into required Section 106 (or highways infrastructure agreements).

What are the policy requirements for Section 106 agreements e.g. affordable housing provision,

education/transport/other contributions etc?

2. Who owns what? Whilst full title due diligence could be undertaken further down the line, it would

certainly be helpful to establish at an early stage the extent of the parties’ ownership – in basic

terms whether freehold or leasehold, whether there are any gaps in the title, the nature and extent

of any occupational interests.

Are all parties owners of land within the Site or do some have options over third party land i.e. rights

to acquire it? Developers often secure options to acquire land as part of their strategic land function

and approach local authority clients with a view to collaborating over land that is not theirs.

Do we understand the duration and structure of those option agreements and the Developer’s

proposals from drawing down land under them?

Whilst the financial arrangements between the landowners and option holder Developers may be

commercially sensitive before too long it will be necessary to get to grips with the terms of the

options. Can ‘redacted’ copies be obtained so that these can be reviewed?

If the parties do not yet own or control all required land for development of the Site (e.g. land

required for infrastructure on or to serve the Site) what do the parties propose in terms of securing

that land or rights over it?

Will each party be tasked with securing vacant possession of its own land, and at its own cost, or are

vacant possession costs (compensation, release fees, professional fees etc) to be shared in the agreed

proportions?

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3. Title issues – in an ideal world all titles would be clean i.e. no impediments or constraints at all. The

likelihood is that some or all of the titles will be affected by some or a few of the following:

easements (adverse private rights), public rights of way, restrictive covenants etc.

How do the parties envisage these will be dealt with?

For example will the anticipated development scheme be designed around these, or will any need to

be released or modified? If so, what is the strategy for dealing with these? It may involve a

combination of negotiation, using established statutory regimes, or compulsory purchase/use of S.237

powers.

In some cases defective title or restrictive covenant indemnity insurance may provide a more sensible

solution.

Who is going to take the lead on all of this and how are the costs to be funded? Will each party suffer

its own costs or will some/all of these costs be shared as part of the equalisation process?

Some of this might be parked for another (post planning) day but the joint venture documentation

would then need to provide for the parties to agree a suitable strategy for dealing with these in the

future. What if they can’t or don’t? Is it feasible to set out some parameters for such a strategy so

that in the event of a dispute an expert might be able to provide a binding solution?

4. What are the physical constraints to development? There can be significant overlap here with legal

constraints (title issues) in relation to flood risk areas, overhead power lines, watercourses and areas

of land requiring remediation before development.

Are the agreed proportions for the purposes of land equalisation to be determined on a gross area

basis, or will each party suffer the consequences of having non developable land within its part of the

Site, and agree that equalisation relates to net (developable) land areas only?

5. Based upon best estimates, and professional advice available to date, how much of the Site do

the parties realistically expect to become development land, and how much of the Site do they

expect to be required for infrastructure/open space/community facilities, or not developable at

all?

This can significantly dent the parties’ aspirations in terms of ultimate sales receipts, and could

negate the viability of the joint venture altogether in some cases.

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6. Tax - this can present its own challenges but what is the VAT position of the land and the

collaborators themselves. Is all land ‘opted’ for VAT purposes? Can the parties recover VAT if they are

required to pay it? All parties will need to take detailed tax advice as to any other VAT, Stamp Duty

Land Tax (SDLT) or (particularly for any developer or private sector landowner) direct tax

implications of the proposed joint venture structure but also of the likely implications of the ultimate

disposal/promotion route intended by the parties. Direct taxation may cause private sector parties

particular problems. A little more on this in later articles.

Investment: what else will the parties do to further their objectives?

1. This will of course depend upon the agreed scope of the agreed joint venture and the agreed

objectives of the parties - how broad or narrow the initial joint venture, whether the project is to be

staged, and whether the parties agree not to exceed a pre-set costs budget.

