Public Procurement Law Update: Court of Justice finds an Agreement for Lease did not fall within Procurement Rules
Public procurement rules do not apply when a public body enters into a contract for acquisition or rental of land. However, if the contract includes works or services, then the public procurement regime is likely to apply. What happens if a public body enters into a contract to become a tenant in a building yet to be constructed? We look at the recent decision in Commission v Austria which provides guidance on an area of procurement law that is often considered to be complex.
The question of land development agreements being subject to public procurement law is a prominent topic in recent case law and is one that we have considered previously. The recent judgment in European Commission v Republic Austria C-537/19 offers practical examples that provide guidance on the extent to which public authority “tenants” can engage with developers on buildings yet to be constructed.
The background was that, in 2012, an Austrian public authority (Stadt Wien-Wiener Wohnen) entered into a contract with a private undertaking for the lease of an office building known as Gate 2. Under the terms of the contract, the private undertaking (which owned the plot) would construct the building and lease it to the authority. The parties classified the contract as a lease.
The leased property consisted of floors 1-5 of wings A and B. The public authority had an option to lease floors 6-8 of wing B (which it did) and there was also an option to have bridges between the wings.
The lease was for an indefinite period. The authority had an option to terminate after 25 years and every 10 years after that. Termination was also possible in the event of certain landlord default events.
Notification of Infringement of EU law
In 2016 the Commission formally complained to Austria that the public authority had directly awarded a contract without conducting any competitive tendering procedure or publishing a contract notice, contrary to the provisions of Directive 2004/18/EC.
In reply, Austria contended that the public authority acted in good faith because the prevailing legal opinion in Austria at the time the contract was entered into was that the exclusion in Article 16(a) of Directive 2004/18 covered the letting of office premises which had not yet been constructed but were already planned and ready to be built. (Article 16(a) provides that the Directive does not apply to the acquisition or rental of land, existing buildings or other immovable property or rights thereon.)
The Commission brought infringement proceedings before the Court of Justice of the EU. It argued that the public authority had an influence on the design of the building that greatly exceeded the usual requirements of the tenant of such a building and that, contrary to falling within the Article 16(a) exclusion, the contract should have been classified as a ‘works contract’ under the Directive and subject to a public tender process in accordance with public procurement law requirements.
Decision of the Court of Justice
The Court dismissed the Commission’s application, finding that Austria had not infringed public procurement law. Interestingly, this was contrary to the conclusion that an Advocate-General had reached in an Opinion in late 2020. The Court identified the following principles from case law.
- The question of whether a transaction constitutes a public works contract is one of EU law, and classification by the parties of the proposed contract as a ‘lease’ is not decisive. In a public works contract, the contracting authority receives a service consisting of the realisation of works which has a direct economic benefit for it. Such an economic benefit can exist not only where the contracting authority is going to become the owner of the works, but also where it is going to hold the legal right over the use of the works. The fact that the main contract may not provide for an option or obligation on the public authority to repurchase the buildings is irrelevant to the classification of the contract in question.
- Where a contract contains elements relating to a public works contract and another type of contract, it is necessary to refer to the main object of the contract to determine its legal classification.
- A contracting authority cannot rely on Article 16(a) where the execution of the planned work constitutes a ‘public works contract’ since that execution corresponds to the requirements specified by the contracting authority. That would be the case where the authority has taken measures to define the characteristics of the work or, at the very least, has had a decisive influence on its design. That could be the case, in particular, where the specifications requested by the authority exceed the usual requirements of a tenant. Although the amount paid to the developer or the arrangements for payment are not decisive elements for the purposes of the classification of the contract, they are not irrelevant. A decisive influence over the design of a proposed building can be identified if it can be shown that the influence is exercised over the architectural structure of the building (such as size, external walls and load-bearing walls). Stipulations concerning interior fittings may be regarded as demonstrating a decisive influence only if they are distinguished because of their specificity or scale.
In dismissing the Commission’s case, the Court pointed to a number of factors. At the time the public authority identified Gate 2 as a suitable site, the building was planned and its characteristics were determined. The Commission argued that the public authority still had an influence on design of the structure of floors 6-8 of wing B and the bridges connecting the wings. However, the Court saw this as an option for the lease, not the construction, of additional floors. The floors and bridges were not planned to meet a need specified by the authority; merely making use of the options did not show a decisive influence on the design of the work.
The Court addressed further factors the Commission relied on to argue that the lease was a works contract. The contract was entered into when there was not as yet a building permit. The Court said that, in accordance with market practices, a comprehensive architectural project is not a prerequisite for the engagement of potential tenants. The exercise of a decisive influence on the design of the work cannot result from the absence of a comprehensive architectural project.
The Commission highlighted that the lease was concluded for a long period. The Court considered that this was not unusual and emphasised that, to find that works constituted a ‘public works contract’, the conditions identified in the case-law had to be satisfied.
The public authority had appointed a company to supervise the implementation of the construction project. The Court considered that it was not unusual for a tenant to take measures to manage a largescale move to new premises by a planned date; it was not the exercise of a decisive influence over the design of the building.
The Commission described the work required as overly specific. However the Court said it was apparent that the building was designed as a traditional office building, without reference to specific groups of tenants or specific needs, and with an interior configuration remaining as flexible as possible for the needs of future tenants. It was normal for a tenant to make its wishes clear as to the specifications that the site should, as far as possible, meet. In so far as the public authority in this case sought that specifications complied with technical standards in statutory provisions or the normal ‘state of the art’ in the market, those specifications could not be regarded as measures taken to influence design or exceed what a tenant might normally require. This related also to specifications concerning energy performance and environmental impact. The number of stipulations (and their degree of detail) was high, but the decisive criterion was whether they went beyond what a tenant might normally require. The Commission had not established that the stipulations called into question the use of the building as office premises by any future tenants; thus the adjustments resulting from those stipulations did not exceed what a tenant may normally require.
The detail of this judgment will provide useful guidance for public authorities seeking to enter into arrangements for the acquisition or use of privately developed buildings.
The authors wish to thank Lauren Lynch for her contribution to this article.