The application of the EU public procurement rules to contracts concerning land has given rise to complex issues and a detailed line of case law. It is clear that the procurement rules are not applicable to the sale or lease of land. However, in some cases, it can be unclear whether the contract at issue is truly a sale or lease or whether it in fact amounts to a public works contract or concession. That is the issue that has most often arisen in the case law and it usually occurs where a public body wishes to develop land in some way.
The UK Procurement Act 2023 continues the exemption, in the UK, for contracts for the sale or lease of land and buildings.
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EU - CJEU
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Case C-220/05 Auroux
Region: EU - CJEU
A development agreement, which provided for the construction of a new leisure centre but also other works, was a public works contract
“41. It is clear from art 1(c) of the directive that the existence of a work must be determined in relation to the economic or technical function of the result of the works undertaken (see European Commission v Italy Joined cases C-187/04 and 188/04 (2005) Transcript (judgment), 27 October ([26]). As is apparent from a number of clauses in the agreement, the construction of the leisure centre is intended to accommodate commercial and service activities, so that the agreement must be regarded as fulfilling an economic function.
42. Furthermore, the construction of the leisure centre must be regarded as corresponding to the requirements specified by the municipality of Roanne in the agreement. It must be observed, in that regard, that the work referred to by the agreement is the leisure centre as a whole, including the construction of a multiplex cinema, service premises for leisure activities, a car park and, possibly, a hotel. It is clear from a number of clauses in the agreement that, by the construction of the leisure centre as a whole, the municipality of Roanne seeks to reposition and regenerate the area around the railway station.”
The Court then went on to hold that the other elements of the definition of a public works contract were present. These included that the agreement was concluded for pecuniary interest, which “refers to the consideration paid to the contractor on account of the execution of works intended for the contracting authority” ([45]). Under the terms of the agreement, the contractor was to receive a sum from the municipality in consideration for the transfer of the car park, the municipality was also to contribute to the costs of construction and the contractor was entitled to obtain income from third parties as consideration for the sale of the works ([45]).
The developer was to acquire land, organise an architectural competition, manage the construction (even though it would not carry out that construction itself) and market the buildings. The service elements of the agreement were held to be part of the completion of the work of constructing the leisure centre, which was the contract’s main purpose ( [46]).
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Case C-451/08 Helmut Müller
Region: EU - CJEU
Exercise by a public authority of planning powers does not amount to works being carried out for the public authority’s immediate economic benefit and so does not give rise to a public contract
This case concerned a 24 hectare site in Wildeshausen, Germany, which was owned by a federal agency, the Bundesanstalt. Another public body, the town council of Wildhausen, had responsibility for town planning.
The Bundesanstalt issued a call for tenders with a view to selling the property. It appears that developers who submitted bids included plans for developing the site and these plans were discussed with the Wildeshausen municipal authorities, in the presence of the Bundesanstalt. The Bundesanstalt had a preference for the tender from a developer, GSSI, which submitted a bid of €2.5 million, in comparison to Helmut Müller’s bid of €1 million. The Bundesanstalt’s preference for the GSSI bid was, apparently, on urban development grounds. It was agreed that the property should not be sold until after the town council had approved the project and the Bundesanstalt confirmed that it would respect the town council’s decision. The town council decided in favour of the GSSI project, although its formal decision at that stage was only that it would examine GSSI’s proposal and application for planning permission.
On foot of an action by Helmut Müller, which argued that the public procurement rules had not properly been followed, the German court was of the view that the relevant decisions had been taken jointly by the Bundesanstalt and the town council of Wildeshausen and that the arrangements gave rise to a public works concession contract. Recognising however that its views seemed to be at odds with the approach taken by other German courts, it referred a number of questions to the Court of Justice.
The Court first examined the question whether the concept of “public works contracts” requires that the works which are the subject of the contract be physically carried out for the contracting authority in its immediate economic interest or whether it is sufficient if the works fulfil a public purpose, such as the development of part of a town. The Court recognised that the questions submitted by the referring court were aimed not at the seller-purchaser relationship between the Bundesanstalt and GSSI but rather, were directed at the relationship between GSSI and the town council, which had planning powers ( [44]). In that context, the Court concluded that it was not the purpose of the mere exercise by the town council of regulatory urban planning powers, to obtain a contractual service or immediate economic benefit ([57]-[58]). Consequently, any works at issue would not be carried out for the immediate economic benefit of the town council.
