Leases Entered into Before the Construction of a Building did not Constitute a Contract Subject to Construction 

May, 2021 - Gitte Holtsø, Lise Asby Nielsen

In a judgment of 22 April 2021, the European Court of Justice found that a lease contract entered into between an Austrian authority and a real estate company before the construction of the building did not constitute a contractual building contract, as the authority had not had a decisive influence on the design. The authority's requirements thus did not exceed the requirements that a tenant usually places on a building of a similar nature. The ruling is an important contribution to the issue of "tailor-made construction".

Briefly about the case

On 25 May 2012, the Austrian authority Stadt Wien-Wiener Wohnen ("WW") entered into a lease agreement with a real estate company for an office building called "Gate 2". The lease was entered into for an indefinite period and could only be terminated by WW after 25 years and then every ten years. The contract was entered into without prior tender and at a time when the building had not yet been erected.

On 25 July 2016, the European Commission sent a letter of formal notice to Austria, alleging that Austria had infringed the rules of the current Public Procurement Directive 2004/18, as the lease was in fact a public works contract and the Austrian authority had therefore direct award in breach of the procurement rules. The Commission did not find Austria's reply to the letter of formal notice satisfactory and consequently initiated infringement proceedings against Austria before the European Court of Justice.

In support of the fact that the lease was in fact a public works contract, the Commission claimed that WW had exercised influence over the design of the building, which went beyond the requirements that a tenant usually places on the design of a lease. In this connection, the Commission referred in particular to the following: 

  • WW had exerted influence on the construction of some bridges between the various wings of the building as well as the addition of some storeys to one wing.
  • Duration of the lease.
  • WW had continuously supervised the construction of the building.
  • A building permit had not been obtained at the time the lease was entered into.
  • WW had set a wide range of requirements for compliance with technical norms and standards.

Austria argued, on the other hand, that the influence which WW had had on the Gate 2 building was of a limited and usual nature and concerned the subdivision of the premises and the basic facilities of the areas. Austria further argued that WW was not the only tenant in the building, which supported the existence of standardized office building areas.

Judgment of the European Court of Justice

The European Court of Justice found that WW had not had such a decisive influence on the Gate 2 building that the lease actually constituted a contractual contract, and therefore acquitted Austria of breach of contract.

Initially, the Court stated that the award of contracts for the lease of buildings by a contracting authority is exempt from the procurement rules and that this applies to the lease of both existing and non-existent buildings (ie buildings not yet erected). 

However, the exception does not apply if the execution of the projected work is organized according to the needs of the contracting authority, in which case it will be a public works contract. Referring to previous case-law, including the judgment of Impresa Pizzarotti of 10 July 2017 (C-213/13), the Court stated that the decisive factor in this connection is whether the contracting authority has taken measures to define the nature of construction. and the construction work or at least has had a decisive influence on the design of the work.

In that regard, the Court stated that this would be particularly the case when the specifications required by the contracting authority exceed the requirements which a tenant would normally place on a building of a similar nature. In addition, there may be decisive influence if this influence is exerted on the architectural design of the building in question, such as its size, its outer walls and its load-bearing walls. On the other hand, requirements for the interior fittings can only be considered as having a decisive influence if they are distinguished by their distinctive character or scope.

In relation to WW, the Court found that WW had not exercised decisive influence over the Gate 2 building. In this connection, the court emphasized that the planning of the building had been completed at the time of the negotiations on the conclusion of the lease, and that WW had also not had any influence on the architectural design of the building. In particular, with regard to the design of the bridges between the various wings and the additional storeys of one wing, the Court found that these were not determined to meet a need specified by WW.

In relation to the other factors, including the duration of the lease, WW's ongoing control of the construction, and that the building permit was only obtained after the conclusion of the lease, the Court found that these were in accordance with market practice and therefore could not lead to WW being considered for having exercised decisive influence. The requirements for compliance with technical norms and standards set by WW did not go beyond what a tenant of an office building such as the Gate 2 building would normally require, according to the Court.

Plesner's remarks

Although the judgment concerns the previous Public Procurement Directive, it remains relevant, as the legal situation under the current Public Procurement Directive has not changed. The procurement rules thus continue to contain a provision that exempts contracting authorities from concluding contracts for the lease of buildings. Construction work related to the rented building, on the other hand, will be subject to tendering if the contracting authority is the real client. Ie. if the contracting authority has had a decisive influence on the design of the building in question, it will be a construction contract. This is often referred to as a "tailor-made construction". 

The judgment is an important contribution to the delimitation of when there may be a tailor-made construction. This will be the case if the requirements set by the contracting authority exceed the requirements that a tenant would normally set for a building of a similar nature. This will also be the case if the contracting authority has an influence on the architectural design of the building, such as its size, its outer walls and its load-bearing walls.

On the other hand, according to the European Court of Justice, this will not be the case if the influence concerns the interior design, unless it is a special or unusual design or the authority's influence is very extensive. It is an important addition.

Read the judgment of the European Court of Justice of 22 April 2021 .

 

MEMBER COMMENTS

WSG Member: Please login to add your comment.

dots