Procurement in a Nutshell – Court considers what constitutes a concession contract
12th October, 2018
A recent judgment of the High Court has provided a useful analysis of the Concession Contracts Regulations 2016 (the Regulations) – in particular in relation to whether the Regulations apply to the tender procedure for new leases. Consequently, it is worthwhile for organisations to consider the Judge's rationale in order to ensure that they are successfully complying with the Regulations.
Click here to view the judgment.
The claim was made by Ocean Outdoor UK Limited (the Claimant), the original lessee of two council owned towers, and related to the decision of the London Borough of Hammersmith and Fulham Council to grant new leases relating to the use and operation of the towers to a separate company.
The towers each supported digital advertising screens; and the permitted use of the towers under the leases was “the installation, maintenance and operation of the two towers for the display of electronic advertisements”.
Following the announcement that the new leases would be granted, the Claimant brought a case alleging that the new leases transaction should have been classified as a services concession to which the provisions of the Concessions Contracts Regulations would have applied and the award would have been invalid.
The Claimant’s argument
The Claimant alleged that the transaction for the new leases did satisfy the definition for a concession contract within the meaning set out in the Regulations as:
- The award of the contract involved the transfer of an operating risk to the organisation taking on the new leases; and
- The new lessee faced a “real exposure” to the vagaries of the market and the risk was “more than nominal or negligible”.
Additionally, the Claimant explained that the exception in the Regulations, which states that the rules do not apply to concession contracts for land transactions, was not applicable as:
“The essence of the New Leases is that the lessee is required to earn advertising revenue from which rent is payable to the Council. That renders the transaction one for advertising services, as opposed to a transaction for land.”
The Defendant’s argument
Contrary to the above, the Defendant council stated that the Regulations did not apply to the tender exercise for the new leases as, by virtue of the arrangements being entered into by way of lease, they were land transactions and were exempt from the Regulations.
In this regard, the Defendant argued that:
“The new leases are not contracts for pecuniary interest because there is no legally enforceable obligation to carry out the services which are the subject of the contract. The fundamental bargain is the exclusive letting of land in exchange for the payment of annual rent. The permitted use of each plot of land is the operation of the tower for the display of static electronic advertisements but there is no obligation on the lessee to use the property for such purpose. The Council’s interest is to generate a guaranteed income from the land”.
The Judge’s findings
Finding in favour of the Defendant, and holding that the land exception did apply, Mrs Justice O’Farrell stated:
“The new leases are genuine leases. Although the objective of entering into the lease arrangement is to exploit the advertising rights, the primary objective of the Council in granting the new leases is to obtain a guaranteed income stream from the rental payments. The advertising concession authorises [the lessee] to exercise an economic activity on state-owned land but does not require [it] to provide a service for the benefit of the Council.”
Why is this important?
With concession contracts frequently utilised by public authorities to help assist with the delivery of services and the creation of infrastructure, the case is a useful reminder that certain contracts involving land are exempted from the Regulations. Nonetheless, public authorities should also be wary to ensure that they abide by the Regulations in circumstances when they do apply.
How can I find out more?
If you have any queries on the issues raised or on any aspect of procurement, please contact us via our procurement hotline on 0191 204 4464.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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