The public sector balancing act

A council has an opportunity to acquire an off-market city centre investment property from a developer under a proposed forward funding arrangement which will involve financing the development for a commercial return and then receiving a rent from the anchor tenant post completion. The opportunity involves another council as freehold landowner which, some time ago, entered into an overarching 20-year development agreement with the developer (the terms of which would require incorporating into the funding commitment and letting with the anchor tenant). This is made more attractive for a number of reasons, including that the developer has recently been successful in its application for public funding from central government to assist with viability, and the building itself promises to have an EPC rating A. Challenges ESG considerations ESG covers numerous issues but, looking at the building, once constructed, the focus of “E” (environmental) will be around the operational impact on the environment. The office space promises an EPC rating of “A”, which means that there will be no issues in complying with minimum energy efficiency standards. However, in addition to an “A” rating, the building needs to be used sustainably and the leases should therefore contain obligations on the tenants to operate their premises sustainably. For example, by reducing electricity (which should be obtained from a renewable source), water consumption, and waste. Additionally, circular economy drafting could be incorporated in the repairs and alterations clauses. The Chancery Lane Project has freely available drafting to cover such scenarios. The “S” of ESG refers to social value, the delivery of which will be key for the council. In the context of a city centre office space, the council may want to consider community use of shared spaces (eg, an atrium) at certain times. Subject to comments below, they may also want to limit the type of occupiers and ensure that the anchor tenant complies with the council’s own ESG values. If so, thought should be given to how this would work if and when the tenant wants to sublet or assign the lease. Procurement consequences The council, as funder, will be concerned to ensure that its proposed commitment does not trigger the application of the Public Contracts Regulations 2015 and there are several factors which support the argument that this is not the case. First, the site in question is subject to an over-arching development agreement which assumes the developer will have “exclusive rights” under the 2015 Regulations to develop the land over the 20-year period (the site only becoming available for third party development if the developers’ solution is or becomes unviable). Secondly, the council is purely driven by economic considerations and has no “decisive influence” over the design of the development, or the nature of the occupier (this is left for the developer and the anchor tenant to respectively determine). The council can, of course, secure some protection against a successful legal challenge (at least in terms of any declaration of ineffectiveness) by issuing a voluntary ex ante transparency (VEAT) notice, prior to entering into the funding agreement. With the introduction of the widely anticipated Procurement Act 2023 on the horizon (currently scheduled to take effect from October 2024), the emerging view is that this is unlikely to materially change our approach to development schemes, such as this, in the UK. There will, however, remain the need for parties to assess, on a case-by-case basis, whether the bespoke nature of any development scheme triggers the application of the public procurement rules. Subsidy concerns Any funding by the council towards this acquisition, if a subsidy, will be governed by the Subsidy Control Act 2022, which came into full force and effect from 4 January 2023. Such funding would qualify as a subsidy if it (a) is given directly or indirectly from public resources by a public authority (this limb is satisfied in this case), (b) confers an economic advantage, (c) is specific and (d) has, or could have, an effect on trade and investment in the UK or between the EU and the UK. Where the funding meets those four criteria, it can still be exempt from subsidy control requirements in the UK (eg, if the total amount of public assistance being provided to the economic actor in question is less than £315,000 over a three-year period). Further, where the council funds the development on market terms and complies with the requirements of the Commercial Market Operator Principle, such funding would arguably not constitute a subsidy. Finally, even where the funding by the local authority is not exempt, it can still be considered a “permitted subsidy” and be considered lawful under applicable UK law if it complies with the principles set out in Schedule 1 of the Act. Final thoughts In assessing the potential solutions for an opportunity such as this, balancing the commercial, reputational and legal risks will be key. Although there are a number of challenges to delivering a project of this nature, by giving those challenges early consideration and engaging legal advisers in the primary stages, the council can navigate a successful route. David Meecham is a partner at TLT Photo © Jordan Opel/Unsplash