In reaching this conclusion, the Court noted that only contracts concluded for pecuniary interest came within the scope of Directive 2004/18, that the pecuniary nature of the contract means that the contracting authority receives a service in return for consideration, that the service consists of works from which the contracting authority intends to benefit and that such a service must be of direct economic benefit to the contracting authority ([47]-[49]). The Court provided examples at [50]-[52] of how such a direct economic benefit might arise:
“50 That economic benefit is clearly established where it is provided that the public authority is to become owner of the works or work which is the subject of the contract.
51 Such an economic benefit may also be held to exist where it is provided that the contracting authority is to hold a legal right over the use of the works which are the subject of the contract, in order that they can be made available to the public (see, to that effect, Ordine degli Architetti and Others, [67], [71] and [77]).
52 The economic benefit may also lie in the economic advantages which the contracting authority may derive from the future use or transfer of the work, in the fact that it contributed financially to the realisation of the work, or in the assumption of the risks were the work to be an economic failure (see, to that effect, Auroux and Others, [13], [17], [18] and [45]).”
The Court further held that the concept of a public works contract requires that the contractor assume a direct or indirect obligation to carry out the works which are the subject of the contract and that that obligation be legally enforceable ([63]).
The Court then addressed the meaning of the phrase “requirements specified by the public authority”, in the third variant of the definition of a public works contract. It held that this could not arise simply from a contracting authority, such as the town council, exercising planning powers ([69]). It has said, at [67]:
“In order for it to be possible to establish that a contracting authority has specified its requirements within the meaning of that provision, the authority must have taken measures to define the type of the work or, at the very least, have had a decisive influence on its design.”
The Court went on to consider whether a public works concession could arise where the economic operator already owned the land on which work was to be carried out. The Court noted that for a contracting authority to be able to transfer the right to exploit a work so as to give rise to a public works concession, the contracting authority must be in a position to exploit the work. This would not normally be the case where the basis of the right of exploitation was the right of ownership of the economic operator. As long as the economic operator itself had the right to exploit land that it owned, it was in principle impossible for a contracting authority to grant a concession relating to that exploitation ([72]-[74]). Again, the Court was considering in this context whether the exercise of urban planning powers by the town council could amount to a public works concession.
The final point of interest in the case was the Court’s recognition that, in principle, a two-phase procedure consisting of a sale of land and subsequent award of a works contract could be considered as a unity (82), even though there was nothing in the facts of the case at issue to suggest this application of the directive.
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Cases C-145/08 and C-149/08 Club Hotel Loutraki
Region: EU - CJEU
Contract was not a public works contract where the main object was the sale of shares in a business, with obligations to refurbish and improve the site and surrounding land being ancillary
“57. There can be no doubt that, where there is a purchase of 49% of the shares of a public undertaking such as EKP, that operation constitutes the main object of the contract. The point must be made that the income which AEAS would obtain as a shareholder appears to be significantly greater than the remuneration which it would obtain as a service provider.”
62 [The] conclusion must be that a mixed contract of which the main object is the acquisition by an undertaking of 49% of the capital of a public undertaking and the ancillary object, indivisibly linked with that main object, is the supply of services and the performance of works does not, as a whole, fall within the scope of the directives on public contracts.”
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Case C-306/08 Commission v Spain
Region: EU - CJEU
Commission’s evidence was insufficient to establish that Spanish regulations providing for the award of “integrated action programmes” (“IAPs”) to developers wishing to develop land constituted public works contracts, where obligations included a number of other matters
“96. In fact, the execution of the IAP by the developer includes, as is clear particularly from [21] and [23] of the present judgment, activities which cannot be classified as ‘works’, within the meaning of the directives relied on by the Commission in its application, namely the preparation of the development plan, the proposal and management of the corresponding land consolidation project, obtaining for the administration free of charge plots for public ownership and for the community’s public land bank, management of the legal conversion of the plots concerned or even the equitable division of the costs and profits between the parties concerned as well as the transactions for financing and guaranteeing the cost of the investments, works, installations and compensation necessary for the execution of the IAP. Such is also the case where the developer, as stated in Article 119(1) of the LUV, must organise the public competition for the appointment of the building contractor to which the execution of the urban development works is to be entrusted.”
