FAQ: Consequences of the Didam judgment for the sale of land by governments

1. What was the case about?

The municipality Montferland intended to sell a location in the centre of the municipality of Didam to a property developer, who was planning to establish a Coop supermarket on that location. However, another (real estate) company was also interested in that location, and contacted the municipality with the intention of commercialising an Albert Heijn supermarket on that same location. The municipality sold the land to the property developer, after which the (real estate) company decided to bring preliminary relief proceedings against the municipality at the District Court of Gelderland. The (real estate) company demanded primarily that the municipality should be prohibited from selling and transferring the land, unless the municipality organised a public and non-discriminatory bidding procedure.

The District Court and the Court of Appeal ruled against the (real estate) company. After this, the (real estate) company went to the Supreme Court. Advocate General Langemeijer concluded that the appeal in cassation should be dismissed. The Supreme Court itself, however, did not follow his conclusion.

The Supreme Court decided that under article 3:14 of the Dutch Civil Code, a competence that has been attributed to a public authority under civil law may not be executed contrary to principles of good governance as enshrined in public law. This includes the principle of equality.

The Supreme Court decided that due to the principle of equality, public authorities that want to sell land must do so in a manner that gives all interested parties the opportunity to bid. This is only applicable if more than one party is interested, or if it can reasonably be expected that more than one party would be interested. In such case, the public authority must formulate objective, verifiable and reasonable criteria by which the bidder will be selected.

Furthermore, the principle of equality requires the public authority to ensure transparency regarding (i) the intention of selling the land, (ii) the selection procedure, (iii) the timetable, and (iv) the applicable selection criteria. The public authority must provide clarity on these criteria timely before the selection procedure.

The Supreme Court also formulates an exception. The public authority does not have to follow a selection procedure (and can therefore award privately and/or 1-on-1) if it is established in advance, or if it can reasonably be expected that, on the basis of objective, verifiable and reasonable criteria, only one serious candidate qualifies for the purchase. In such case, the public authority has to make public its intention to sell prior to selling. This needs to be done in such way that anyone can take note of the announcement. Furthermore, the public authority has to motivate why it thinks that, based on the above-mentioned criteria, it is established or it can reasonably be expected that only one serious candidate will be eligible for the transaction.

2. To which public authorities does this judgment apply?

The judgment is in principle only applicable to public authorities that are bound by the general principles of good governance, as – according to the Supreme Court – the obligation to organise a selection procedure is based upon one of these principles (the principle of equality). These authorities are categorised as ‘a-organs’ (these are part of a legal entity which has been established by public law) and ‘b-organs’ (any other person or body which is invested with any public authority). These public authorities include, in any event: municipalities, provinces, water boards, joint arrangements, and the State. Future case law will have to clarify if the judgment of the Supreme Court also applies to public-sector enterprises and semi-public organisations, based on their close ties with the government.

3. What does the selection procedure entail?

The Supreme Court only describes in broad outline which criteria the selection procedure must meet. The Supreme Court rules that the public authority must set, within its scope for policymaking, objective, verifiable and reasonable criteria.

Furthermore and as mentioned above, the public authority must ensure transparency regarding (i) the intention of selling the land, (ii) the selection procedure, (iii) the timetable, and (iv) the applicable selection criteria. The public authority must provide clarity on these criteria timely before the selection procedure. The announcement needs to be done in such way that (potential) candidates can take note of this announcement.

The Supreme Court does not provide specific points of reference. Further case law will have to provide more clarity about the precise specifics of the selection procedures. Several authorities (such as the Municipality of Amsterdam) already organise tenders for the transfer of land for commercial property development. We expect that, in most cases, such procedures will meet the requirements set by the Supreme Court. Other procedures are also conceivable. Inspiration can be derived from procedures that are followed when distributing limited public rights (such as an auction, a competitive test ("beauty-contest"), and classification e.g. by drawing lots).

4. When is a selection procedure not required?

The selection procedure explained above is not required if it is established in advance, or if it can reasonably be expected that, on the basis of objective, verifiable and reasonable criteria only one serious candidate qualifies for the purchase. In such case, the public authority has to make its public intention to sell, timely before the sale. This needs to be done in such way that anyone can take note of the announcement. Furthermore, the public authority has to motivate why it thinks that, based on the above-mentioned criteria, it is established or it can reasonably be expected that only one serious candidate will be eligible for the transaction.

The Supreme Court does not provide any specific guidance as to in which cases this exception applies. Future case law will have to provide more clarity about these exceptions. One potential example may be where a public authority intends to conclude a contract with a market player regarding an integrated area development and this market player already lawfully owns a big part of the lands in the plan area in question.

