Birmingham Exeter London Manchester Nottingham

www.brownejacobson.com 1

Birmingham Exeter London Manchester Nottingham

www.brownejacobson.com 1

Page

The great devolution debate

Richard Barlow 2

The election manifestos – a local government perspective

Stephen Matthew 3 – 6

Cost budgeting nightmare

Nichola Evans 7 – 10

Take a dip in the pool?

Neil Walker 11 – 21

The best value duty (part 2)

Angelica Gavin 22 – 27

Employment update

Sarah Hooton 28 – 30

Procurement Policy Notes: January – March 2015

Anja Beriro

31 – 35

Awarding contracts under Public Contract Regulations 2015: new guidance

published

Anja Beriro and Emma Graham

36 - 38

The articles in this newsletter are for general information only. They do not represent legal advice. You should always

take legal advice before pursuing any course of action discussed in this newsletter. If you would like to instruct any of

our lawyers on any matter please call +44 (0)115 976 6000.

2

Devolution to local government in England will be a key issue for many in the run up to the general election.

Many local authorities are demanding the right exercise wider powers so that they can make important

decisions for the benefit of their areas. These authorities are beginning to lobby central government for

greater autonomy, and we are seeing the results of this in the devolution deals which have been agreed for a

number of combined authorities. Devolution to local government looks set to continue in one form or

another, and whatever ‘colour’ of government is returned on 7 May; it has the potential to make really

significant changes to the way in which public services are delivered.

We recently held a round table event which was attended by local and central government leaders,

stakeholders and policy influencers at which we discussed devolution to local authorities and how it might

change the local authority landscape in the near future. Following on from that, we produced a report which

discusses some of the key issues faced by local authorities. These issues include the pressure placed on

authorities by cuts to central government funding, which has fallen by 37% in real terms between 2010/11

and 2015/16 and how that pressure might be alleviated through the devolution of powers to raise taxes and

borrow money. We also look at the current powers of local authorities to raise money through taxation,

borrowing and through charging and trading. We see many authorities using these powers to great effect,

and believe that this is likely to continue in future.

We go on to make a number of recommendations which we hope will be useful to those in local and central

government in trying to negotiate a sustainable settlement for devolution in England. A copy of the report

can be found here. We hope you find it interesting.

Richard Barlow | +44 (0)115 976 6208 | Richard.Barlow@brownejacobson.com

3

This is our summary of the party election manifestos as they affect councils. Inevitably, this is a selective

summary and other policy issues (e.g. the minimum wage) will also have an impact. We thank all councils for

the hard work they do in making any election possible.

Conservative

Key message: “Strong leadership; a clear economic plan; a brighter, more secure future”

Devolution:

devolved powers to large cities with directly elected mayors

growth deals for other areas where locally supported

more powers over economic growth, transport and social care for local authorities.

Local government:

savings to be made from identifying wasteful spending and making government more efficient,

effective and accountable; this will mean an increase in scrutiny and transparency on those using the

public purse

local authorities to keep a higher proportion of business rate revenue

encouragement of more public sector shared services to drive efficiencies

10% stake for local authorities in the sale of any public land in their area.

Housing and planning:

200,000 new homes and the extension of the Right to Buy scheme to housing association tenants and

an obligation on local authorities to manage their housing assets more effectively

Right to Build scheme requiring local authorities to allocate land for people to build/commission

their own home and a ‘Brownfield Fund’ will be set up to facilitate more housing on Brownfield sites.

Education:

a freeze on the amount of government spending per pupil, the pupil premium would continue at

current protected rates

free school meals for all infants

3 million more apprenticeships to be created

conversion of all failing or ‘coasting’ schools into academies.

4

Other proposals relevant to local authorities:

strengthening of the Community Right to Bid by way of extending the time communities have to

purchase an ‘Asset of Community Value’ (under the Localism Act 2011)

an increase in free childcare for working parents of 3-4 year olds up to 30 hours and the introduction

of regional adoption agencies working across local authorities

every public sector worker in a customer-facing role must be fluent in English

EU migrants will not be considered for a council house unless they have been living in an area for at

least four years.

Labour

Key message: Budget responsibility and a commitment to reach budget surplus within the life of the

next parliament

Devolution:

to pass an English Devolution Act, handing £30 billion of resources and powers to our great English

city and county regions

to give new powers for communities to shape their high streets, including power over payday lenders

and the number of fixed-odds betting terminals

to give 16 and 17-year-olds the vote

to give local areas freedom to choose their governance arrangements.

Local government:

multi-year budgets for local authorities, and a local Public Accounts Committee; to account for how

‘every pound’ is spent.

Health:

a promise to ‘rescue the NHS’, bringing physical health, mental health and social care into a single

‘system’. The Health and Social Care Act 2012 will also be repealed and commissioning and budgets

brought together at ‘a local level’.

Education:

the Free School programme will end and new ‘Directors of School Standards’ given powers for

commissioning new schools, it seems these will be national appointments

free child care will increase from 15 to 25 hours for 3-4 year olds with doubling of paternity leave

and smaller class sizes are promised for 5-7 year olds.

5

Housing:

a promise to build 200,000 new homes by 2020 and the abolition of the ‘bedroom tax’.

Other points of note for local authorities:

use of digital technology to create ‘a more responsive, devolved, and less costly system of

government’ and all the country will have high speed broadband

expansion of rail links to boost regional economies and long-term investment in strategic roads

the establishment of a new British Investment Bank to help support co-operative and mutual

organisations, as well as small businesses

a cut in tuition fees and the promise of new apprenticeships in the public sector.

Liberal Democrats

Key message: “Stronger economy, fairer society: opportunity for everyone”

Devolution:

reduce Ministers’ powers to interfere in democratically elected local government

remove the requirement to hold local referenda for Council Tax changes, and the introduction of

‘fair votes’ to ensure councillors are properly accountable for their decisions

devolve more power and resources to groups of local authorities and local enterprise partnerships

and greater devolution of financial responsibility to local authorities.

Local government:

overhaul of the voting system with the introduction of proportional representation

extend of the Freedom of Information Act 2000 (FOI) to private companies delivering public services

increase in public sector shared services to improve public services and generate efficiencies

introduction of a ‘community trigger’ mechanism to enable the public to require a review of

consistently poor delivered public service

elevation of data protection standards to be enforced.

Education and childcare:

pupil premium to be increased to £1000 per pupil per year

free school meals to all primary school children

20 hours free childcare for children aged between two and four

extended paternity leave of one month a ‘use it or lose it’ basis.

6

Housing and planning

300,000 new homes to be built per year and 10 new garden cities as well as a continuation of the

Right to Buy scheme

changes in ability to appeal local planning decisions for communities and developers.

Health and social care

combined working between NHS, local authority social services and the voluntary sector in relation

to public health and £500million to be spent on mental healthcare; the delivery of public health will

be returned to local authorities

increase in carer’s allowance.

Environment

five new ‘Green’ Acts to provide for energy efficiency and achieve goal of zero carbon emissions.

Green Party

The Green Party manifesto contains many similar provisions to that of the Labour Party but their differing

key proposals affecting local authorities are:

an increase of Corporation Tax from 20% to 30% (which would affect local authority trading

companies)

an increase in spending on recycling and waste disposal by £4 billion a year with a view to increase

recycling of domestic waste to 70% by 2020

the prevention of new building on flood plains

the requirement that 40% of public sector boards must be women

an increase in spend of £1 billion per year on disability living allowance/personal independence

payments

an end to private finance initiative contracts in the health sector and the sale of NHS assets

academies and free schools to be integrated into the local authority system

the restoration of education maintenance allowance for 16 and 17 year olds

the introduction of higher council tax band

the building of 500,000 new social rental homes and the abolish bedroom tax

an increase in child benefit to £40 a week per child.