2. It will also depend upon whether the parties have agreed or are prepared to agree a particular

exit/delivery route e.g. outright sale/appointment of promoter/own development

3. For example, with a narrowly scoped joint venture, the parties may intend to secure a planning

permission and to sell on the open market.

4. That is seldom likely to maximise land values or receipts. Simplistically, a serviced site with planning

permission should fetch more than an unserviced site. The parties would have to weigh the likely

enhanced receipts against the additional costs (financial and time/other resources) of servicing the

Site.

5. So what else are they prepared to do to further those objectives? Will they, for example, agree to:

a. seek discharge of reserved matters/planning conditions?

b. acquire additional land or rights over land - whether by negotiation or compulsory means?

c. cleanse their titles, again through negotiation/compulsory means or by invoking statutory

procedures?

d. apply for sources of public funding (perhaps through a local enterprise partnership) for core

infrastructure works?

e. procure consultants and contractors to carry out core infrastructure works?

6. To what extent can the parties agree to further their objectives by undertaking any of these steps?

The parties will need to consider the extent of the authorities they have been given by their

board/cabinet/committee/executive and any costs budget agreed.

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This may be helpful in determining whether the parties are bound to proceed to a next stage without

reaching further agreement or obtaining further approvals.

The local authority (and the private sector parties if receiving the benefit of public money) will again

need to consider state aid rules in relation to the deployment of public money.

What else should we think about?

1. Are there any sources of funding that might be obtained to assist with promotion of the site, for

example in relation to infrastructure provision or is it feasible for core infrastructure be funded by

Buyers on a ‘land for infrastructure basis’?

Particular care needs to be taken when deploying public money-whether the Council’s own or ‘growth

fund’ type monies-it can’t be deployed in a manner that breaches ‘state aid’ rules, otherwise the

parties will run the risk of clawback, penalties and reputational damage.

Sorry, state aid again: state aid is simply a fact of modern legal life for local authorities and the risks

need to be identified and managed appropriately.

2. What and who need to be procured? Even with a narrow collaboration, unless one of the dispensations

applies, the parties will need to consider the procurement regime and how it applies to procuring

services from consultants, and works (and services) from contractors, promoters and buyers.

Again the procurement regime is hard to escape, but it can be managed if the likely procurements

are identified sufficiently early in the process.

3. Should the parties consider ‘pooling’ their land more formally, by creating a trust under which they

declare that all of their land within the Site is held on trust for themselves and the other parties? This

can have some tax advantages in terms of direct tax consequences for some of the parties, but can

create its own tax headaches in relation to SDLT and VAT.

4. Should the parties set up a new joint venture company and/or appoint a promoter?

We’ll look at some of these questions again in our later articles when we compare different joint venture and

disposal structures. The more the parties can identify where they are at the moment, what their objectives

are and what they will and won’t be able to agree will help the proceed via heads of terms to a workable

contractual framework to deliver their aspirations.

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Having tentatively agreed to take a dip in the pool, how comfortable are the parties in

swimming further and what direction should they take? More on this soon….

Neil Walker +44 (0)115 9084127 | neil.walker@brownejacobson.com

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As is well known in the annals of childhood, Father Christmas lives at the North Pole. Well, he did live in the

North Pole until a rural and large local authority in the North of Scotland, whom we will call Snowy and

Mountainous Council (SMC), decided it would be a cracker of an idea to provide him with a whole host of

financial incentives to relocate. Look at that mate of Santa’s in Lapland, they thought. Look at the hordes of

tourists who visit – think how many more would come to the area. Think about the boost to the economy from

the manufacturing and logistics facility – and more SMC based elves are bound to be required – think of the

employment opportunities.

So, SMC approached Father Christmas and made him a grant funding offer he really couldn’t refuse.

SMC, being a forward thinking authority, had heard of state aid and thought it should check out the position.

So, it asked young Hamish, one of its junior lawyers to have a bit of a think.

Hamish rightly thought that the first thing was to check out whether the grant would actually amount to state

aid, so he went through the Article 107 tests:

(a) Is the support granted by the state or through state resources?

