Is it a lease…? Is it a public works contract…? New developments on an old question

In the case of Commission v Austria,[1] the European Court of Justice (the "ECJ") has recently handed down an important judgment on the interaction between leases and public works contracts.  This detailed ruling will provide some clarity to parties dealing with the thorny issue of whether a "mixed" contract will be subject to EU public procurement rules.

 

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Background
The rule that EU public procurement law does not apply to contracts for the sale or lease of land has existed for several years.  In Ireland, this position is set out in Regulation 10 of the European Union (Award of Public Authority Contracts) Regulations 2016 (the "2016 Regulations").  

A public works contract is defined in Regulation 2(1) of the 2016 Regulations as, in addition to the execution/design and execution of certain prescribed works/activities, a public contract having as its object "the realisation, by whatever means, of a work corresponding to the requirements specified by a contracting authority exercising a decisive influent on the type or design of the work".  When works are to be done on a contracting authority's own land, it is clear that EU public procurement rules apply. 

However, the position is less clear in circumstances where a contract relates partly to the rental or acquisition of land and partly to works on that land.  Such "mixed contracts" can take many forms.

EU Case-Law
The ECJ has had cause to consider this issue several times over the years, often in preliminary rulings under Article 267 TFEU.  It is clear that the classification of a contract as a "lease" or "works contract" is not determinative – the question is ultimately one of EU law.[2]  The decisive factor is the main purpose or main object of the contract, which in turn is determined by analysing whether the contracting authority has had a "decisive influence" on the design of the works.[3]

Often, the analysis has turned on a factual analysis of the contract in question.  Some examples from case-law have illustrated the issue.

The 1994 ruling in Gestión Hotelera[4] centred on two agreements awarded by municipal authorities in the Canary Islands relating to certain activities at a hotel owned by one of the authorities.  The agreements were advertised in the relevant official bulletin of the Canary Islands but not in the Official Journal of the European Communities pursuant to the then-applicable procurement directives.  The activities included a concession to install and operate a gaming establishment; the operation of a hotel business; and the performance of works including "renovation, conversion and restoration" works so that the hotel in question could preserve its five-star status.  The court decided that the main object of the contracts was the installation and opening of the casino and the operation of a hotel business.  Importantly, the successful tenderer would be required to invest a significant sum to perform the fit out works and would not be remunerated for this.  Furthermore, the tender documents contained no description of the works to be carried out.  As the works element was "merely incidental to the main object" of the agreements, the contracts did not fall within the then-applicable definition of a public works contract.

In Auroux,[5] the Court of Justice ruled that one must look to a contract's "main purpose" in determining whether to classify a contract as a public works contract.  In that case, the French municipality of Roanne had engaged a semi-public company, SEDL, to build a leisure centre, without following a public procurement procedure.  This formed part of a town planning project pursuant to which SEDL would acquire land and manage the overall project.  The land in question would eventually be sold to third parties at the end of the project, or failing that, would pass automatically to the town of Roanne.  It was argued that the contract with SEDL was not a public works contract, as its scope went beyond what is envisaged in that definition – rather, it extended to the overall management of a town planning project.  The French Government also argued that as the buildings in question were to be sold to third parties, they could not correspond to the contracting authority's requirements.  In rejecting those arguments, the ECJ again cited the fact that the main purpose of the contract was the execution of the works.  The court observed that Roanne had specified requirements, namely the construction of the leisure centre as a whole.  Therefore, the court rejected the French Government's argument that the works did not correspond to the contracting authority's requirements and hence did not fall within the definition of a public works contract.

In 2014, the ECJ considered the issue again in the case of Pizzarotti.[6]  This case concerned a mixed contract involving the construction of a courts complex in the city of Bari, Italy.  The Italian Consiglio di Stato requested a preliminary ruling, asking whether a contract containing an undertaking to let buildings not yet built was a public works contract despite having elements akin to a lease.  In that ruling, the court referred to the framework of requirements drawn up by the Corte d’appello di Bari; the authorities' reservation of rights to verify, prior to accepting a work, its compliance with that framework; and "the various technical and technological characteristics of the planned work".  In the court's view, this placed the contracting authority, the Commune di Bari, "in a position to have a decisive influence on the design of the work to be constructed".  Accordingly, and consistent with Helmut Müller (cited above), the main object of the contract was the execution of works corresponding to the authority's requirements.

Recent Case-Law – Commission v Austria
In 2012, Stadt Wien-Wiener Wohnen ("Wiener Wohnen"), a public body linked to the City of Vienna, entered a contract, classified as a lease, with a private entity, Vectigal Immobilien GmbH & Co KG ("Vectigal"), for the lease/construction of an office building which had yet to be built.  The building, which comprised two wings (A and B), was situated on land owned by that private entity.  Under the relevant contract, which was not advertised pursuant to EU public procurement rules, Wiener Wohnen took up an option to have a bridge constructed between the two wings and to have three new floors constructed on wing B. 

Following a complaint from a third party, the European Commission began an investigation into the alleged failure to follow a competitive tendering procedure in 2016.  There followed several rounds of correspondence between the parties before the Commission, dissatisfied with Austria's failure to remedy the alleged infringement, instituted proceedings in July 2019.

In essence, the Commission alleged that Wiener Wohnen had an influence on the planning of the works relating to the premises which went beyond the usual requirements of the tenants of a new building.  Therefore, the Commission argued that the contract between Wiener Wohnen and Vectigal was a public works contract.  The Commission not only cited the fact that Wiener Wohnen had taken up the options descried above, but also argued that it had chosen most of the technical solutions in the final design.  For example, Wiener Wohnen was alleged to have specified details of the type of piping system ultimately chosen in the design and construction.  Furthermore, the Commission claimed that the authority had supervised the execution of the works "in the same way as a developer would".

In response, Austria claimed that by the time the contract was entered, the planning of the building had been completed in its entirety.  In particular, Austria argued that the bridges had actually formed part of the building from the outset and that the additional floors would have been constructed regardless of the option being taken.  The Member State countered that the negotiations focused mainly on the amount of the rent and operating costs, i.e., elements typical of a lease arrangement.

The court agreed with Austria.  Among other matters, the following points were noted:

Taking these factors (and others) into account, the court dismissed the Commission's action.

Comment
This case is yet another development in an old and interesting area.  Although it turns on its own facts, it contains a very detailed analysis of the precise factors which may determine whether a mixed contract falls under EU public procurement rules.  Read in conjunction with other case-law on this issue (including the cases cited above), it demonstrates that the analysis of whether public procurement rules apply to a "mixed" contract will be fact-specific and highlights the need to obtain advice in each case.

Written by Eoin O Cuilleanain

[1] Case C‑537/19, Commission v Austria, judgment dated 22 April 2021.