Stephen Matthew | +44 (0)20 7871 8505 | stephen.matthew@brownejacobson.com

7

Cost budgeting is an area of litigation that parties seem to have struggled to get to grips with and the most

recent case of CIP Properties (AIPT) Ltd v Galliford Try Infrastructure Ltd & Ors [2015] EWHC 418 (TCC) (CIP

Properties) is an example of where the claimant’s solicitors got it very wrong and paid the price.

This case is the latest in a string coming from the higher courts in relation to cost budgets.

The provisions in the CPR are very wide and we should be reminded that CPR 3.15-(1) states “In addition to

exercising its other powers, the court may manage the costs to be incurred by any party, in any

proceedings.”

Background

CIP Properties involved a contractor being sued by an investor for a number of defects to a large

development on the site of a former hospital.

The case was in Coulson J’s view not a particularly complex one but with six parties involved and experts, he

was of the opinion that the experts would take up the bulk of the costs.

In a previous judgment from October 2014, Coulson J ruled that the court had discretion to order cost

budgeting despite the claim being for £18 million. CPR 3.12 and Practice Direction 3E states that for cases

over £10 million a cost budget is not required and so the decision by Coulson J to order a cost budget was

not usual.

Before the first case management conference (CMC) the claimant’s CMC Information Sheet estimated that

they had spent £1,575,425.39 and total costs for the case would be £3,420,425.39.

One year later, CIP Properties then stated in its ‘Form H’ costs budget that it had incurred costs of

£4,226,768.16 and that its estimated costs were £5,050,469 making a total of over £9.2 million. All that had

taken place in that time was a preliminary issue pursued by the defendant which was subsequently

abandoned and disclosure which had not been completed. Coulson J was at a loss as to what the claimant

had done in that year to justify costs of over £2.5 million and was also unimpressed at spending a second full

day of the court’s time on costs for this case.

The defendant, on the other hand, had incurred costs of just under £1.5 million and estimated incurring

future costs of around £3 million making a total of £4,483,140.41.

8

The judgment

One of Coulson J’s main issues with the claimant’s costs budget was in relation to the schedule of

assumptions and contingencies which contained so many contingencies that made the budget “wholly

uncertain and therefore unreliable.”

Coulson J’s judgment is quite damning of the claimant’s costs and he clearly felt aggrieved that so much

court time was being spent dealing with such issues and states in his judgment:

“Such satellite litigation, and the costs incurred in consequence, is very far removed from the spirit and

purpose of the new costs management provisions in the CPR.”

Coulson found the defendant’s cost budget to be at the upper end of the proportionality test and therefore

the claimant’s highly disproportionate. He said that the main factor in judging proportionality for this type

of case was the complexity.

The recent case of Savoye v Spicers Ltd [2015] EWHC 33 (TCC) was applied where the claimant’s cost budget

was cut by over half as it was not proportionate to the overall amount claimed.

In CIP, as the value of the claim was at the very best £18 million (although this was highly disputed and

thought inflated) the claimant’s cost budget of £9.2 million was simply disproportionate to the value of the

claim.

Significantly, Coulson J went further to identify the causes of the unreasonableness of the costs budget.

Firstly, he identified that the claimant’s solicitors, Squire Patton Boggs, were based in Birmingham and were

claiming £370 per hour for a Grade A partner despite the guideline hourly rate being only £217 per hour.

Secondly, too much work was being inappropriately done by the partner instead of more junior lawyers or

assistants and in addition, he considered that the hours claimed to have been done and estimated at each

phase were excessive. Coulson J failed to see what work had actually been undertaken for the amount of

hours claimed.

The judge analysed the costs at each phase starting with pre-action costs which were stated by the claimant

to have been £1.3 million which Coulson J thought was completely unjustified. His condemnation followed

for the costs incurred and estimated for every single phase through to Contingencies. After he made

reductions at each stage the cost budget had been reduced by more than half to £4.28 million in total.

9

Following this he set out a number of orders available to him:

1. Ordering a new budget - he ruled this out as it would only seek to increase costs further.

2. Decline to approve the claimant’s costs budget - not a viable option as, although it would be the

easiest option, it would not provide any assistance to the case or any of the parties.

3. Setting budget figures - Coulson J did not particularly like this option as it would allow the claimant

to “ride roughshod over the costs management process” and would still leave the overall figure of

costs too high and disproportionate to the case.

4. Refuse to allow any further costs - this option was rendered unworkable due to the fact that the

claimant may end up being penalised twice as it would leave the door open for the defendant to

seek a reduction on the costs already incurred.

From the above options Coulson J said that there was no alternative but to make a cost management order

which set specific figures for each phase looking at not just prospective costs.

This meant that the costs estimated would fall to be reduced pound for pound to the extent that the

amounts actually recovered for costs incurred were higher than the figures the judge ordered for each

phase.

The defendant’s costs budget was reduced by around £256,000.The other three additional parties’ budgets

were approved in full.

Conclusion

Hourly rates and the level of fee-earner doing the work should be carefully considered on the costs budget

and the guidelines checked as both will be easy targets for judges to seek to reduce budgets. It was

previously thought that these issues were not to be looked at by a judge at a CMC but should be left for

detailed assessment. However, it seems that some judges are prepared to go that one step further.

CIP Properties not only reminds us that judges have very wide powers in relation to making cost management

orders but that they are prepared to use them. In Redfern v Corby Borough Council (unreported) [2014]

EWHC 4526 (QB) a costs budget was reduced where it was equal to the amount claimed and obviously

disproportionate.

10

The case reinforces and goes further than some of the other recent cases such as Yeo v Times Newspapers

Ltd [2015] EWHC 209 which looked at whether the court could look at hourly rates and provided guidance in

relation to contingencies.

Contingencies have certainly been a trickier area and have been dealt with inconsistently across the courts.

Any assumptions or contingencies should be clear, not fall within the categories on ‘Form H’ and should be

work that is ‘more likely than not to be required’. Anything short of this standard should be omitted.

Certainly, what this case does highlight is that the cost budget should be seen as a reliable source of

information for the costs incurred and estimated. Proportionality will be one of the first things a judge will

look at compared to the amount claimed, complexity and the other parties’ costs.

It has been a while since the Jackson reforms were introduced but it seems only now that we are starting to

see judges feeling confident about making strict cost management orders.

Nichola Evans | +44 (0)161 300 8021 | nichola.evans@brownejacobson.com

11

Local authorities and land collaboration/joint venture agreements #3

This is the third and final article in our series of articles dealing with local authority land

collaboration/joint venture transactions.

You may recall that we started this series in December 2014 with our first article which examined the

objectives of the parties and the heads of terms for proposed arrangements between Brownshire

Metropolitan Borough Council (the Council) and Jacobsons Strategic Land (Brownville) Limited (the

Developer), collectively owners of 100 acres of land (the Site) with the potential to support a new urban

extension of approximately 1,500 dwellings (Brownville Village).

Our second article in January 2015 reviewed a number of the more common joint venture structures at

which the Council and the Developer might wish to consider in order to turn their ‘in principle’ agreement in

relation to Brownville Village into something more contractually binding and robust-the contractual joint

venture, land pooling/trust and the use of special purpose vehicles (SPVs).

This third article considers the last stage in the collaboration timeline the disposal of the Site itself.

Although others may refer to ‘exit routes’, ‘delivery structures’ or some other form of words, we are using

the term ‘disposal structures’ to consider how the Site may be disposed.

Do we need to decide yet?

Most of what we have looked at so far deals with setting up a framework for the promotion (and possibly

‘infrastructuring’) of the Site, so in essence setting up a site for disposal. Ultimately, both the Council and

the Developer will want to unlock value from the Site (and recoup their investment in it) and so the choice

of disposal structure is relevant to that.