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Case C-576/10 Commission v The Netherlands
Region: EU - CJEU
Commission claim that The Netherlands had infringed Directive 2004/18 by failing to tender a public works concession mixed use development dismissed as Directive did not apply at the time of the decision
For a detailed discussion of the substantive issues, see the opinion of Advocate General Wathelet
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Case C-213/13 Impresa Pizzarotti
Region: EU - CJEU
An agreement whereby a developer would construct buildings on its own land, which would be leased to the Municipality of Bari for use as its courts complex, where the municipality had a decisive influence on the design to be constructed, constituted a public works contract
“45 In the main proceedings, recital 10 of the draft ‘undertaking to let’ — which is mentioned by the referring court as being the latest suggested form of the contract proposed to the Comune di Bari by Pizzarotti — refers to the framework of requirements which had been drawn up by the Corte d’appello di Bari for the purposes of publishing the market investigation notice in question. Article 7 of that draft reserves the right for the authorities to verify, prior to accepting the work, whether it complies with the framework of requirements.
46 That framework specifies the various technical and technological characteristics of the planned work and, on the basis of a set of statistical data relating to judicial activity in the district of Bari (number of civil and criminal cases, number of hearings per week per court, number of judges or prosecutors, number of members of administrative staff, criminal investigation staff or security service staff, number of lawyers admitted to the Bari Bar, and so on), lists the specific requirements of each of the courts coming within that judicial district (number of offices and of courtrooms, conference rooms, meeting rooms and archive rooms required, surface area of rooms, methods of internal communication), along with certain common requirements, such as car park capacity.
47 Contrary to the assertions of Pizzarotti and the Italian Government, that framework of requirements puts the Comune di Bari in a position to have a decisive influence on the design of the work to be constructed.
48 It follows that the main object of the proposed contract in the main proceedings is the execution of a work corresponding to the requirements specified by the contracting authority.
50 [The] decisive element for the purposes of the classification of the contract concerned is the main object of that contract, not the amount paid to the contractor or the arrangements for payment.”
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Case E-4/17 EFTA Surveillance Authority v Norway
Region: EU - CJEU
Contracts for the construction and operation of an underground car park had, as their main purpose, the construction of the car park, which was a public works objective. The contracts constituted a public works concession as the consideration consisted in the right to exploit the work together with payment
“84 The services element of the contracts is simply a consequence of Torvparkering’s right to exploit the building for a limited period before the transfer of ownership to the municipality takes place. That objective does not outweigh the public works objective of the project. It follows that were it not for the construction of the underground car park, Torvparkering would not have been able to provide car park services.
85 The Court thus concludes that the contracts awarded by the municipality meet the criteria of a public works contract under Article 1(2)(b) of the Directive.
86 It remains to be assessed whether the contracts constitute a public works concession as defined by Article 1(3) of the Directive, that is, a contract of the same type as a public works contract except for the fact that the consideration for the works to be carried out consists either solely in the right to exploit the work or in this right together with payment. An essential characteristic of a concession is that the concessionaire bears the main or substantial operating risk (compare the judgment in Müller, cited above, [75] and case law cited).
87 According to the eighth paragraph of Article 2 of the “Service Concession Contract”, Torvparkering bears the full operating risk for the underground car park for the duration of that contract. Moreover, there can be no doubt that consideration for the works that were to be carried out consists in the right to exploit the work together with payment. In response to Norway’s argument that Torvparkering was only granted a right to exploit land, rather than being granted the right to exploit a work, it should be noted that without the “Service Concession Contract” with the municipality, Torvparkering could not exploit the car park. The Court therefore concludes that the two contracts in question constitute a public works concession within the meaning of Article 1(3) of the Directive.”
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Case C-537/19 Commission v Austria
Region: EU - CJEU
A long-term lease of a building not yet constructed will not (without more) be reclassified as a public works contract where the public tenant does not actually exercise a decisive influence over the building’s design (in particular its architectural structure), and where the specifications imposed do not exceed the usual requirements of a tenant for an office building; on the facts, the Commission failed to prove that Wiener Wohnen’s involvement went beyond typical tenant requirements or that it took advantage of any opportunity to shape the design, so the infringement action was dismissed.
