Supreme Court strikes down contractual freedom of government entities in real estate transactions

Very recently, the Supreme Court handed down a groundbreaking judgment, which is of great influence on real estate practice(ECLI:NL:HR:2021:1778). Indeed, in this judgment the Supreme Court ruled that government bodies, wishing to sell an immovable property, must, in principle, give all (potential) candidates the opportunity to compete and, in doing so, offer a certain degree of publicity of information. These obligations follow from the principle of equality. This new development raises questions, creates disadvantages, but also offers opportunities. In this blog you can read why.

What was the case study?

The Montferland municipality planned to make Didam's village center more attractive by having supermarkets relocated to the center. To make this possible, the Montferland municipality signed a purchase and cooperation agreement with a real estate developer for the redevelopment of the former town hall into a supermarket. A course of action, which normally does not lead to much fuss. Yet things turned out differently. For there was another real estate developer who was also interested in this location and had also previously made this interest known to the municipality.

The real estate developer, who fell behind, argued (among other things) that the municipality was allowed to sell the plot only after an open and non-discriminatory bidding procedure in which all candidates would have a chance to buy the plot. The municipality's failure to do so would have favored the other real estate developer. This would violate the principle of equality. In support of this ground of appeal, the real estate developer referred to the "national competition standard" introduced and declared applicable in the issuance of scarce permits by the Administrative Law Division of the Council of State in 2016(ECLI:NL:RVS:2016:2927). The link to scarce land was made.  

Background: when the Division introduced the 'national competition standard', the Division ruled that this legal standard is a corollary of the principle of equality. According to the Division, this 'national competition standard' applied to the distribution of scarce permits and scarce public rights, such as the permit for a slot machine hall in that case. The Division did not rule on whether this "national competition standard" also applies to private law actions.

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Competition standard also applicable to private law actions?

In the case before the Supreme Court, the municipality invoked the fact that this was an "ordinary" private law land allocation and that this was not subject to a competition obligation. In that, according to the municipality, this situation differs from the case in which the Administrative Law Division ruled.

The latter was also assumed (until now) in (legal) practice. It is therefore not for nothing that the real estate developer, who brought the case, lost at both the District Court and the Court of Appeal. The court ruled that a municipality is not obliged to provide opportunity for competition when issuing land (and that it has not been established that there is scarcity). The deputy attorney general (a key advisor to the Supreme Court) also advised that the court's ruling be upheld. The mere fact that there would potentially be more candidates does not (yet) imply that there would be scarcity.

Yet the Supreme Court itself thinks otherwise.   

What does the Supreme Court rule?

The Supreme Court ruled that even in private law relationships, a public body must by law comply with written or unwritten rules of public law, including the general principles of proper administration. Such as, for example, the principle of equality. This is where the position of a government differs from that of a private party, the Supreme Court said.

It follows from the principle of equality that a public body wishing to sell an immovable property must offer the opportunity to all (potential) candidates to compete. This means that the public body must select a buyer in a selection procedure based on objective, verifiable and reasonable criteria. The public body must also provide an appropriate degree of publicity about the desire to sell and the sales process (e.g. a notice in the newspaper, etc.).

In the Supreme Court's opinion, there is one exception to this selection procedure and publicity. Namely, this selection procedure does not have to be gone through if it has already been established that there is only one serious candidate for buying the land or building in question. It must also be possible to assume this on the basis of objective, testable and reasonable criteria. Moreover, the intention to sell must then be made known to everyone in good time prior to the sale and reasons must be given as to why there is only that one serious candidate. The Supreme Court further ruled that it is not so much a question of the scarcity of land, but whether it can be expected that there may be other (potential) candidates for the purchase of the real estate in question. 

This ruling thus brings a major change in perennial real estate practice. Public bodies "can no longer simply choose to whom they sell land. They must be able to make a good case that there is only one candidate, and if not, a public selection process must be held.

What does this mean for you as a real estate developer?

In any case, an uncertain time is approaching in which many questions remain unanswered. One can think of questions such as:

• What consequences does this ruling have for purchase agreements concluded in the past (where there were also more candidates who were "ignored")? Does this only lead to liability for damages based on wrongful government action or is the purchase agreement itself still subject to attack?
• When is it objectively determinable that there is only one serious defendant?
• What requirements should the information requirement meet for both the selection process and the justification that there is only one serious defendant?
• What is a reasonable time for the notice to proposed sale?
• Does this obligation to offer also apply when exchanging land with a public body?
• Does this case law also apply to other agreements that involve land grant/land acquisition, such as leasehold? Or leasehold or rental?

Uncertainties can be detrimental in current or upcoming projects, but of course they also present opportunities. For example, you could still try to "get your foot in the door" on a deal that has just passed you by. Another advantage is that in the future it will become more transparent what is offered on the market from government bodies. If a selection process is not desirable, there are opportunities to provide early direction.

Of course, we do already have ideas about the right answers to the above-mentioned questions and will research them thoroughly. Should more become clear, we will inform you further. For now, it is in any case important that you are aware of this major change (with major consequences) in real estate practice. 

Should you see opportunities or drawbacks in an existing or future project, we would be happy to think with you.