Neither party is legally or commercially compelled to agree at the date of the joint venture which disposal

structure they will agree to follow, but unless the agreement provides for the method of disposal (whether

by identifying a preferred disposal structure, or providing for a mechanism for such a disposal structure to be

agreed or determined) the arrangements will be at risk of deadlock at best unless and until a further

negotiation takes place and the parties agree the way forward.

There is a risk that either of the parties may perceive a commercial advantage in not providing for the

disposal structure in the joint venture documentation, believing (rightly or wrongly – the future is likely to

determine this) that in refusing to agree to the other’s preferences, it can in the future hold the other to

ransom. Good faith provisions may help but the more comprehensive the joint venture documentation the

less the parties are exposed to the inherent risks of having to seek to enforce them.

12

If the parties never agree that way forward then it would seem illogical for the parties to remain bound by

the terms of the joint venture, and either of the parties may rightly consider they need the ability to

determine those arrangements and ‘go it alone’ with their own land.

Apart from the practical issues of terminating a joint venture (reconciling any outstanding costs balances,

providing for copyright licence/reliance documentation in relation to technical reports, removing any entries

made against Land Registry titles etc.) there could be far more significant issues to address.

For example, if one party is able to go it alone, will that crystallise any section 106 agreement or Community

Infrastructure Levy obligations, and if so how are the parties going to provide for these in financial and

practical terms? Will one of the collaborators simply have used the other to part fund the promotion of its

own part of the Site?

In short then, whilst there is no absolute requirement for the disposal structure to be agreed at the date of

the joint venture agreement, leaving this to be decided at a later date has clear risks, and can provide a

number of complications in relation to the unravelling of the joint venture agreement on termination.

What are the disposal structures then?

There are others, or variations on the following themes, but we will look at three:

1. direct development and sale (of completed dwellings)

2. sale of land, and

3. partnering-by way of promotion agreement or option.

What are the influencing factors?

1. We say now, and will reiterate later, that the objectives of the parties, and in particular the extent

to which the parties are prepared to invest their own money and accept promotion risk in order to

recoup greater rewards later, will be a significant factor influencing the parties in settling upon a

preferred disposal strategy. Conversely the determination of a required disposal structure may

influence the form of the joint venture arrangements.

2. Public law considerations which must be borne in mind by any local authority collaborator

throughout the joint venture process, particularly Section 123 Local Government Act 1972 requiring

Secretary of State Consent (subject to limited exceptions, and the provisions of the General Consent

Order) for disposals of land for less than the best consideration that can reasonably be obtained (and

the state aid regime).

The Galaxy case (R v Durham County Council and others ex parte Galaxy Land Limited [2015] EWHC

13

16 (Admin)), which we reviewed in the February 2015 addition of the Public Matters Newsletter, is a

salient reminder of the risks to local authorities in proceeding to enter into disposal contracts or

other disposal documents (in that case an option) without a proper assessment of the value of the

land asset and the likely disposal proceeds (all of which must be backed up with proper valuation

advice, and an appropriate reporting and decision making paper trail),and without a proper

consideration of Section 123.

The Galaxy judgment also highlighted some rather striking detail in relation to the commercial terms

of the disposal documents in that case – a long term (30 years) option period granted for a nominal

option fee, which effectively prevented the Council realising any value during that period, or holding

the purchaser to any contractual timetable for action to be taken, and with no termination

provisions.

To compound matters, the party which held most of the substantive (although limited obligations)

was an SPV with no covenant strength and no guarantor to support its obligations.

Fundamentally then, in our scenario the Council needs to ensure that it is not locked into an

obviously bad deal for too long, or to be obliged to give away too much for too little.

3. Public procurement law. Whilst this may not be the overriding factor, some disposal structures (e.g.

partnering by way of promotion agreement) are more likely to invoke the need to comply with

procurement law than others (e.g. simple land sale).Wherever procurement rules need to be

followed, the costs and timetables need to be factored into the deal. Even where the disposal

structure does not inherently require compliance with public procurement, wherever the

collaborators are appointing planning consultants or engaging others to carry out works (e.g.

infrastructure building contracts) and one or more of those collaborators is a public body, it will be

necessary to consider procurement law.

4. The nature of the parties. Local authorities are generally not developers, but neither are many

major landowners. However a number of joint venture agreements are entered into between parties

which are fundamentally different in terms of nature and aspirations. Where the parties are very

different in nature the joint venture may need to provide flexibility and permit direct development

and sale as well as land sales.

14

Direct development and sale

A fairly simple concept, though not without its challenges in terms of implementation.

The collaborating parties would themselves:

a) promote the Site through the planning process

b) obtain a satisfactory planning permission

c) procure the installation of defined ‘primary’ on-site and any necessary off-site infrastructure (spine

or distributor roads, junction improvements with main roads, rail or waterway crossings, sewers,

possibly community facilities required by a section 106 agreement and other items required to be

provided to enable the development of the Site, and any necessary site preparation,

decontamination and groundworks)

d) construct or procure construction of secondary infrastructure and properties for sale (houses, flats,

any commercial properties (for example district centre shops, medical or pharmacy facilities)), and

e) dispose of the sale properties to a number of end purchasers.

The joint venture documentation would contain suitable provisions to reflect the parties agreed

commitments in relation to these matters.

Costs and receipts would be shared in agreed proportions.

To avoid a disorderly chaos, the parties would do well to consider incorporating terms in their joint venture

arrangements to regulate the marketing and disposal of the properties by way of a marketing and disposals

strategy which could cover (among other matters) phasing of the development, target sales rates (in order to

seek to produce a regular income stream starting as soon as practicable), maximum sales rates (to avoid

flooding the market and depressing sales values) and regulating the number of sales outlets operating from

the site.

The parties could also agree to market the properties for sale through sole or joint agents, and could provide

for a co-ordinated approach to signage, promotional materials and the like.

This disposal structure is ideal where the two landowners are each in the business of property development

as their interests will be aligned: each will intend in the ordinary course of its business to develop land for

the purpose of sale of completed dwellings and other units.

It is somewhat more challenging where one of the collaborating parties is not in the business of property

development i.e. the Council in our scenario.

15

If direct development and sale is likely to produce best value/consideration for the Council as well as the

Developer, it might be worth the Council considering terms under which the Developer could in addition to

development of its own land, develop out the Council’s land as well.

Alternatively, the parties might agree that the Developer is able to direct develop and sell from its part of

the Site, and the Council is able to sell parcels of land from its part of the Site (in all likelihood to other

developers).

In this case the terms of the joint venture agreement will need to provide for a fair way of equalising land

value. The intention here is likely to be in that the Developer will want to provide for a return on its

investment in its part of the Site, and is likely to want to be able to deduct a sum equivalent to ‘X’ per cent

of the ‘gross development value’ of its part of the Site (to reflect its usual profit requirements) in arriving at

an appropriate residual land value.

As with all forms of disposal route, it is vital that a Council takes appropriate professional valuation advice

from surveyors experienced in collaboration deals and residential/mixed use and development so that an

equitable basis for sharing of costs and receipt can be set out (ideally in the heads of terms, to avoid

unnecessary future argument over the basis on which the parties will share the spoils).

As a general point, a direct development and sale is the most cost intensive form of disposal structure in

that at least one of the collaborating parties will be investing not only in promoting the Site through the

planning process and procuring shared infrastructure, but also in building the ‘product’ for ultimate sale. A

Council would clearly need to be wary that it is not inadvertently agreeing to contribute towards a

proportion of those product costs.

Sale of land

In circumstances where the collaborating parties are each landowners, and with no ‘direct development’

experience or aspirations, their interests may be best served by seeking a purchaser of the combined site, or

defined parcels of it, by offering the Site up for sale.

The collaborators could offer the Site up to the open market by placing it with sole or joint sales agents

(note procurement of services here), either as a single lot or in tranches (if the latter ensuring that each sale

tranche is granted all required rights over any retained tranches, and ensuring that each retained tranche

reserves all necessary rights over each sale tranche).

