Falling foul of these rules mean that the development or letting can be challenged and ultimately the contract being declared ineffective. This can cause serious losses, not only for the public body but for the developer/property owner as well.
What is exempt?
It is generally accepted that obligations under a Section 106 agreement will not need to follow public procurement law as the provision of the additional facilities as a result of a development is not an obligation on the developer to execute works on behalf of the council but a decision of the developer to proceed with their intended works that warrant the inclusion of a Section 106. Therefore, planning obligations are not usually counted as contractual obligations.
Local authorities can submit a voluntary transparency notice (called a VEAT) which states that the authority does not believe that there is a requirement to advertise the contract. However, in the case of Faraday Development Ltd v West Berkshire Council  this notice was submitted and was deemed by the court to be insufficiently detailed and the contract was therefore deemed ineffective. Since this case, developers should be warned that successful challenges to public contracts might be more likely.
What are the issues?
There are six months in which the contract can be challenged by a third party and this puts developers and property owners at risk of facing abortive costs and contractual penalties due – much like Judicial Review insurance. These will be exacerbated in the event that the contract is deemed ineffective.
Insurance is now available for this type of risk. In a bidding process with a public sector body, quango or charity that results in a contract, the risks associated with a challenge can be covered. In the event that a contract is awarded with a public sector body, that did not have a bidding process, there is greater risk of challenge, even if a VEAT is submitted. It is imperative that developers asses the risk of challenge and look into insurance as a way to mitigate financial loss. There is more than one insurer who can provide this type of cover.
The policies can cover:
- Abortive costs i.e. costs of materials expended / works that have been undertaken / legal fees and professional fees
- Increased costs associated with a delay in the development, such as increased finance costs
- Contractual liabilities.
These policies allow comfort, not only for the developer but for key stakeholders such as lenders to protect their balance sheet in the event of a challenge.