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Case C-220/05 Auroux
Whether a public contract is an exempt land contract depends on its main purpose
- In determining how to categorise a contract for purposes of the public procurement rules and in deciding whether a contract is a public works contract, one looks to the “main purpose” of the agreement (C-220/05 Auroux, [37], [38], [46]; C-306/08 Commission v Spain, [90]).
- That determination must be made in light of the “essential obligations which predominate and which, as such, characterise the transaction” as opposed to ancillary or supplementary obligations “required by the very object of the contract” (C-306/08 Commission v Spain, [91]). What is crucial for classification “is the main object of the contract, not the amount paid to the contractor or the arrangements for payment” (C-213/13 Impresa, [50]; C-536/07 Commission v Germany, [61]).
Categorisation is a Question of EU Law
- The question whether a transaction constitutes a public works contract for the purposes of the public procurement rules is one of EU law. So, in C-213/13 Impresa, the characterisation of the proposed contract as a “lease” was not decisive ([40]) (see also C-536/07 Commission v Germany, [54]; C-220/05 Auroux, [40]).
Mixed Contracts not caught if works are incidental
- A mixed contract relating both to the performance of works and to the assignment of property does not fall within the scope of the procurement directives if the performance of the works is merely incidental to the assignment of property (C-331/92 Gestión Hotelera [29]).
Timing of development is relevant to determining the contract’s object
- Timing may be a significant factor in evaluating the object of a contract. In particular, if buildings have not yet been constructed, it is more likely that their construction will be seen as the main object of a contract which may appear on its face to be, say, a lease or sale of land.
- For example, in Case C-213/13 Impresa, the Court noted at [42] that at the time when the conclusion of the contract in question was proposed to the Comune di Bari by Pizzarotti, the works for creating the complex referred to in that contract had not yet begun. The CJEU concluded from this fact that “the main object of the contract is the creation of that complex, which the subsequent letting of the complex necessarily presupposes”.
- Similarly, in C-536/07 Commission v Germany, the CJEU observed at [56]:
“As regards the object of the project at issue, it must be noted that the main contract, concluded on 6 August 2004 by the City of Cologne and GKMGbR, is formally described as a ‘lease’ and does, in fact, contain certain elements of a lease. However, as at 6 August 2004, the building works in question had not even started. Consequently, that contract could not have had as its immediate object the lease of buildings whose construction had not yet begun. Therefore, the main purpose of that contract could, logically, only be the construction of those buildings which were subsequently required to be handed over to the City of Cologne under the terms of a contractual relationship described as a ‘lease’.”
Works Contracts impose Direct or Indirect Obligations on Contractors to develop
- The concept of a public works contract requires that the contractor assume a direct or indirect obligation to carry out the works which are the subject of the contract and that that obligation be legally enforceable (C-451/08 Helmut Müller, [63]).
- The rationale for the requirement that there be an obligation to carry out works is explained by Advocate General Mengozzi at [76]-[77] of his opinion in Helmut Müller as follows:
“This follows, first and foremost, from the provisions of Directive 2004/18 itself which, as we have seen, defines public works contracts as contracts for pecuniary interest. The concept is therefore based on the idea of an exchange of services between the contracting authority, which pays a price (or, alternatively, grants a right of use), and the contractor, who is required to execute a work or works. Thus, public contracts are clearly mutually binding. It would obviously be inconsistent with that characteristic to accept that, after being awarded a contract, a contractor could, without any repercussions, simply decide unilaterally not to carry out the specified work. Otherwise, it would mean that contractors were entitled to exercise discretion with regard to the requirements and needs of the contracting authority.”
Contract must be for Pecuniary Interest
- Only contracts concluded for pecuniary interest come within the scope of Directive 2014/24.
- The pecuniary nature of the contract means that the contracting authority receives a service in return for consideration.
- The service consists of works from which the contracting authority intends to benefit
- “[Such] a service, by its nature and in view of the scheme and objectives of Directive 2004/18, must be of direct economic benefit to the contracting authority” (C-451/08 Helmut Müller, [47]-[49]).