Advice should be sought from appropriately qualified property consultants as to whether the Site should be

marketed for disposal as a single lot or in (and if so, how many) tranches. Those consultants should also be

16

asked whether there are any potential ‘special purchasers’ who may be prepared to bid more than the

market in general.

On the simple premise that a site with planning permission and the benefit of use of shared infrastructure

such as roads, sewers and utilities (a serviced site) it is almost certainly going to commend a higher value

than an unserviced site without planning permission, the parties need to weigh up the pros and cons of

deciding whether to themselves promote the Site through the planning process (which is not without

considerable cost) and with or without installing a common infrastructure (which will clearly have

significantly greater cost).

As with the disposal of completed dwellings, there is the potential for market values to be depressed unless

parcels of land are marketed and sold in an orderly fashion. Advice from appropriate sales agents is vital.

The disposal of a large number of parcels on a piecemeal basis could impact upon the appetite of purchasers

for earlier (or later parcels) and the receipts to be realised could fall well short of the landowners’

aspirations.

Worth pausing for thought here. What are the collaborators’ aspirations in terms of return? Each of the

collaborators may have its own views on what makes a viable disposal scheme, but of course a council has

wider public law concerns in relation to achieving a consideration which complies with the requirements of

section 123. A council needs to be wary of being compelled to sell land without appropriate safeguards.

Whilst the General Disposal Consent (England) Order 2003 (annexed to circular 06/03) provides some

protection for local authorities against disposal of undervalues less than £2m where the disposal will

contribute to the achievement of the promotion or improvement of the economic, social or environmental

wellbeing, that cannot always be relied upon (for example, land held by local authorities for planning

purposes). Section 233(3A) of the 1990 Town and Country Planning Act as facilitated by section 8 of the

Growth and Infrastructure Act 2013) enables the Secretary of State to issue a general consent in relation to

land held for planning purposes and is in force, but no consent order has yet been issued.

As Durham County Council found out in the Galaxy case, where land is ‘open space’ within Section 336 Town

and Country Planning Act 1990, notice of intention to dispose must be advertised, and objections considered

under the ‘other’ limb of Section 123 (sub-section 2A).

In determining best value for Section 123 purposes whilst the price achievable in the open market is

relevant, all bids (including bids from special purchasers) must be considered and so if the property has

strategic importance in a wider site and is more valuable to particular purchasers that cannot be ignored.

17

A lower ‘base’ price may in fact be better value than a higher base price in circumstances where the lower

base price is ‘guaranteed’ to be significantly topped up with overage (R v London Borough of Barnet and

Others ex p London Jewish Girls High Limited 2013 EWHC 523 (Admin)). The overriding issue though is

whether the overage is virtually guaranteed, or rather less certain. A public body needs to be wary of placing

too much reliance upon overage, but equally should not ignore it.

Whilst a simple sale of land without the collaborators having first obtained a suitable planning permission

and procured common infrastructure is likely to realise less value than a serviced site, from a public

procurement perspective, the Council is of course unlikely to be troubled with the requirement to undertake

any procurement exercise – as long as the land disposal is just that and does not involve the procurement of

works or services by the purchaser for the Council.

Partnering – options and promotion agreements

In circumstances where the collaborating parties are landowners rather than developers, and particularly

where the collaborators may not have the appetite or financial wherewithal to seek to promote the Site

through the planning process, they may consider ‘partnering’ with a specialist property promoter, or with a

developer (by way of option).

An option agreement or promotion agreement will enable the collaborators to avoid the initial expense of

promoting the Site as the optionholder developer or promoter will be required to fund these and take on the

risk of an unsuccessful promotion. Whilst this may assist with cashflow, the promoter/optionholder will

recoup its investment down the line in terms of discounted purchase prices or promotion fees.

What are the main features of options and promotion agreements and what are the differences between

them?

A promoter will use its expertise in order to promote the Site for development by seeking its allocation

within the planning framework for development purposes, then obtain planning permission and finally

marketing the property for sale with the benefit of the planning permission.

An optionholder may do the same although is more likely to promote the Site with a view to acquiring it for

its own development purposes.

Under a true promotion agreement, the promoter acquires no interest in the land (so there should be no

SDLT charge to the promoter, at least not upon the grant of the promotion agreement), and the ultimate

sale documents will be entered into between the collaborating parties as vendor, and the ultimate

purchaser(s).

18

The promotion agreement will govern the extent to which (and the terms upon which) the collaborating

vendors are compelled to enter into sale documents, normally only after a satisfactory planning permission

has been obtained. The promotion agreement may well contain minimum land value/sale price provisions so

that the landowners are not compelled to sell land on the cheap.

Conversely, with an option agreement, the collaborating parties would as grantors confer upon a developer

(as grantee) an option to purchase the Site either in whole or (more likely) in phases at a date in the future,

subject to first having obtained a satisfactory planning permission, and so the developer optionholder

acquires an interest in the Site itself.

There may be SDLT payable by the developer optionholder upon the grant of the option, though this will

depend upon the value of any option fee paid. SDLT will ordinarily be payable upon the transfer of the land

following exercise of the option although the optionholder is likely to require the ability to sub-sell (so that

the landowners transfer land direct to the ultimate purchasers at the request and direction of the

optionholder) with a view to avoiding a double SDLT charge.

With a promotion agreement, the promoter would typically take a fee based upon a percentage of actual

sale receipts realised from disposals (plus reimbursement of some or all of its planning and promotion costs-

although query whether this may be double counting for the promoter’s benefit) but no money would be

payable to the collaborators until land was sold.

With an option agreement, the option would typically enable the Developer to purchase the Site (albeit for a

discount against its full market value). An option agreement would usually provide for the payment of an

option fee (perhaps also payment of the collaborating vendors’ legal and surveying costs relating to the

option agreement) although this may be relatively modest, and may be deductible from the ultimate sale

price if the option is exercised. On completion of sales following exercise of the option the landowners will

receive further payment.

The commercial terms of option agreements and promotion agreements can fluctuate, both over time to

reflect the market, and to reflect the specific circumstances of a Site and the negotiating strength of the

parties, and all collaborating vendors will need to take their own professional advice to establish that those

commercial terms are ‘market norm’ and will enable any public authority collaborator to pass the ‘best

value’ test.

We mention the Galaxy case again to remind those dealing with promoters and developer optionholders to

consider some of the basics - the covenant strength/ability to deliver of the contracting promoter/developer

(any guarantees or other security required?), the term of the arrangements, suitable milestones for action to

be taken/results delivered (consider termination provisions if not met) and to ensure that the commercial

19

terms are market norm (in terms of option fee, promotion fees, discount of land price against market value)

and will comply with Section 123 (and not infringe state aid rules).

It is worth reminding ourselves when best value is to be assessed for Section 123 purposes. R v Hackney

London Borough Council ex p Structadene 2001 or ER 225 establishes that the relevant time of the disposal is

the date of completion of that disposal, but also that the date of the grant of the option is the relevant

date. In the Galaxy and Structadene cases the court referred to the grant of an option to purchase as a

disposal of land (authority: Trustees of the Chippenham Golf Club v North Wiltshire District Council [1991] 64

P & CR527). So the terms of the option including any option fee and the basis of calculating eventual sales

prices will need careful scrutiny.

A word of warning in relation to option agreements and promotion agreements. As we have said above, the

substance of the arrangements is more important than what names the parties choose to call them. Over the

last few years there has been considerable blurring of the differences between the two, to the extent that

some promotion agreements contain (or effectively are) options. This blurring can fundamentally distort the

analysis of the arrangements, and can have significant tax implications.

Private sector landowners and developers will be particularly concerned by direct tax consequences, but VAT

and Stamp Duty Land Tax (SDLT) also need to be considered in detail based upon a review of the actual

agreed terms, as it is generally not in any of the collaborators’ interests for any party to be faced with an

unwelcome and unexpected charge to either, or irrecoverable VAT. So, always check that tax advice has

been obtained and is followed.

