Practical Law

On 11 February 2015, the High Court quashed a decision by Winchester City Council to vary an agreement with a developer for a proposed redevelopment of the Silver Hill area of Winchester city centre (R (on the application of Gottlieb) v Winchester City Council [2015] EWHC 231 (Admin)). In doing so, Mrs Justice Lang applied the ECJ’s decision in Pressetext Nachrichtsagentur v Republik Österreich (Bund) (C-454/06) in holding that the implementation by the Council of the variations in question constituted material change to the original development agreement, thereby triggering a fresh requirement for a competitive tender exercise.

Christopher Brennan, Consultant at Wragge Lawrence Graham & Co, considers the decision.

Developers have sought to vary development agreements with local authorities for town centre schemes to restore their viability ever since the 2008 property crash. Even in better times, a need for modifications can arise as occupiers’ requirements change during the period when planning permission is obtained and site assembly completed – often following a compulsory purchase order. But when will such changes require a fresh developer competition?

The decision is the result of an application for judicial review brought against the Council by Kim Gottlieb, one of its own Councillors, who leads the “Winchester Deserves Better” campaign against the Silver Hill development.

The decision concerns a development agreement entered into on 22 December 2004 by Winchester City Council and Thornfield Properties (Winchester) Limited. The agreement was intended to deliver a mixed-use development comprising residential, retail, car parking, a replacement bus station, a civic square, a CCTV office, shop mobility and Dial-a-Ride service, and a market.

On 9 February 2009, the Council granted planning permission for the scheme. The proposals included approximately 95,000 square feet of retail space, 287 residential units with 122 car spaces, 20 live work units, 330 public car parking spaces, a bus station, office space and proposals for public realm improvement. An accompanying “section 106 agreement” dated 28 January 2008 made provision for affordable housing of 35-40% of housing units (or an equivalent financial contribution).

Thornfield entered administration in 2010 and its business was acquired from the administrator.

The development agreement had been entered into prior to the ECJ’s decision in Jean Auroux and others v Commune de Roanne (Case C-220/05), and had not been subject to a competitive procurement. Variations to the agreement had already been made in October 2009, December 2010 and January 2014 before the Council approved further variations in August 2014. It was the August 2014 variations which gave rise to Councillor Gottlieb’s challenge. The changes proposed included:

• A significant increase in retail provision, allowing the inclusion of a department store.
• A reduction in the number of residential units.
• The replacement of the bus station with an on-street bus interchange.
• The deletion of certain other facilities and a reduction in the number of public car parking spaces.
• Substitution of the affordable housing with a financial contribution to be assessed on the basis of the future viability of the scheme up to the equivalent of 40% affordable housing provision.
• Extension of the site.
• Permission for the developer to procure the construction of the whole scheme by a construction company with a house building subsidiary as opposed to going to competitive tender.
• Improvements to the financial terms to reflect additional retail space.

Mrs Justice Lang held that the variations, whose effect was to remove unprofitable elements from the scheme, amounted to the award of a new public contract being:

“materially different in character from the original contract and, therefore, such as to demonstrate the intention of the parties to renegotiate the essential terms of that contract”

as explained in the leading case before the CJEU of Pressetext Nachrichtenagentur GmbH v. Republik Österreich (Bund) (Case C-454/06). The Council was therefore required to advertise the development contract with the proposed variations under the Public Contracts Regulations 2006 (SI 2006/5) (PCR 2006).

The outcome may be unsurprising on the particular circumstances of the case but there are certain matters of interest.

Procurement challenges by claimants who are not economic operators

First, Councillor Gottlieb’s application was for judicial review of the Council’s decision to vary the development agreement. The Council had sought to persuade the Court to refuse relief on the basis that the claimant was not an “economic operator”, and, as such, had no interest in the observance of the public procurement regime. Mrs Justice Lang held that the Council had (for the second time during the lifetime of the development agreement) committed a serious breach of the regime, which “is both substantive and procedural in nature”, holding that this casts doubt on whether the scheme proposed was the best scheme on the best terms available, and highlighting concern among local people as to the particular characteristics of the scheme being out of character with its surroundings.