- There does not appear to be an exhaustive number of ways in which a contracting authority can derive the requisite economic benefit. Examples include where the benefit to the contracting authority lies “in the economic advantages which the contracting authority may derive from the future use or transfer of the work”; or “in the assumption of the risks were the work to be an economic failure” (C-451/08 Helmut Müller, [52]; see also, Case C-399/98 Ordine degli Architetti [2001] ECR I-5409, [76]-[86]).
Specification of the Authority
- With respect to the third variant in the definition of a public works contract – the realisation of a work corresponding to requirements specified by the contracting authority concerned – “in order for it to be possible to establish that a contracting authority has specified its requirements within the meaning of that provision, the authority must have taken measures to define the type of the work or, at the very least, have had a decisive influence on its design” (C-451/08 Helmut Müller, [67]).
- This is made express in Article 2(6) of Directive 2014/24.
- Where a contracting authority seeks to reposition and regenerate an area or piece of land, this may lead to the conclusion that construction works which form part of the agreement, correspond to requirements specified by the contracting authority (C-220/05 Auroux, [42]).
The Entire Transaction is Examined
- A two-phase procedure consisting of a sale of land and subsequent award of a works contract could be considered as a legal unity for purposes of the procurement rules so that Directive 2014/24 could apply to such a transaction (C-451/08 Helmut Müller, [82]), even though a pure sale of land itself falls outside the scope of the Directive. In other words, one must look at the whole of the arrangements between the contracting authority and the developer.
Elements of a Public Works Concession Contract
- A public works concession contract has three elements:
- (i) a contract in writing;
- (ii) a “public works contract” and
- (iii) a contract concluded for pecuniary interest, where the consideration consists either solely in the right to exploit the work or in this right together with payment (e.g.,
- For a contracting authority to be able to transfer the right to exploit a work so as to give rise to a public works concession, the contracting authority must be in a position to exploit the work.
- “That will normally not be the case where the only basis for the right of exploitation is the right of ownership of the economic operator concerned”. As long as the economic operator itself had the right to exploit land that it owned, it was in principle impossible for a contracting authority to grant a concession relating to that exploitation (C-451/08 Helmut Müller, [72]-[74]).
- With respect to the required pecuniary interest in a public works concession contract, a right of exploitation of the developer when it is the owner of the land and properties to be constructed, will not usually be a right of exploitation within the meaning of the term “consideration” in Article 1(3) of Directive 2004/18 (see also, C-576/10 Commission v The Netherlands, opinion of Advocate General Wathelet, [130], [143]-[172]).
English Cases
- In R (Midlands Co-Operative Society Limited) v Birmingham City Council) [2012] EWHC 620 (Admin), the English High Court considered whether the sale of land amounted to a public works contract where it was envisaged that the land would be developed in accordance with certain planning requirements.
- Hickinbottom J held that there was no legal obligation on the developer to develop the land the subject of the agreement for sale, however likely it might have been that the land would in fact be developed. The developer could have walked away after purchasing the land, without developing it and the lack of a clear legal obligation to develop was a key factor in the court’s ruling.
- On the point that one must examine the whole of the arrangement between the contracting authority and the developer in determining whether the procurement rules apply ([107]):
“[In] considering whether the procurement provisions apply, one must look at the whole of the arrangements between the contracting authority and the contractor; and, in particular, whether there is in reality a multi-stage award procedure which comprises in substance a unity which includes an obligation to perform works and is consequently subject to the procurement rules. For example, there may be an award of a land contract by the authority to the contractor, with a separate award of a contract involving works. Where the authority and contractor are legally committed to the works contract at the time of the land contract, then the two stages might of course be considered as a single transaction, to which the procurement provisions apply. However … at the time of the land transaction, it is insufficient that the authority merely intends to, or is very likely to, enter into a works contract with the contractor, short of a formal, legally enforceable commitment.”
- In AG Quidnet Hounslow LLP v Hounslow London Borough Council [2012] EWHC 2639 (TCC), it was argued that the respondent council seemed to be relying on the commercial imperatives that the developer would face as the long term tenant of the site, to carry out development. This was relied upon as evidence of an obligation to develop being placed on the developer. However, Coulson J did not find an obligation to undertake works, stating at [42]:
“On a proper construction of these terms, they amount to an agreement by the council to grant a ground lease for a long period on the site. There is no express obligation on the part of L&G to develop the site or provide any services whatsoever. Whilst Mr Giffin may be right to say that this was the deliberate result of careful drafting, so as to avoid the consequences of the 2006 Regulations, the fact remains that the heads of terms require no services to be provided by L&G. If L&G subsequently find themselves faced with the commercial necessity of developing the site (as opposed, say, to landbanking it for 20 years), then that is a matter for them. The development would in any event be some way into the future, and is predicated on a number of uncertain events.”