Care also needs to be taken in relation to the procurement regime. It is highly likely that in engaging a

promotion partner (either alone or jointly with other collaborators), works and/or services are being

procured by the Council. However, care also needs to be taken in dealing with an option agreement if the

developer option holder is to be contractually obliged to submit planning applications, carry out works or

provide other works or services.

In general commercial terms, as a promotion partner’s return is likely to be based on a percentage of

ultimate sales values realised, the interests of landowners and promoter are aligned in that it is in all of

their interests for sales values/land values to be maximised.

In relation to an option agreement, a cynic might argue that a developer optionholder has a vested interest

in keeping land value lower as this will enable it to purchase the land at a lower value, and generate

additional profit on sale of completed dwellings.

20

This risk can be mitigated by way of overage provisions to provide the vendors with a potential further

upside if sale prices exceed forecast sale prices, or if the Developer obtains a further and more valuable

planning permission in the future. Overage may of course also be factored into any deals for disposals

brokered by a promoter, but overage is rather more important in the context of an option.

Different expectations

With Brownville, the Developer is likely to want to dispose of completed dwellings following its own direct

development of its part of the Site. The Council is far more likely to want to embark upon sales of land from

its part of the Site.

So the joint venture arrangements will have to enable different types of disposal whilst ensuring that each

collaborator receives a fair return.

The Council might also wish to appoint its own promoter or grant options over its part of the Site, which

would add a further layer of complexity

Summary

We said at the outset of this article that the disposal structure could influence the form of joint venture

arrangements, and that the objectives can influence the disposal structure.

By way of an extreme example, where two or more collaborators are landowners (not developers) unable to

fund the promotion of a Site through the planning process or the installation of infrastructure, partnering

with a promotion partner or a developer optionholder may be the only realistic option.

Where the one or more of the collaborators are developers and collectively able to fund the promotion of

the Site, new opportunities are opened up, and the parties are likely to be able to realise a larger overall

capital receipt by the sale of consented land which they have promoted themselves.

If they are able to go further and prime the Site with core infrastructure, then those receipts can be

enhanced further.

In relation to Brownville Village, the Council and the Developer would inevitably need to first agree the basis

upon which the Site was to be promoted, infrastructure installed and land or buildings sold, as these factors

will influence what the parties are going to be required to spend, what they are likely to achieve

collectively, and when and how those spoils are to be shared.

Advice will be required from valuation and tax professionals, and property consultancy and legal advice will

be required in relation to structuring the joint venture/collaboration arrangements between the Council and

21

the Developer in the most appropriate way (whether by way of land pooling, contractual joint venture, use

of an SPV or otherwise).

It can be tempting to local authorities to dive into arrangements with the private sector in order to further

political or other strategic objectives without having fully considered all of the options available, the pros

and cons of each and the factors that ought to influence the decision making.

Before taking a dip in the pool, always best to know that you’re not going to be out of your depth.

Neil Walker | +44 (0)115 908 4127 | Neil.Walker@brownejacobson.com

22

Following the article in our February edition of public matters, we continue to look at the best value duty

(the Duty). In this article, we explore the statutory regime surrounding inspection and enforcement in

relation to the Duty, and some of the other duties of local authorities which support compliance with the

Duty.

The Duty

To recap, the Duty, as set out in s.3 of the Local Government Act 1999 (the LGA 1999), provides that “a best

value authority must make arrangements to secure continuous improvement in the way in which its

functions are exercised, having regard to a combination of economy, efficiency and effectiveness.” There is

also a wide duty to consult on how the Duty should be fulfilled.

In order to comply with the Duty, an authority must demonstrate that it is making arrangements to improve

service delivery in the present as well as in the future. It must also be delivering services which provide best

value at the present time. The Duty applies very broadly, to both duties and powers of the authority and the

way in which those duties and powers are delivered. Most activities of a local authority, including those

which are carried out by an arms-length company on behalf of the authority are therefore subject to the

Duty.

Background to the Duty

The basis of the regulatory regimes surrounding the Duty are ‘the four Cs’, which came out of the White

Paper ‘Modern Local Government: in touch with the people’, which was published in 1998. The four Cs

require best value authorities to:

challenge why and how a service is being provided

invite comparison with others’ performance (including organisations in the private and voluntary

sectors)

consult with local taxpayers, service users and the wider business community in the setting of new

performance targets, and

embrace fair competition as a means of securing efficient and effective services.

Initially, best value authorities were required to apply the four Cs to their functions in order to demonstrate

that continuous improvement was being achieved. They would then produce a best value performance plan

(BVPP) to demonstrate how they would satisfy their best value duty and to show progress against best value

performance indicators. BVPP’s were quickly replaced with a comprehensive performance assessment (CPA)

23

which established a star rating system, and then a comprehensive area assessment (CAA), intended to

provide a holistic view of a local authority’s area rather than focussing on the authority itself.

The current regime

The CAA was abolished in 2010 on the basis that its removal would reduce inspection costs for best value

authorities and allow them to spend money on frontline services. The foreword to the single page of

statutory guidance which replaces the CAA says that the intention is to “remove barriers to more open and

efficient local public services by freeing local authorities from targets, prescriptions and duties”. The new

guidance was intended to “allow [best value authorities] the flexibility to exercise appropriate discretion in

considering the circumstances of individual cases...” In essence, the guidance requires authorities to:

consider overall value, including economic, environmental and social value when reviewing service

provision

consult representatives of the local community at every stage of the service commissioning cycle,

including when the authority considers decommissioning services

give at least three months’ notice of an intention to reduce or stop service provision

engage stakeholders before making a decision on the future of services, and

allow stakeholders and the local community to put forward opinions on how to reshape a service or

project.

This guidance is extremely minimal and provides little by way of clarity for authorities as to what practical

steps will enable them to demonstrate that they are complying with the Duty. The guidance is supported by

an inspection regime and the powers of the Secretary of State under the LGA 1999. Under the LGA 1999, the

Secretary of State may require an inspection of an authority’s compliance with the requirements of the LGA

1999 in relation to specific functions. We have seen this power used recently in the cases of Tower Hamlets

Council and Rotherham Metropolitan Borough Council, where inspections produced reports which were, in

both cases, highly critical of the performance of the authorities. The inspection regime may be used by the

Secretary of State in order to investigate a diverse range of issues, and, therefore, any failing falling within

the scope of the Duty may result in an investigation. The Secretary of State has a wide discretion to decide

when intervention is required, and indeed, there is no obligation for him to give reasons for requiring an

inspection to be carried out. In November 2014, the High Court rejected a second application by the London

Borough of Tower Hamlets to bring judicial review proceedings on the basis that the Secretary of State had

not given adequate reasons for appointing an inspector. The court held that there was only a duty to identify

in general terms why an inspection was being held. This creates the inherent risk that the duty may be

exercised in a political way by a Secretary of State. The ability of best value authorities to challenge the

wide discretion afforded to the Secretary of State will be extremely limited.

24

The consequences of failing to meet the Duty

The powers of an inspector appointed by the Secretary of State are provided for by section 11 of the LGA

1999. These powers include the right to access the premises of a best value authority and to be granted

access to any document which appears to be necessary for the purposes of the inspection; the right to

request that authority staff and members give information or explanations for particular documents, and to

check computers. The authority is required to provide the inspector with “every facility and all information

which he may reasonably require for the purposes of the inspection”. Obstructing the inspector or failing to

comply with his or her requirements is a criminal offence, punishable by a fine of up to £1000. The authority

is also required to pay the inspector a fee for carrying out the inspection.

