Council which agreed to vary a development agreement in order to assist viability is subject to a successful judicial review

On 11 February 2015, pursuant to an application for judicial review by a local resident, the High Court ruled that a redevelopment project in Winchester had to be put out to competitive tender under the EU procurement rules. This obligation arose when the Council agreed to make substantial variations to a development agreement that had originally been entered into 2004. The case illustrates the severe problems which can arise when regeneration projects are awarded, or subsequently amended, without due regard for the procurement rules.

1. The facts

2. The High Court ruling

3. Lessons to be learned

4. Post-script: new procurement regulations are about to enter into force

1. The facts

The case of R (on the application of Gottlieb) v Winchester City Council concerned the proposed redevelopment of a site at Broadway/Friarsgate in Winchester. The Council, as owner of the site, had entered into a development agreement ("Agreement") with Thornhill Properties (Winchester) Limited ("Developer") in December 2004. This Agreement provided for a comprehensive mixed-use development, including residential, retail, car parking, a replacement bus station and a civic square. The Council would assemble the land necessary for the scheme and then grant the Developer a long-term lease, while retaining the freehold.

In June 2014, after years of delay and viability issues, the Developer (now owned by Henderson Global Investors) sought the Council's consent to vary the Agreement and the underlying scheme in various respects, including:

• A reduction in the number of residential units from 364 to only 184 units
• A major dilution of the original requirements for affordable housing
• An increase in retail provision from 95,000 sq. ft. to 148,000 sq. ft.
• Provision for one shop unit of more than 60,000 sq. ft.
• Removal of the bus station and provision instead for an on-street bus interchange with public toilets and a ticket office
• Deletion of a requirement for a Shop Mobility Centre and Dial-A-Ride premises
• A reduction in the number of car parking spaces from 330 to 279
• Changes to external elevations, massing and servicing arrangements
• Removal of a requirement that the Developer procure the construction works by a competitive tender from at least three named contractors.

On 14 August 2014, the Council decided to authorise these variations to the Agreement.

The claimant in this case, Mr Gottlieb, was a Winchester resident and elected city councillor who belonged to a local campaign group which opposed the scheme. The claimant argued that the variations to the Agreement rendered it materially different to the original contract and meant that the Council was obliged to the carry out a procurement exercise under the EU procurement rules, as implemented by the Public Contracts Regulations 2006 ("the Regulations"). The claimant was given leave to apply for judicial review on this sole ground.

2. The High Court ruling

The High Court (Mrs Justice Lang) considered that the original Agreement was a public works concession contract which ought to have been put out to tender in 2004 under an earlier version of the Regulations. The Council had failed to do so "in reliance on mistaken legal advice". However, the time limit for bringing a claim in respect of that earlier breach had long since expired.

As regards the 2014 variations, the High Court recalled the well-known ruling of the EU Court of Justice in the Pressetext case. This established that amendments to an existing public contract constitute the award of a new contract, requiring a new tender, when they render the original contract "materially different" and so demonstrate the parties' intention to renegotiate its essential terms.

The High Court ruled that the varied contract was materially different in character from the original contract. The fundamental change was that, overall, the varied contract was considered by the parties to be viable, whereas the old contract was not. The unprofitable elements of the scheme, such as the bus station, affordable housing and civic amenities, were largely removed, giving the Developer a much-improved opportunity to derive profits. These were all material variations to the original contract which provided an economic benefit to the Developer.

The Council argued that the variations were acceptable because they were made in accordance with a variation clause in the Agreement. The Court dismissed this argument because the variation clause was too broad and did not specify what changes might or might not be accepted by the Council.

The Court also cited evidence from the CPO Inquiry that Winchester was an attractive location for investment. This strongly suggested that other potential bidders, with a realistic prospect of success, would have bid for this contract (as varied) if it had been advertised.

For all these reasons, the Court concluded that the Council's decision to authorise variations to the Agreement, without carrying out a procurement process under the Regulations, was unlawful. The Court also refused to exercise its discretion to withhold a remedy, as there was no pressingly urgent need to develop the site and the Council's "serious breach" had cast real doubt on whether the Developer was offering the best scheme and the best terms available.

3. Lessons to be learned

This case provides a sobering reminder that procurement law needs to be carefully considered at every stage of a development scheme. Depending on its precise structure and terms, a scheme may well have to be advertised in the EU Official Journal at the outset, before the local authority selects a developer. The current ruling demonstrates that this obligation may also arise if and when the original deal with the chosen developer is subsequently re-negotiated, leading to substantial amendments.

The situation in Winchester is not unusual. Many urban development schemes in the UK have been delayed over recent years by viability issues resulting from the global economic crisis and the general decline in town-centre retail. In such circumstances, a local authority will often prefer to try to rescue the deal with the existing developer partner, rather than going through the expense and delay of holding an entirely new competitive procurement process. The Winchester case highlights the risks of taking this approach.

It is particularly noteworthy that the successful legal challenge was brought not by a rival developer, but by a local resident and councillor who opposed the scheme. Mr Gottlieb's success may encourage other citizens to attempt a similar wrecking tactic on other projects.

Overall, therefore, the case may make local authorities more cautious about procurement law risks. It may reduce their appetite for re-negotiating existing development deals and may lead to more stalled projects being put back out to tender.

4. Post-script: new procurement regulations are about to enter into force

The 2006 Regulations have recently been replaced by the Public Contracts Regulations 2015, which will enter into force on 26 February 2015. The scope of the Regulations remains broadly unchanged, but many of the procedural requirements have been revised or clarified. One important new provision clarifies in some detail the circumstances in which changes to contract terms will or will not result in a new requirement to go out to tender.

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