Not Your Average Tenant?

[NB this article has been updated - below - to reflect the judgment of the Court issued on 22 April 2021]

In his opinion today in Case C-537/19 (Commission v. Austria), the Advocate General concluded that the control exercised by a public body over the construction of the head office premises it had agreed to lease was sufficient to trigger application of the EU public procurement rules.

In this case the European Commission claims that Austria has failed to fulfil Directive 2004/18/EC (the predecessor of the current Public Procurement Directive) because in 2012 a public body linked to the City of Vienna (Wiener Wohnen) concluded with a private undertaking (the Landlord), without complying with the provisions of that directive, a contract, classified as a lease by the signatories thereto, (the Lease Contract) for the construction of an office building by the name of ‘Gate 2’ (the Building) on land owned by the Landlord.

According to the Commission there are a number of factors which show that Wiener Wohnen had a decisive influence over the design of the building and over the execution of the project to construct the Building and that, therefore although the parties concluded the Lease Contract as a property lease, it is in fact a public works contract within the meaning of the Directive. Meanwhile, Austria argues that the transaction falls within the exemption under the Directive for public contracts for the leasing of buildings.

The Advocate General’s concluded that the Lease Contract did amount to a public works contract within the meaning of the Directive. In reaching that conclusion, he placed particular weight on the contractual rights exercisable (and in fact exercised) by Wiener Wohnen over the eventual structure of the Building (the design of which was not final when the Lease Contract was entered into). 

It is true, as the Republic of Austria submits, that, in the case of large property development that has yet to be built, the (future) tenant may negotiate with the owner in order to have the building adapted to some extent to suit his own purposes. In this case, however, the conditions imposed were so extensive and Wiener Wohnen’s role so significant as to go beyond the customary scope of the landlord-tenant relationship.

In particular, Wiener Wohnen was entitled to require the construction of two extensions to the Building (the first for additional floors and the other for a bridge to connect the two wings of the Building). According to the Advocate General, those two extensions were, “unquestionably an important architectural addition affecting the structure of the property and, under the terms of the contract, would not have been built if Wiener Wohnen had not made provision for them. The wishes of that public body were thus instrumental, inasmuch as the building was built in the form and with the characteristics which it wanted” [para.67]. Those contractual rights were not, in the Advocate General’s view, “consistent with the typical position of a mere tenant but, rather, with that of an actual project owner who imposes his own solutions on the plans for the building and their execution” [para.73]. This view was, “reinforced by the fact that Wiener Wohnen appointed its own operatives to supervise the execution of the project, in parallel with the owner. This too is a role that does not normally fall to the tenant of a property which has yet to be built, since it is not usual for a tenant to supervise a project which is not his own” [para.76].

Whilst not relevant to the ultimate conclusion reached to the Advocate General, it is worth noting that there were two factors – first, that the Building would not have been built if the Lease Contract had not been signed and, second, that the Lease Contract imposed handover deadlines for the completion of the Building along with penalties for delay (in this case EUR 30,000 per day) – which were not of themselves sufficient to establish that the building had been designed or constructed in accordance with Wiener Wohnen’s requirements.

Interestingly, the Advocate General also appeared to accept that, in principle, the long duration of the lease to be entered into under the Lease Contract (which was not open to ordinary termination until 2040) might bring the contract within the scope of the Directive to the extent that the sum of the rents accumulated over such a period of time could be regarded as deferred payment for the building works themselves.  However, he could not endorse such an argument in the absence of data produced by an economic study taking into account the project’s write-off period and the costs to the owner of maintaining the building during the minimum contract term. 

Update: judgment of the Court (Fifth Chamber) on 22 April 2021

In the judgment issued today the Court has dismissed the action, finding (contrary to the Advocate General) that the Lease Contract did not in fact amount to a public works contract.

The Court was satisfied that the design of the building had essentially been settled prior to the conclusion of the Lease Contract and that the rights granted to Wiener Wohnen in respect of the additional floor and connecting bridge were no more than options made available to Wiener Wohnen in its capacity as a tenant. According to the Court, "the mere fact that Wiener Wohnen made use of the options offered, that is to say that it availed itself of the possibilities already provided, cannot suffice to show that that entity exercised a decisive influence on the design of the work in question".

Discounting other factors relied upon by the Commission, the Court made the following key observations:

• Absence of a building permit: The Court found that, "according to standard commercial practice, large-scale architectural projects are let well before the detailed construction plans are finalised, so that the owner of the site or the developer initiates the formal procedure for obtaining a building permit only when it has commitments from future tenants for a significant part of the space in the planned building".
• Supervision by Wiener Wohnen over execution of the works: According to the Court, "it is in no way unusual for a tenant to take measures in order to ensure that the move into the premises could take place on the planned date, in particular, as in the present case, where a large-scale move is involved. The fact of having recourse to the services of a third party specialising in this area enables effective monitoring of the deadlines for handing over the building, ensures monitoring with a view to detecting any delays or defects well in advance and making the necessary arrangements, such as, for example, extending certain leases in certain buildings that were still occupied".
• Degree of specification by Wiener Wohnen: In the Court's view, "it is necessary to determine whether the specifications set out by Wiener Wohnen were intended to satisfy stipulations that went beyond what a tenant of a building such as the Gate 2 building might normally require and lead to Wiener Wohnen being regarded as having exercised a decisive influence on its design".

As regards the final point above, the Court took the position that, "in so far as Wiener Wohnen sought to ensure that the specifications in the technical standards applicable under statutory provisions were complied with or that the specifications of the building comply with the normal ‘state of the art’ on the market concerned, in the light of which the proper technical execution of the construction is evaluated, those requirements cannot be regarded as measures taken by Wiener Wohnen in order to influence the design of the Gate 2 building or as exceeding what a tenant may normally require".