Following an inspection, the inspector will produce a report which may be published by the Secretary of

State, setting out any areas in which the authority is failing to meet the Duty. The inspector may also make

recommendations that the Secretary of State gives a direction under section 15 of the LGA 1999, which

provides that if the Secretary of State is satisfied that the authority is failing to comply with the duty, he

may:

order it to carry out a review of the exercise of specified functions

direct a local inquiry to be held into the authority’s exercise of specified functions

direct the authority to take any action which he considers necessary or expedient to secure its

compliance with the Duty

direct that a specified function of the authority shall be exercised by him or a person nominated by

him for so long as he considers appropriate, and

direct that the authority shall comply with the instructions of the Secretary of State or his nominee

in relation to the exercise of a specified function and provide such assistance as they shall require

for the purpose of exercising that function.

Before making a direction of this nature, the Secretary of State is required to give the authority an

opportunity to make representations about the report and the proposed direction. However, he is not

obliged to take the representations of the authority into account in making any decision. If the Secretary of

State considers it sufficiently urgent to make the direction without allowing the authority time to make a

representation, he may do so. He is entitled to mandate compliance by the authority with the direction if it

does not voluntarily comply.

These powers can be used to take control of the operation of a local authority. In the case of Rotherham,

the Secretary of State appointed a team of commissioners who are expected to exercise all of the executive

functions of the authority and oversee “a rigorous programme of improvement to bring about the essential

changes in culture and ensure there is in future effective and accountable political and officer leadership”.

These directions will be in place until March 2019 unless they are revoked or amended at an earlier date.

25

Additionally, the Secretary of State also has the power under section 16 of the LGA 1999 to “modify or

exclude the application” of an enactment in relation to all best value authorities or a particular authority or

class of authorities if he “thinks that an enactment prevents or obstructs compliance by best value

authorities” with the Duty.

Alongside the powers under the LGA 1999, the Secretary of State also has powers under the sections 86 and

87 of the Local Government Act 2000 (LGA 2000) which allow him to specify the years in which a local

authority holds elections of councillors and the scheme for elections.

The penalties for an authority failing to comply with the Duty are therefore extremely severe, risking not

only financial and economic damage, but huge reputational consequences.

How to comply

There are a number of other duties of local authorities which interact with the Duty and may assist in

demonstrating compliance with the Duty. The Public Services (Social Value) Act 2012 (Social Value Act)

requires local authorities to consider how the services they are procuring could bring added economic,

environmental and social benefits. This ties in with the statutory guidance on the Duty, which requires

authorities to consider the overall value contributed by their suppliers, with the aim of encouraging “public

agencies and civil society to collaborate more, including greater involvement for voluntary and community

organisations as well as small businesses in the running of public services”. Authorities are required to

consider “overall value, including economic, environmental and social value when reviewing service

provision”. Demonstrating that this has been appropriately considered is a key element of complying with

the Duty, and may be supported by strong and transparent procurement processes which give appropriate

weight to the social value which may be achieved through the purchase and running of public services.

The public procurement regime is particularly relevant in demonstrating compliance with the Duty. In the

case of R (Risk Management Partners Ltd) v Brent London Borough Council [2009] EWCA (Civ) 490 Lord Justice

Moore-Bick said that the Duty involved obtaining “a reduction in the cost of goods or services wherever

possible”. The Public Contracts Regulations 2015 (the 2015 Regulations) provide at regulation 67 that

contracting authorities “shall base the award of public contracts on the most economically advantageous

tender assessed from the point of view of the authority” which requires the authority to take into account

“qualitative, environmental and/or social aspects linked to the subject-matter of the public contract in

question”. Authorities may therefore use their procurement obligations to assist in demonstrating

compliance with the Duty. However, it is worth noting that simply because a particular requirement is

consistent with the Duty does not mean that it will be consistent with procurement law. In particular,

section 67 of the 2015 Regulations provides that the additional requirements of the authority must be

“linked to the subject-matter of the public contract in question”. The Duty is therefore somewhat wider

26

than the 2015 Regulations because it does not require the additional value which may be gained from a

public contract to be linked to the subject matter of the contract. It should also be noted that any

requirements of suppliers must be sufficiently transparent to comply with the duties of contracting

authorities to “act in a transparent and proportionate manner” under section 18 of the 2015 Regulations.

The four Cs remain the cornerstone of the best value duty regime, and if appropriately applied should

provide an authority with a good base from which it can evaluate its performance and make the changes

needed to secure best value from its services. The role of overview and scrutiny committees in this process

is significant. Louise Casey’s report into Rotherham MBC’s compliance with its best value duty highlighted

the failings of the authority in its duty to scrutinise its own performance. She noted that “the Council does

not use inspection to learn and improve. Members are overly reliant on officers and do not challenge

tenaciously enough to ensure improvements. Meetings and action plans are numerous but unproductive,

with a tendency towards inertia”.

Overview and scrutiny committees (which must be appointed by authorities using the executive system of

governance under section 9F the Local Government Act 2000, and which may be appointed by authorities

using the committee system under section 9JA of the same Act and the Local Authorities (Committee

System) (England) Regulations 2012) have the power to:

review and scrutinise decisions made, or other action taken in connection with the discharge of any

functions, whether they are the responsibility of the executive or not

make reports and recommendations to the authority or the executive with respect to the discharge

of any functions, whether they are the responsibility of the executive or not

make reports or recommendations to the authority or the executive on matters which affect the

authority’s area or the inhabitants of that area, and

recommend that a decision is reconsidered.

Under section 9FB, an authority with the executive system of governance is required to designate a scrutiny

officer to:

promote the role of the overview and scrutiny committee

support the committee, and

provide support and guidance to members, the cabinet and the officers of the authority.

27

Comment

It is absolutely essential that authorities consider the framework which supports their compliance with the

Duty, including the public procurement regime and the Social Value Act and use these to structure their

procurements in order to assist them to “make arrangements to secure continuous improvement in the way

in which its functions are exercised, having regard to a combination of economy, efficiency and

effectiveness” from the start of service delivery.

In addition to procurement considerations, best value authorities should learn from the recent lessons of

Rotherham MBC and empower the resources available to them in their overview and scrutiny committees and

other governance arrangements to challenge their service provision and provide constructive feedback to the

authority in order to highlight areas which require improvement and identify key steps to take which will

assist in making the necessary improvements. The risks of failing to do so are significant both for service

users and for the authorities themselves. This is partly about changing cultures but also about making

officers aware of their duties under the legislation and enabling them to perform them. It is not the case

that this is the only factor in achieving improvements in service delivery; authorities are under incredible

financial pressure at the moment as a result of significant cuts in public spending which ultimately have an

effect on service delivery and the ability of authorities to achieve improvements. Nevertheless, the duties of

authorities to comply with the Duty remain, and these are best achieved through a regime which allows

improvement through constructive criticism and challenges to the established routine.

Angelica Gavin | +44 (0)115 976 6092 | angelica.gavin@brownejacobson.com

28

Traditionally, April is one of the two key months for legislative employment law changes (the other being

October). Hopefully, you will already be aware of the new provisions which came into force earlier this

month but in case you need a reminder:

Shared parental leave

The right to take shared parental leave and receive shared parental pay applies to qualifying parents whose

baby was due (or placed for adoption) on or after 5 April 2015.

Shared parental leave is intended to allow parents greater flexibility as to how their leave is structured in

the first year after the birth of their child. In particular, it allows leave to be taken by both parents at the

same time and for leave to be taken in discontinuous blocks (with the employer’s agreement).

Parental leave

Not to be confused with shared parental leave, this allows employees with one year’s service to take up to

18 week’ unpaid leave. Previously, such leave could only be taken by parents of children under five (unless

the child had a disability). Now, it will apply to parents of children under 18 in all cases.

Adoption rights

The requirement for an employee to have 26 weeks’ service to qualify for adoption leave has now been

removed. Statutory adoption pay has been increased to be consistent with statutory maternity pay. The

definition of being ‘matched for adoption’ has been extended to include those within the ‘fostering for

adoption’ scheme (i.e. local authority foster parents who are also prospective adopters).