Yes – the grant was coming from SMC, so that’s easy enough.

(b) Does the support confer a selective advantage to an undertaking?

State aid rules only apply in respect of financial support to undertakings (which can include individuals). An

undertaking is considered to be an entity which is engaged in economic activity - offering goods and/or

services on a given market – and it can include not for profit activities. Well, Hamish was a bit puzzled by

that one until he asked older members of the legal team. As every parent knows, Father Christmas gets

through a fair old amount of sherry and mince pies – not to speak of food for the reindeers – as consideration

for his services…

(c) Does the support distort or have the potential to distort competition?

Where activities are ‘economic’ there may be state aid present, but there is still a requirement for

competition to be distorted. Are there other undertakings offering the same or similar services as Father

Christmas, on a commercial basis? If there are, then these may not be able to compete fairly if he’s using

resources obtained with public funding. Hamish quickly Googled the competition (that state aid compliant

rural broadband programme did wonders for the internet speed at SMC). He was astonished at the numbers of

international Christmas present providers with amazing logistics capabilities…

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(d) Does the support affect trade between member states?

The Commission’s interpretation of this is broad – it is sufficient that a product or service is tradable between

member states, even if the recipient of support does not itself export to other EU markets. This one was a no

brainer.

So, it was state aid. What to do? Could Hamish argue that Father Christmas was providing services of general

economic interest (SGEI) and either rely on Altmark or the SGEI decision? Well, it’s up to member states

(within reason) to determine whether a service is an SGEI and he thought the chances of getting the

Department for Communities and Local Government (DCLG) or the Department for Business, Innovation and

Skills (BIS) to opine on whether Father Christmas was providing an SGEI were pretty remote. He wasn’t going

to email them asking that one.

It was clearly time to have a look through the General Block Exemption Regulation (GBER).

Brilliant, thought Hamish. We’re in an assisted area under Article 107(3)(c) and a sparsely populated one, to

boot. Lots of opportunities there.

Now, Father Christmas’s undertaking is a small and medium-sized enterprise (SME), so we can take advantage

of that. He’ll be closing down his business in the North Pole, which is outside the European Economic Area

(EEA), so we don’t have to get approval from the Commission on those grounds. We’re ok in terms of the

amount of funding – only €7.5 million – and we’ll make sure the aid intensity works – that’ll be 35%, given

where we are. Let’s go for a mixture of aid for initial investment and provide operating aid to compensate for

the additional transportation costs of the presents which will be produced in the area – that reindeer food is

way more expensive here than at the North Pole.

Young Hamish reckoned it was sorted. He drew up a grant funding agreement and thought he’d better put a

condition in the funding agreement that Father Christmas uses local products, or the members wouldn’t be

happy.

Father Christmas quickly moved his establishment to the SMC area and the SMC started to promote the new

arrangements. The tourists started flocking in, the local elves were accumulating their elvish gold and

everyone was happy. And yet. And yet.

Hamish was taken aback to receive a letter from the Commission. There had been a complaint. A Signora

Befana, from Italy, (look her up, dear reader…) had lodged a complaint (and had been savvy enough to use

the complaints form which had been mandatory since May). The Commission was investigating it.

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To cut a long story short (and yes – I know it would take longer than this for a normal complaint to be

investigated but we are talking magic and stuff like that…), the Commission found that there had been illegal

state aid provided by SMC to Father Christmas. Why? GBER doesn’t allow aid to export related activities –

directly linked to the establishment and operation of a distribution network and doesn’t allow aid contingent

on the use of domestic over imported goods. Oops.

SMC was required to recover the aid from Father Christmas and there was a distinct lack of good cheer in the

air.

So, if Santa is a little less generous this year, blame it on Hamish…

No elves or local authorities were harmed in the writing of this article.

Sharon Jones | +44 (0)115 976 6284 | Sharon.Jones@brownejacobson.com