How to Procure a legal section 106 agreement

A fair few column inches have been taken up over the past six weeks with news of the ODPM announcement that registered social landlords are now public bodies for EU procurement purposes.

RSLs now know where they stand; rightly or wrongly, they now have to get on top of the rules and ensure that their procurement practices and programmes are EU compliant. If not, they run the risk of challenge but also (and perhaps of more immediate concern) they may not get the grant that they were looking for. This is all clear. What is less clear is how RSLs are supposed to comply with the rules in the context of a section 106 development – which in the past has been one of the most frequently used methods for affordable housing delivery.

Invitation to bid

In these deals, the RSL often responds to an invitation to bid from the developer who controls the site and then submits a bid made up of land and construction costs. In nearly all cases, the developer will build the units for the RSL. This makes good sense: the developer controls the site and is best placed to manage the construction of both the affordable housing and private units.

In some cases (for example, a block of flats where affordable housing units may be “pepper potted” with units for sale) it could be essential.

But can this approach continue in light of the ODPM announcement? The contract for the delivery of the affordable housing units is likely to be a public works contract under the rules, and if it is worth more than the stipulated financial threshold (currently £3.83m), should be advertised in accordance with the rules. But the developer is, at best, likely to be “underwhelmed” by the RSL whose offer refers to the need to advertise the construction works.

No real choice

So what does the RSL do in this situation where it has no real choice as to who it appoints? Is it a case of “business as usual” with the RSL having to take a view as to the risk of procurement challenge, or are there grounds for arguing that the rules should not apply? RSLs could consider the following:

n  Can it be argued that the primary purpose of the deal is the acquisition of land and the construction work is “merely incidental” to that purpose? If it could, the works may not be caught. But is that right? Is the RSL only really interested in land or the acquisition of affordable housing units? In most cases, one would assume it is affordable housing units that RSLs are after and, therefore, the land exemption may not apply.

n  What about units bought “off the shelf” from the developer? A contract to buy newly completed dwellings is not caught by the rules. But this is not the same as a contract under which the developer agrees to build dwellings for the RSL to an agreed specification; the latter would be a public works contract.

The rules apply to the “seeking of offers” by a contracting authority. But in most section 106 deals, it is the developer that seeks offers, not the RSL. The RSL is just responding to the developer’s invitation.

The whole purpose of the new rules is to open up procurement where public money is involved

Maybe the RSL could delegate the obligation to comply with the procurement rules to the developer. The whole purpose of the rules is to open up procurement where public money is involved. Getting the developer to advertise for a sub-contractor would achieve that end even if, technically, it is the RSL who should advertise.

But how keen developers will be on this suggestion is another question.

The rules allow a public body to avoid advertisement and to negotiate with a contractor where “for reasons connected with the protection of exclusive rights”, the relevant work can only be carried out by that one contractor.

It might be argued that the developer’s ownership of the land is an exclusive right, leaving the RSL with no choice but to appoint the developer to undertake the work. The provision is probably meant to cover situations where the subject matter of the contract is protected by intellectual property rights rather than land ownership.

Furthermore, it is viewed as an exceptional provision and the burden of proof would be on the RSL to show that it applied to this situation.

Call-off contracts

Alternatively, rather than considering how section 106 deals may be brought outside the scope of the rules, RSLs could look to establish EU-compliant framework agreements with a number of developers. Individual schemes could then be called off under the framework agreement without the need to advertise, even where the value of the individual “call-off” contract exceeded the £3.8m threshold.

Some of those developers may be RSL subsidiaries set up in response to the Housing Corporation’s proposed “New Partnerships In Affordable Housing” programme.

Lots of food for thought and the government has a good opportunity to clarify these issues when it drafts the regulations implementing the EU consolidated directive adopted by the European Parliament in the spring. Let’s hope they take it up.