She then referred to the well-established principle that a direct financial or legal interest is not required to establish standing to bring a claim for judicial review, also holding that although the PCR 2006 provide a remedy for economic operators, this does not preclude judicial review claims by those who are not economic operators (citing R (Law Society) v Legal Services Commission [2007] EWCA Civ 1264). She distinguished the present claim from that in R (Chandler) v Secretary of State for Children, Schools and Families [2010] LGR 1, on the basis that the claimant in that case did not have any interest in the observance of the public procurement regime whereas the claimant in the present case had no ulterior motive to pursue.

This serves to affirm and underline some of the principles which have evolved in recent years around the availability of judicial review (as opposed to relief under the PCR 2006) in cases relating to public procurement but in which claimants are not economic operators: they may pursue judicial review in cases which concern the observance of the public procurement regime where they can demonstrate a sufficient interest in the proper observance of that regime, but not where they cannot.

This decision does not, however, explore all of the principles dictating when judicial review may provide an available route to a procurement challenge, for economic operators or otherwise. The area is complex and evolving (for more detail, see Practice note, Judicial review and public procurement).

Factors relevant to categorising the contract and determining whether the variations were material

Mrs Justice Lang also made various observations which have wider implications:

• She characterised the development agreement as a public works concession contract “because it provided for the developer to be paid a majority share of the profits of the development, and to be granted a lease of the site under which tenants occupying the site would then pay rent to the developer”. This allows for a more flexible procurement method suited to the development industry. Although the Public Contracts Regulations 2015 (SI 2015/102) (PCR 2015) came into force from 26 February 2015 the existing arrangements relating to public works concession contracts remain unchanged pending the separate transposition into domestic law of Directive 2014/23 relating to the award of concession contracts.
• Given the characterisation of the agreement as a concession, it was also material to consider the changes against the impact on the potential profitability of the development to the developer.
• The changes were considered against the 2004 development agreement scheme, and not against the development agreement as subsequently varied.
• The claimant need only show a realistic hypothetical bidder would have applied for the contract, had it been advertised, but he is not required to identify actual economic operators who might bid. The failure to comply with the EU procurement regime in 2004, when the original development agreement was entered into, weighed against the Council.
• The postponing of the Council’s right to terminate through an extension to the pre-development period was not a variation leading to a requirement to re-procure.
• The variation clause in the 2004 agreement was so unspecific that it was not transparent. A right for the developer to vary with the Council’s approval, not to be unreasonably withheld but without any specific criteria, will not defeat a challenge based on Pressetext.

Relevance of the decision in light of the Public Contracts Regulations 2015

This case is a relevant and useful point of reference when assessing variations to contracts awarded both before and after the implementation of the PCR 2015. Modifications to contracts which were either:

• Awarded prior to 26 February 2015.
• Advertised prior to 26 February 2015, but awarded on or after that date,

will (like the contracts themselves) not be subject to the PCR 2015 (nor will they be subject to the rules on modification contained within them). Modifications to such contracts will be subject to the Pressetext tests as they have classically been interpreted, and the judgment itself provides a useful application of the tests in relation to a contract whose award (and modification) pre-dated the advent of the PCR 2015.

However, the judgment also contains messages which are consistent with the revised (and embellished) rules on contract modifications found in the EU public procurement directive 2014/24 and the PCR 2015. Regulation 72 of the PCR 2015 applies to modifications to contracts whose procurement commenced on or after that date. In line with Directive 2014/24, regulation 72 allows variations to public contracts to be made without a fresh procurement where (inter alia):

• The modification is not substantial, applying the Pressetext test.
• The modifications have been provided for in in the initial procurement documents in clear, precise and unequivocal review clauses which set out their scope and nature and the conditions under which they may be used (and which would not alter the overall nature of the contract in question).

This case provides a useful example of a variation clause that was deemed too unspecific to be relied upon.

For more information, see Practice note, Varying public contracts; Variations permitted by the Public Contracts Regulations 2015.