Time off to attend adoption appointments has been introduced. A single adopter or main adopter in a pair of

joint adopters is entitled to attend up to five paid adoption appointments lasting a maximum of six and half

hours each. The partner of the main adopter is entitled to attend up to two unpaid appointments.

Adoption rights have been introduced for eligible employees who have a child through surrogacy.

Additional paternity leave

Employees whose baby was due (or placed for adoption) on or after 5 April 2015 will no longer be eligible to

take this leave.

29

Pension rights

Individuals aged 55 or over can access their pension funds and withdraw pension benefits without purchasing

an annuity.

Whistleblowing

Student nurses and student midwives are now included in the definition of ‘worker’ for whistleblowing

purposes.

Statutory pay increases

A week’s pay (including for the calculation of statutory redundancy pay) has risen from £464 to £475.

The maximum compensatory award in capped unfair dismissal claims is now £78,335 (or a year’s salary, if

lower).

The prescribed rate for maternity pay, paternity pay, adoption pay and shared parental pay is £139.58 (or 90

% of the employee’s weekly earnings, if this is lower).

Statutory sick pay rises from £87.55 to £88.45 per week.

Changes to National Insurance

Employers’ National Insurance will not be due in relation to employees under 21 earning less than £815 per

week.

Criminal record checks

Not an April change (it came into effect on 10 March) but still worth a reminder: it is now a criminal offence

for employers to force applicants/employees to obtain and provide their criminal record by means of a

subject access request.

Case law also continues to develop:

Diabetes as a disability?

In Metroline Travel Ltd v Stoute, the EAT overturned an Employment Tribunal’s decision that type 2 diabetes

amounted to a disability under the Equality Act 2010. The EAT could not accept that abstention from sugary

drinks constituted a substantial adverse effect on day-to-day activities. Nor was it the case that type 2

diabetes amounted to a disability per se. Whilst a particular diet could amount to a treatment or correction

that must be ignored when assessing the effect of an impairment, the EAT did not consider that abstaining

from sugary drinks was sufficient for this purpose.

30

Holiday pay and commission

Lock v British Gas Trading Limited returned to the Employment Tribunal in February and a reserved

judgment was issued on 25 March 2015. The European Court of Justice had previously held that commission

payments needed to be included within remuneration and this hearing was to determine whether the

Working Time Regulations 1998 could be read consistently with EU law and, if not, whether wording could

and should be added. The Tribunal held that wording could be added to Regulation 16(3) to allow those

workers who receive commission to have their remuneration calculated as if it varied with the amount of

work done. There were a number of issues in Lock which were deferred until after this point was

determined. Therefore it still remains to be seen what approach the Tribunal will take to applying this in

practice and what reference period will be deemed to be appropriate.

Tribunal fees

UNISON has been granted permission to appeal against both decisions of the High Court dismissing its judicial

review challenges to the introduction of employment tribunal fees. Both appeals are expected to be heard

together in June of this year.

Sarah Hooton | +44 (0)115 976 6033 | Sarah.Hooton@brownejacobson.com

31

There have been eight Procurement Policy Notes (PPNs) published during the first quarter of this year, the

contents of which have been summarised below. To access the PPN to which the summary relates, click on

the relevant hyper-linked title.

1. Implementing Energy Efficiency Directive article 6: further information

(PPN 01/15) published on 19 January 2015

This PPN applies to central government departments only, including their Executive Agencies and non-

departmental public bodies (NDPBs).

The Energy Efficiency Directive (EED) came into force on 5 June 2014 and this PPN contains practical advice

on implementing obligations detailed in article 6 of the EED.

It details that contracting authorities only need to buy in compliance with the standards set out in Annex III

of the Directive where it is cost effective to do so (i.e. subject to value for money and life cycle costs) and is

consistent with other considerations such as economic and technical feasibility, as well as ensuring sufficient

competition.

It is anticipated this should not be a major change as operational energy related costs are already routinely

taken into account in procurement processes.

2. Public Contracts Regulations 2015

(PPN 02/15) published on 6 February 2015

This PPN applies to central government, local authorities and NHS bodies.

It announced that the Public Contract Regulations 2015 were due to come into force on 26 February 2015.

3. Reforms to make public procurement more accessible to SMEs

(PPN 03/15) published on 4 March 2015

This PPN applies to central government, local authorities and NHS bodies.

It provides some detail and explanation on the Lord Young Reforms under Part 4 of Public Contract

Regulations 2015.

32

The key reforms are:

the abolition of pre-qualification questionnaire (PQQ) stage for below threshold contracts

the requirement for contracting authorities to have provisions to ensure prompt payment through

the supply chain, and

the requirement for contracting authorities to advertise public sector contracts (including those

below threshold) in one place, on Contracts Finder, and also to publish award notices and framework

call-offs.

There are some exemptions from these rules, namely maintained schools and academies, that are exempt

from the obligation to publish on Contracts Finder and the prompt payment provisions. Additionally the

procurement of NHS health services is also exempt as such procurements are governed by the National

Health Service (Procurement, Patient Choice and Competition) (No. 2) Regulations 2013.

4. Taking account of suppliers’ past performance

(PPN 04/15) published on 25 March 2015

This PPN applies to central government departments only, including their executive agencies and NDPBs, and

applies from 1 April 2015 to procurements in respect of all in-scope stand-alone public contracts and

framework agreements for which an Official Journal of the European Community (OJEU) notice has not yet

been published.

The PPN contains guidance which covers the practical application of using the new discretionary ground

under the regulation 57(8)(g) of the Public Contract Regulations where a bidder may be excluded on the

basis of “significant or persistent deficiencies in the performance of a substantive requirement under a

prior public contract, a prior contract with a contracting entity, or prior concession contract, which led to

early termination, damage or comparable sanctions”.

The policy is to ensure that the bidder’s past performance is taken into consideration in the contracts to

which this policy applies. The guidance contains detailed direction on the selection criteria for assessing

bidders and what information and documents can be requested. The power to include such requirements in

the selection criteria is contained in regulation 58 where at sub-clause 15 it states contracting authorities

may impose requirements ensuring the bidders possess the necessary human and technical resources and

experience to perform the contract to an appropriate standard.

In-scope organisations must be satisfied that the bidder’s relevant principal contracts within the last three

years have been performed satisfactorily. If for any reason any of the past contracts have not been

performed in accordance with the terms and conditions, the in-scope organisation must be satisfied that

such a failure would not reoccur if the bidder was awarded the contract.

33

Documents and information to be provided by the bidder should include a list of past contracts for the last

three years, certificates of satisfactory performance for each and relevant references. The selection criteria

relating to past performance and the information required for those criteria must be specified in the OJEU

Notice.

The guidance also contains assistance in the process of obtaining certificates of performance, the

clarification/verification of information provided by bidders, the assessment of any reliance by the bidder on

others including sub-contractors, the assessment and the exclusion of bidders and any re-assessment during

subsequent stages in the procurement process.

The guidance annexes templates, including a certificate of satisfactory performance and a draft OJEU

Notice, to assist with the implementation of the processes described in the PPN.

5. Prompt payment and performance reporting

(PPN 05/15) published on 27 March 2015

This PPN applies to central government departments only, including their executive agencies and NDPBs.

The note sets out new requirements for prompt payment following the announcement of the 2015 Budget.

Current policy is that 80% of undisputed invoices should be paid within five days of receipt, and the rest

within 30 days.

There is now a requirement for all in-scope organisations to publish the percentage of invoices paid within

five days and those within 30 days on a quarterly basis. There is also a requirement for all interest liable,

under late payment legislation, to be published on a quarterly basis.