European Commission Enforcement Activity
- In the Flensburg case, the Commission issued a press release (IP/08/867, 5 June 2008) when it closed an infringement case against Germany on the basis that a contract for the sale of land by a public authority did not contain a legally binding obligation on the developer to build a building which it was envisaged would be built. Rather than an enforceable obligation to build, the contract stipulated that the public authority had the right to purchase the land for the city of Flensburg if the building was not constructed. The Commission explained as follows:
“The public utility company, a 100% affiliate of the city of Flensburg, had sold a piece of land to a private property developer for the construction of a building that would correspond to certain urban development needs. Apart from a simple statement of intent, the sales contract does not contain a legally binding obligation for the developer to realise the envisaged building; it only stipulates a right to purchase the land for the city of Flensburg, in case the building should not be constructed.
In the view of the Commission, such a land sale can neither be considered as a public works contract nor as a public works concession, because the contract in question did not contain a legally binding obligation to execute works specified by the contracting authorities. The mere right for the public authority to (re-)purchase the land in case of non-construction is not, in the Commission’s view, a sufficient sanction that could give rise to a legal obligation to execute the works.”
- This analysis is not, of course, a binding precedent and there is obviously a lack of detail in a short press release. The argument has also been made that “[the] legal mechanism employed, whilst not creating a contract in the terms of the Directive, might nonetheless be characterised as a straightforward device to avoid its application whilst still securing the objectives of procuring works” and that “it might be said that the mechanism employed in that case amounted to an “indirect obligation” to carry out the works which were legally enforceable through the means of the default provision which was triggered if the works were not carried out” (Elvin and Banner, ‘The application of the Public Contracts Directive to planning: the position at the beginning of 2011’ (2011) Journal of Planning & Environmental Law 508).
- In 2010, the Commission requested The Netherlands to comply with the EU public procurement rules for land developments projects in Ede (see Commission Press Releases IP/10/1233 of 30 September 2010 and IP/11/600 of 19 May 2011). Several contracts for a land development project were awarded to one developer without the authorities having conducted a tender. The contractor was to develop a centre for commercial and social use, including a sports hall, as well as parking spaces and 648 houses. The total value of the contract was €140 million. The Commission considered that the contracts were public works contracts and a public works concession. It explained in its reasoned opinion:
“In the Commission’s view, the main objective of the contracts was not the sale of land, but the execution of works, which falls under EU public procurement rules. As the contractor was to develop specific sites, the municipality took the decisions on the buildings to be constructed. Furthermore, the initiative for the project was taken by the municipality of Ede and its influence on the project went far beyond the mere exercise of the municipality’s urban-planning powers.
Although the developer is to carry out the project at his own risk and does not receive a direct payment from the municipality, the Commission considers that the municipality of Ede has given the developer a right of exploitation within the meaning of the EU public procurement rules, since the developer acquires for the project a tailor-made building license that gives him the right to construct and exploit the work foreseen in the contract. Some parts of the work in question – the sports hall and a number of parking places – will however be directly paid for by the municipality.
The Commission is also of the opinion that the municipality of Ede obtained a clear and direct economic benefit by means of this contract within the meaning of the jurisprudence of the Court of Justice in a similar case (Case C-451/08, Helmut Müller).”
- The Netherlands responded by annulling certain contracts so that it was not ultimately necessary for the Commission to institute proceedings. Explaining how this alleviated the Commission’s concerns, it noted in IP/11/600:
“[The] Dutch authorities decided to annul those contracts relating to the development of the sports hall and the parking spaces. In addition, the building obligations for the development of the houses and the centre for commercial and social use were removed from the contract. In this way, the revised contract now solely concerns the sale of land and not works. Consequently, the contract should In the light of the Helmut Müller judgment of the Court of Justice (Case C-451/08), not be considered to be a public works concession anymore.”