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Lawbite: Faraday – magnet for concerned developers?

  • United Kingdom
  • Litigation and dispute management
  • Real estate litigation

06-12-2018

Faraday Development Ltd v West Berkshire Council [2018] EWCA Civ 2532

Relevant background:

The Court of Appeal has issued a decision that has rendered a development contract between a Council and a private developer for the regeneration of an industrial site ineffective.  The outcome of the case is that the development contract must be terminated due to the contract breaching EU procurement legislation.

The case will cause a number of developers and public bodies to urgently review the legality and status of recent development contracts, essentially to verify whether the contracts should have been procured under the Public Contracts Regulations (2015) (“PCR”).  If the PCR apply then specific procurement rules are triggered.  Further, the case will trigger a review of any voluntary ex-ante transparency notice (“VEAT Notice”) to establish the VEAT Notice has given a clear and unequivocal picture of the transaction.                 

Facts of the case:

The case centred upon the entry on 4 September 2015 by West Berkshire Council (the “Council”) into a development agreement with St Modwen Developments Limited (the “Developer”) for the ultimate disposal of land at an industrial estate in Newbury from the Council to the Developer.

The development agreement was carefully structured so that the Developer would have the option to draw down land for development and then carry out development works for the benefit of the Council and the Developer.  Prior to service of an option notice by the Developer upon the Council, the Developer had to provide services to the Council that included obtaining planning permission, estate management and a plot strategy for the land. 

It was accepted by the Council in the case that it was very likely the Developer would pursue the options to acquire the land. 

Faraday Developments Limited was unsuccessful in its bid to be the preferred development partner of the Council.  Faraday brought a challenge to the Council’s decision to award the development contract to the Developer. 

Faraday argued in the Court of Appeal that the nature of the options granted to the Developer under the development agreement were such that it was a Public Works Contract in the future and therefore illegal under EU Procurement Rules.  Faraday argued the Council’s decision to publish a VEAT Notice in the Official Journal of the European Union (OJEU) stating that (i) the main object of the development agreement was an “exempt land transaction” and (ii) there was no obligation upon the Developer to carry out any works were both wrong.                          

Decision

The Court of Appeal decided that it was important to look at the substance of the development agreement as a whole.  The Court of Appeal stated it had to apply “realism and common sense” to the situation.  The reality was the Council had entered into the development agreement with the main object being the execution of works.  The nature of the options in the development agreement in favour of the Developer without any further actions required of the Council meant the Council was requiring the Developer to act unlawfully in the future. 

The Court of Appeal also determined that the Council’s VEAT Notice was invalid and could not be relied upon – it was “incorrect, or at best misleading”.  The development agreement went much further than a land transaction and had “intricate” terms for the design and execution of a large development.  Due to the invalid VEAT Notice, the Court of Appeal declared the development agreement ineffective.

Key points

  • Parties to a development agreement involving a contracting authority will need to urgently review whether there is a risk the PCR have been engaged and a consequent breach of EU procurement legislation.
  • The content of all VEAT Notices issued under OJEU should be scrutinised so as to ensure they have disclosed the full extent of a proposed development arrangement affecting land
  • Parties to a potential development agreement will need to carefully think about how they structure land sales agreements and whether sequential land arrangements ought to be considered as a whole     
  • Parties ought to take procurement advice so as to avoid the risk of a court ultimately declaring a heavily negotiated and no-doubt expensive development partnership agreement is ineffective. 

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