The High Court provides guidance on what constitutes a “concession contract”; Ocean Outdoor UK Limited v London Borough of Hammersmith and Fulham [2018] EWHC 2508 (TCC)

Sharpe Pritchard acted on behalf of the London Borough of Hammersmith & Fulham in the recent case of Ocean Outdoor UK Limited v London Borough of Hammersmith and Fulham [2018] EWHC 2508 (TCC) in which the Council successfully defended a challenge brought by Ocean against the Council’s decision to grant leases of land to Outdoor Plus Ltd.

The case concerned two small plots of land adjoining the Hammersmith Flyover in West London on which two metal towers with large digital advertising screens are situated (“the Two Towers”). The Council had granted leases of the land to Ocean in 2010 and those leases expired at the end of June 2017. Following a tender exercise which started in April 2017, the Council granted new leases of both plots to Outdoor Plus who had submitted the highest bid. Ocean’s primary argument was that the new lease transactions were properly classified as a services concession to which the provisions of the Concession Contracts Regulations 2016 (“CCR 2016”) apply[1]. Ocean also argued that there was sufficient potential cross-border interest for general EU principles (in particular transparency, non-discrimination, equality, fairness and proportionality) to apply and that the Council was in breach of general EU principles arising from the Treaty on the Functioning of the European Union (“TFEU”)[2].

The Council’s case was that the new leases granted property rights over the land in question and the CCR 2016 did not apply to the tender exercise. The Council was obliged to obtain the best consideration reasonably obtainable in respect of any land disposition under s123 Local Government Act 1972 and did so. The leases were land transactions excluded from the CCR 2016. They were not contracts for pecuniary interest as there was no legally enforceable obligation, direct or indirect, for the tenant to carry out any works or services which were the subject of the contract. The Council also argued that the award of the new leases was not governed by the general principles of EU Law as they concerned internal matters only and there was no cross-border interest.

Mrs Justice O’Farrell found in the Council’s favour and dismissed the Part 7 procurement claim. She found that the new leases did not entrust to Outdoor Plus the provision of services for the benefit of the Council and did not therefore engage the CCR 2016 for the following reasons:-

  1. The Council has no statutory obligation to provide advertising services for its residents; the advertising services are not provided on the Council’s behalf.
  2. The advertising from the Two Towers is not required by, or provided for the Council. The Council derives income from the rent paid under the leases, but that income is in consideration for possession and use of the land. The Council does not dictate the contents of the advertising and the advertising is not designed to support the objectives of the Council nor is it in discharge of its statutory obligations.
  3. The new leases do not provide a service for the benefit of the Council or its residents.
  4. General advertising does not fall within the services envisaged by the Concessions Directive. Cases where a services concession has been found are those where there is an obvious benefit to the Contracting Authority or the community, such as parking facilities, leisure services or public toilets.
  5. The Judge decided that there was no legal obligation on Outdoor Plus to provide any service. There was a covenant to pay rent, but no covenant to provide advertising. There was permission to use the land for the purpose of advertising but no enforceable obligation to provide any defined advertising service. The new leases were therefore not contracts for pecuniary interest for the purpose of Regulation 3 of the CCR 2016.

Even if the new leases could be construed as service concession contracts, Mrs Justice O’Farrell found that they would be excluded from the provisions of CCR 2016 because they were property contracts for the rental of land within the meaning of the land transaction exemption[3]. The primary objective of the Council in granting the leases was to obtain a guaranteed income stream from the rental payments. Outdoor Plus had exclusive possession of the land and the structures on it and had permission to use the Two Towers for the display of advertising and to sell the advertising space to third parties, but that did not change the nature of the transaction as one for the rental of land.

Mrs Justice O’Farrell also found against Ocean in respect of their arguments that EU general principles applied. She had decided that the agreement was a land transaction and not a services concession contract and therefore it was not a transaction to which TFEU principles applied. The Judge was also satisfied that the transaction was purely an internal UK matter and there was insufficient potential cross-border interest to engage TFEU principles. She found that there was no evidence of a realistic hypothetical bidder who would have bid for the new leases if the opportunity had arisen.

Ocean had also sought to challenge the Council’s decision by way of Judicial Review proceedings and the application for permission was dealt with at the trial. Ocean argued that there had been a breach of confidentiality by the Council in respect of an earlier offer made by them when they had submitted terms to the Council in 2016 for the continued operation of the Two Towers. The founder of the consulting company engaged by the Council under a framework agreement to carry out the tender exercise on its behalf had formerly been a CEO of Ocean. Ocean also alleged conflict of interest and bias in respect of the Council’s consultants and sought permission to amend their claim to allege actual bias during closing submissions.

The Judge found that allegations of actual bias had no real prospect of success and, in any event, the application to amend was made far too late, after the evidence had been concluded. She determined that Ocean had failed to establish any unlawful conduct in respect of the tender exercise and decided that the claim did not raise any arguable grounds for Judicial Review. Ocean’s application for permission to proceed with the claim for Judicial Review was therefore also dismissed.

This is the first reported decision on the interpretation and application of the CCR 2016 with particular regard to service concessions. The judgment includes a detailed analysis of the nature of service concessions and provides guidance to public authorities on the question of whether or not certain leases and contracts have to be awarded in compliance with the procurement process under the CCR 2016.

[1] Under Regulation 3 of the CCR 2016 a “service concession contract” means a contract – “(a) for pecuniary interest concluded in writing by means of which one or more contracting authorities or utilities entrust the provision and the management of services (other than the execution of works) to one or more economic operators, the consideration of which consists either solely in the right to exploit the services that are the subject of the contract or in that right together with payment; and (b) that meets the requirements of paragraph (4).” The requirements in paragraph (4) are that “(a) the award of the contract shall involve the transfer to the concessionaire of an operating risk in exploiting the works or services encompassing demand or supply risk or both; and (b) the part of the risk transferred to the concessionaire shall involve real exposure to the vagaries of the market, such that any potential estimated loss incurred by the concessionaire shall not be merely nominal or negligible”.

 [2] TFEU Article 49 provides for freedom of establishment. Article 56 – “Within the framework of the provisions set out below, restrictions on freedom to provide services within the Union shall be prohibited in respect of nationals of Member States who are established in a Member State other than that of the person from whom the services are intended”. “Services” are defined in Article 57 and include activities of a commercial nature.  

[3] Regulation 10(11) of the CCR 2016 – “These Regulations do not apply to service concession contracts for (a) the acquisition or rental, by whatever financial means, of land, existing buildings or other immovable property or which concerns interest in or rights over any of them…”

Mari Roberts, a Senior Associate in the dispute resolution team at Sharpe Pritchard acted for the Council and instructed James Goudie QC and Joanne Clement of 11KBW. We have extensive experience on advising on procurement and procurement challenges and would be happy to advise further on the law and practice in these areas.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.

Posted in Judicial review, Litigation, Local government, Mari Roberts, Procurement, Procurement challenges, Procurement challenges.