5. How does the judgment relate to procurement law?

The judgment is unrelated to the requirements to put out tenders, which are applicable to governments pursuant to the Dutch Public Procurement Act 2012 ("Aanbestedingswet 2012") and European Directives on public procurement.

In fact, pure allocations of land are not subject to tender under the Dutch Public Procurement Act 2012. On 25 March 2010, the European Court of Justice ruled that a public contract is subject to tender in the case that the works are carried out for that authority's 'immediate economic benefit'.

According to the European Court of Justice, the contracting authority does not have to tender the 'pure' transfer of land, in the case that the contract does not have the object to supply products or provide services.

The Didam judgment actually creates a so-called 'additional obligation to tender' (or at least an obligatory selection procedure) when transferring land – for certain public authorities.

Furthermore, in procurement law 'threshold values' are applicable: in the case that the value of the contract for works, supplies or services remains under that threshold value, the contracting authority will not – in principle – have the obligation to follow the European procurement procedure. Whether certain 'threshold values' apply to the obligatory selection procedure from the Didam judgement is not yet clear. The Supreme Court has not referred to this subject.

6. What are the consequences of the Didam judgment for existing projects?

A pressing question is, of course: what are the consequences of this judgment for existing projects and concluded contracts? The Supreme Court states nothing about these consequences and has referred the case back to the Court of Appeal. We expect that this Court of Appeal judgment will provide more clarification about the consequences of not complying with the obligation to give other interested parties the opportunity to participate in the bidding process. Below are some initial thoughts on the possible consequences.

In Dutch case law there are examples of contracts that were concluded in breach of “the general principles of good governance”. Pursuant to Article 3:14 and 3:40 of the Dutch Civil Code, such an act by a public authority may lead to nullity of the contract. However, it follows from a judgment of the Court of Appeal in The Hague that not every act by a public authority in breach of the aforementioned principles directly leads to nullity, but that a serious breach is required. This is for example the case when without objective and legitimate ground, similar cases are not treated equally. The question whether there is a similar case, needs to be assessed with due observance of all the relevant circumstances, to the extent that these circumstances are allowed to be taken in consideration.

This means that not every contract that has been concluded contrary to the obligation to give other interested parties the opportunity to participate in the bidding process is null. A serious breach of this obligation must be inferred from facts and circumstances.

Furthermore, the public authority could – under certain circumstances – be held liable on the basis of unlawful act (Article 6:162 Dutch Civil Code). This unlawful act is an infringement of a right and an act or omission in breach of a legal obligation or in breach of what is generally accepted according to principles of good governance as enshrined in public law. If there is an unlawful act, the party that has suffered damage as a result – such as competitors who could have tendered – may be able to claim compensation.

The question of whether and to what extent the above-mentioned remedies are possible will also have to become clear in further case law. On the basis of legal certainty, it seems difficult to argue that all agreements concluded in the past would suddenly all be null or unlawful. Regarding contacts concluded contrary to procurement law, the Supreme Court has ruled in the past that such a breach does not lead to nullity. At this point, European and national procurement law regulate in which cases voidability is at issue when procurement law is not applied correctly. These rules may provide a basis for how to handle transfers of land for which wrongfully no selection procedure has been organised and where there is no serious breach of the principles of good governance.

7. Does the judgment also apply to transactions such as the issue of ground lease, the grant of superficies and lease by governments?

It seems plausible to us that the judgment of the Supreme Court does not only apply to the transfer of land, but also to for instance the issue of ground lease and the grant of the right of superficies as well as the lease thereof by governments. The Supreme Court derives its judgement from the principle of equality and is partly inspired by case law regarding limited public rights. Therefore, it seems logical that when issuing ground lease or right of superficies in the future, governments will have to organise a selection procedure.

8. What is the broader perspective of this judgment?

The judgment of the Supreme Court is in line with judgments of the Administrative Jurisdiction Division of the Council of State regarding the distribution of limited public rights (such as licenses under the Betting and Gaming Act and permits under the Environment and Planning Act for wind turbines). For instance, the Council of State has already (in 2016) considered that when distributing limited permits, potential interested parties should have equal chance to participate in the process.

Regarding social housing associations, it is usually assumed in the Netherlands that Dutch social housing associations are not 'contracting authorities' under the Dutch Public Procurement Act 2012. Furthermore, social housing associations are not bound by the general principles of good governance, which means that the rules from the Didam judgment do not apply to social housing associations.

However, the European Commission believes that Dutch social housing associations are subject to tender and has initiated infringement proceedings against the Dutch government. The European Court of Justice is yet to give its ruling about this issue (see also our Dutch blog 'Nederlandse woningcorporaties volgens Europese Commissie aanbestedingsplichtig').