11/05/2012

Care Needed in Municipal Property Development Projects

In the current economic straits, municipalities are looking for new ways to make use of their assets. Many municipalities own significant amounts of valuable property, and the sale and lease of such properties can be a lucrative economic policy option. Successful real estate transactions can also enhance a municipality's image. At the same time, Finnish municipalities are finding that they have to take unfamiliar business realities and legislation into consideration.

There are some distinctive legal issues that need to be addressed when a municipality takes on the role of a property developer. Municipalities engaging in property development need to take into consideration issues that fall outside the familiar scope of municipal self administration. ‘One example of such issues would be the terms and conditions of real estate transactions’, points out Counsel Annaliisa Lehtinen, who specialises at Castrén & Snellman in the legal aspects governing municipal enterprise groups.

The main issues are public procurement and state aid legislation. The focus of EU regulation has strongly shifted towards the markets: a municipality is not allowed to ‘disturb’ the functioning of the markets and must keep in mind how its decisions are perceived by companies operating on them. In this respect, legislation sets quite strict obligations on the behaviour of municipalities. Compliance with these obligations should be made as transparent as possible in a municipality’s decision-making processes and reports.

State Aid Legislation Is Binding 

Municipal property development projects can easily raise the question of whether such projects constitute unlawful state aid. In such cases, compliance with legislation will be assessed from the perspective of the property sale process and pricing. According to the EC Treaty, unlawful state aid can take many forms, for example, favourable lease terms or the sale of a property below market price can be deemed unlawful state aid in property development projects. The mere suspicion of aid is sufficient. For example, it is unnecessary to demonstrate the effects of state aid on trade between member states.

Increasing Awareness of the Right to Lodge a Complaint

There is an extensive right to lodge complaints against state aid. A property transaction decision made by a municipality may be challenged at any time during ten years from the transaction. Anyone can lodge a complaint—the right does not depend on the place of residence of a private individual or on the registered office of a company or even on their home country.

Several complaints relating to the sale of Finnish municipal properties that could have been avoided through more careful planning are currently pending before the European Commission. Complaints are typically lodged by a competitor of the company that won the contract. Unlawful state aid has been used as grounds for municipal complaints. This may delay a decision becoming final and also delay the right to grant the title to a property, among other things.

Focus on the Architecture of a Tender Process 

The transfer of a municipality’s property assets must take place at fair value. Market value must be determined either by an appraiser or through a public tender process. Fair value must be examined in a reliable and independent way. Therefore, it is advisable to put care and effort into the valuation process.

On the other hand, if the transaction is to be arranged through a public tender process, it is essential to manage the architecture of the process. For example, the notice procedure must be adequate and the number of bidders may not be artificially limited by introducing unreasonably tight criteria.

The strictness of the procedural provisions may come as a surprise to municipal decision-makers who have decided to undertake real estate arrangements entirely in good faith on solely on economic policy grounds. However, time-consuming legal proceedings and a tarnished image can be avoided by careful planning. ‘Many things are possible, as long as certain basic issues and procedural provisions are kept in mind’, Ms Lehtinen sums up.

For more information, please contact:
Annaliisa Lehtinen

 

 

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