Additionally, there will be a ‘mystery shopper’ who will be checking if contracting authorities are complying

with these new measures and ‘name and shame’ those who are falling short in a fortnightly publication on

GOV.UK.

6. Sustainable skills development through major projects

(PPN 06/15) published on 27 March 2015

This PPN applies to central government departments only, including their executive agencies and NDPBs;

however all other public sector contracting authorities are encouraged to adopt the approach.

On 24 March 2015 the government announced that it requires public procurers of major construction and

infrastructure projects (including infrastructure consultancy services) with a capital value of over £50m to

use public procurement to drive increased investment in training and apprenticeships.

34

The aim is to improve value for money, risk management and long-term productivity as well as encouraging a

more responsive supply chain.

To that end, government departments should include in their procurement documentation the requirement

for the supplier to evidence their commitment to investing and developing skills for staff. Any commitments

made should be captured in the contract and any incentive mechanisms, as appropriate.

A guidance note and a checklist of example objectives are included in the PPN for further assistance on how

to include and manage this requirement effectively.

7. Open standards for technology

(PPN 07/15) published on 27 March 2015

This PPN applies to central government departments only, including their executive agencies and NDPBs,

however local authorities and the wider public sector are encouraged to adopt the principles in order to

deliver wider benefits.

If compliance measures have not already been implemented then immediate action is required.

Open standards principles set out in government policy aim to help the government:

a) work more efficiently

b) deliver more innovative services, and

c) encourage more competition for government contracts.

The PPN directs specific action to be taken by in-scope organisations when specifying IT requirements for

software interoperability, data and document formats. In-scope organisations must request that open

standards (in accordance with the open standards principles) are adopted; and use of compulsory open

standards profiles that have been adopted for use in government, subject to restrictions such as spending

controls.

The Open Document Format (ODF) is one of the key standards which must be used which concerns creating

and managing documents in software such as office productivity tools. The use of ODF is contained within

another policy on sharing or collaborating with government documents.

35

8. Tax arrangements of appointees

(PPN 08/15) published on 27 March 2015

This PPN applies to central government departments only, including their Executive Agencies and NDPBs (the

Departments).

Following a review of public sector appointees and the extent to which arrangements were in place which

would minimise their tax payments, a set of recommendations were made; the key recommendations being:

the most senior staff must be on the payroll

departments must be able to seek formal assurance from contractors with off-payroll arrangements

(of longer than six months and over £220 per day) that income tax and national insurance obligations

are being met, and

Implementation of all the recommendations by the departments will be monitored and sanctions

imposed for non-compliance.

As part of the implementation process all departments are required to include a clause in all contracts from

23 August 2012 (this also applies to any contract renewal) which gives the department the contractual right

to seek assurance that the worker is meeting their income tax and National Insurance obligations (if certain

conditions mentioned above are met), or preferably for the worker to give that assurance in the contract.

Departments are also required to apply the recommendations to all existing contracts, subject to ensuring

value for money.

To assist the departments, they are now required to use the assurance guide and illustrative clauses

published by the government, which are annexed to the PPN. It is the responsibility of each department to

implement the guidance fully as they will continue to remain accountable to Parliament for figures in their

annual report and accounts.

Action to be taken by the departments from 6 April 2015 consists of:

determining employment status of all off-payroll workers, regardless of how work was engaged

ensuring the contractual provisions are in place to enable the assurance to be obtained from the

worker as to meeting their tax obligations.

Anja Beriro | +44 (0)115 976 6589 | Anja.Beriro@brownejacobson.com

36

Awarding contracts under the new guidance published

The Cabinet Office has published new guidance in March to assist with the interpretation and application of

the Public Contract Regulations 2015 (the 2015 Regulations) which came into force on 26 February.

Several pieces of guidance were published on 26 March, one of which provides a more detailed explanation

and analysis of the changes to the contract award criteria provisions under the new Regulations (the

Guidance). There have been a few significant changes in contrast to the rules under the old regime.

The Most Economically Advantageous Tender (Regulation 67)

Previously contracting authorities had to award a contract based on the Most Economically Advantageous

Tender (MEAT). In the UK this concept was assimilated by the government’s value for money policy (based on

the best price-quality ratio).

Under the 2015 Regulations the definition of MEAT has undergone a significant change and it is now much

more flexible. The Guidance states that the definition now includes the ability to have lowest price as a

single award criterion. It is not actually clear from Regulation 67 that this is the case but it is fair to say that

it is clear from the recitals in the Public Sector Directive 2014 (the 2014 Directive) that cost or price can be

a sole MEAT criterion for evaluating a tender, if used correctly. There has been in a shift in emphasis from

the definition under the old regime, as Regulation 67(2) illustrates: “That tender [the Most Economically

Advantageous Tender] shall be identified on the basis of price or cost…” There is more of a focus on price

than previously and certainly more information given as to how price or cost could be evaluated. It should

remembered that the government’s aim is still to secure value for money and this should always still be

borne in mind when carrying out a procurement process; this would imply that the best price-quality ratio

still needs to be included in the evaluation criteria, if not there would need to be justification that the

lowest priced bid would achieve value for money.

The Guidance makes reference to extended discussions on this area, when the 2014 Directive was under

negotiation, as to whether to remove the use of lowest price as a single award criterion altogether.

However, the outcome was that it would be left to the member states as to whether a price only criteria

was to be included when the Directive was transposed. The UK opted to include it in order to provide

contracting authorities with more flexibility. It will enable UK contracting authorities to take account of a

wider range of characteristics during the evaluation process than ever before.

37

Life cycle costing (Regulation 68)

This concept has now been enshrined by the 2015 Regulations at Regulation 68 with further definition at

regulation 2(1), and recital 96 of the 2014 Directive. This is just one example of a cost-effectiveness

approach; contracting authorities are not obligated to use life cycle costing and may use other approaches.

However, it is the mandatory approach under one piece of EU legislation, namely the Clean and Efficient

Vehicles Directive 2009/33/EU. The 2015 Regulations provide that if any legislative EU act in the future

makes the approach mandatory then it must be used.

Recital 96 states that life cycle costing means “internal costs, such as research to be carried out,

development, production, use, maintenance and end-of-life disposal costs”. It can also include “cost

imputed to environmental externalities, such as pollution caused by extraction of raw materials used in the

product or caused by the product itself or its manufacturing, provided they can be monetised and

monitored”. Recital 96 and regulations 2 and 68 make it clear that every stage within the life of the contract

delivery should be taken into account when considering the cost.

This is a method to ensure that all potential costs are priced for and to eradicate the situation where there

is are add-on costs later in the contract which ultimately mean the contracting authority is not getting the

value for money they initially thought they would at the outset.

Abnormally low tenders (Regulation 69)

Under the old regime, a contracting authority had the option to investigate any abnormally low tenders,

before rejecting them. Under the new regime there is now a duty to investigate and disregard that tender if

it is found to be abnormally low. The contracting authority must assess whether any evidence provided by

the bidder does or does not “satisfactorily account for the low level of price or costs proposed, taking into

account the elements referred to in paragraph (2)” (Regulation 69(4)). The bidder must be rejected if the

low price is due to a breach of international environmental, social and labour law provisions (those which are

listed at Annex X of the 2014 Directive).

Other changes

Other additions to the permissible award criteria include:

the requirement for fair trade products to be used, which can include a requirement to pay a

minimum price and price premium to producers (at Recital 97 of the 2014 Directive and Regulation

67(3)(a))

the relevant experience and skills of individuals can be taken into consideration when awarding

contracts as well as at selection stage. These must be pertinent for the actual work to be carried on

38

under the contract that is to be awarded and relate to the individuals who will

be performing the services.

You can access the Guidance in full via the link here.

Anja Beriro | +44 (0)115 976 6589 | Anja.Beriro@brownejacobson.com

Emma Graham | +44 (0)115 948 5641| Emma.Graham@brownejacobson.com