1. Introduction
On Nov. 26, 2021, the Supreme Court r uled on the bondage of a public body in the sale of real estate[1] to general principles of proper administration, particularly the principle of equality. Underlying the ruling is the premise that government land must consider, when intending to sell land, whether there could be scarcity, where there is more demand, than supply. The ruling will hereinafter be referred to as “the Didam case” or “the Didam ruling.
The ruling, in short, puts an end to the common practice whereby the government sells its land on a one-for-one basis to a market party. The application of the ruling in practice raises questions for both existing and future legal relationships.
Answering the questions is subject to the uncertainty associated with applying new case law to practice cases, because it is not possible to say with certainty how the court in any given case will apply the ruling to a case that is not one-to-one equivalent.
Section 2 summarizes the rules from the Didam case study. Section 3 begins by answering a common practice question and includes practical advice. Section 4 clarifies the various manifestations of area development agreements in which land sales may apply. Section 5 addresses the question of the possibly retroactive effect of the ruling. Section 6 discusses the possibilities of invoking nullity or voidability, also in light of procurement law. Section 7 addresses an appeal of changed circumstances. The opinion concludes with a brief conclusion.
2. Case study Didam
The facts in the Didam case can be summarized as follows.
- The municipality owns a site.
- The municipality intends to modify the area (with the site within it).
- A retailer + real estate developer (1) have expressed interest in acquiring the site.
- Municipality refers retailer + property developer to property developer (2)
- The municipality concludes a purchase agreement with real estate developer (2).
- Real estate developer (1) institutes proceedings and invokes the competition and transparency standard[2].
The Supreme Court ruled as follows:
By law,[3] a power vested in a public body under civil law may not be exercised in violation of written or unwritten rules of public law. The rules of public law include the general principles of good governance. This means that a public body must observe the general principles of good governance and thus the principle of equality when entering into and performing private law contracts. This therefore also applies to the decision with whom and under what conditions it enters into an agreement to sell a property belonging to it. This is where the position of a public body differs from that of a private party.
Read: when the government sells land, the government must apply the principle of equality (Rule 1).
It follows from the principle of equality – which in this context is intended to provide equal opportunities – that a public body intending to sell an immovable property belonging to it must provide room for (potential) candidates to compete for this immovable property if there are several candidates for the purchase of the immovable property in question, or it can reasonably be expected that there will be several candidates.
Read: if there are or are expected to be multiple applicants for a site, they should be allowed to compete for the site (Rule 2).
In this case, the public body will have to establish criteria against which the buyer will be selected, with due regard to its discretion. These criteria must be objective, testable and reasonable. The principle of equality also implies that in order to achieve equality of opportunity, the public body must ensure an appropriate degree of publicity regarding the availability of the property, the selection procedure, the timetable and the selection criteria to be applied. The public body must clarify this in good time prior to the selection procedure by publishing information about these aspects in such a way that (potential) candidates can take note of them.
Read: the government must set criteria for the sale and publish an intention to sell (Rule 3).
The said room for competition through a selection procedure need not be provided if it is established in advance or can reasonably be assumed that, on the basis of objective, testable and reasonable criteria, only one serious bidder will be considered for the purchase.
Read: if there is reasonably only one candidate, there is no need (exception to rule 2)[4].
In such a case, the public body shall publicize its intention to sell in a timely manner prior to the sale in such a manner as to enable any person to take cognizance thereof, giving reasons as to why, in its judgment, on the basis of the criteria referred to above, it is established in advance or may reasonably be assumed that only one serious prospective bidder will be considered.
Read: but then the government must communicate this with justification (condition for the exception).
Conclusion
The starting point for land transactions by the government after the “Didam” ruling is that the government must apply the principle of equality and thus rules 1 and 2 for all land sales if more candidates can reasonably be expected and one can therefore speak of scarcity.
3. Frequently asked practice question on ongoing projects
The situation for the future is now relatively clear. What does the ruling mean for ongoing municipal area development negotiation processes and agreements already entered into? We first turn to ongoing projects.
In ongoing[5] area development projects that do not meet the requirements developed by the Supreme Court and have not yet resulted in an agreement, it is reasonable to at least pause and consider the extent to which a restart of the project can be designed (in line with) with the application of the Supreme Court’s requirements. A first step in doing so is to publish[6] the interim status: that on a date located prior to the Didam ruling, the municipality entered into negotiations with a market party regarding proposed land sales within a particular zoning area with the opportunity for interested parties to express any interest. It is desirable to indicate in that publication at least what criteria a candidate must meet.
If there is no response to this, it is conceivable (but not entirely without risk[7], see below) if the municipality and the market party pursue the process and continue negotiations regarding the agreement.
4. Closed agreements
We highlight the effect of the ruling on closed agreements from different perspectives. This first raises the question of the extent to which the ruling could be retroactive. This general question occurred to us after reading the Didam ruling. We then look at the nullity or voidability of contracts under the law and compare the case histories with procurement law. We close with a conclusion.
Appearances
In discussing the questions below, it is worth noting that agreements between a developer and a municipality that include provision for the transfer of municipal property can have different manifestations. Area development is usually done under an antecedent agreement. If sale of municipal property is an issue, it is already provided for in the antecedent agreement. In practice, however, we also encounter “land reservation agreements” and “purchase and realization agreements. In all of these situations, the government (prior to the date of the Supreme Court’s ruling) expressed to a specific counterparty an intention to sell the real estate belonging to the government.[8] Effectively, all of these agreements amount to a claim by a market participant to purchase land under the condition of obtaining an irrevocable use.[9]
5. Retroactivity?
Does the Supreme Court ruling have retroactive effect? Retroactivity is generally not the premise of (new) legislation. Article 4 of the General Provisions Act requires that a law only binds for what is due and has no retroactive effect. This is different only if provided for in the law itself. There will then usually be special circumstances that justify it.[10] Unless a law has transitional rights, laws take effect immediately.
There is no new law in the case at hand, but rather court law. In the ruling, the Supreme Court did not note anything about “transitional law” to that judicial law. The question is whether a ruling (other than a law) does have retroactive effect.[11] [12] There are two views of how judicial law works. The classical view holds that the judge basically just interprets the law and thus basically judges the situation as it has always been. This is called “classical doctrine. Under this doctrine, a Supreme Court ruling is in fact always retroactive.[13]
In contrast, the modern doctrine which assumes that the Supreme Court is also entrusted with a task of creating and thus also amending law, so that retroactivity as a general principle does not apply, because this is contrary to the legal certainty that citizens derived from the law known to them at the time before the judgment in question.
Applying these viewpoints to the case, we observe the following. Under Article 3:14 of the Civil Code, the principle of equality (general principle of proper administration) has always applied to land sales by the government. In practice, however, this was rarely given concrete implementation (despite the discussion on the subject after Heijnsbroek[14] called attention to this in his dissertation). Providing equal opportunity to multiple potential candidates was certainly not the prevailing doctrine until the ruling.[15] Already for this reason, in our view, the ruling has a law-creating rather than an explanatory character.
This is even more compelling for the procedural rules for land sales outlined by the Supreme Court. We mark these as right-wing (modern doctrine). They are loosely grafted onto procurement law, with no legislative intervention. As a result, the government can no longer sell land (no longer enter into new legal relationships) without following procedural rules (1 through 3). We believe that as a result, the ruling should not be given retroactive effect and existing agreements already concluded should be respected.
Finally for this section, it is generally not acceptable for a judgment to alter the existing legal relationship between parties not involved in the proceedings in question.[16]
6. Nullity or voidability under the law?
Can a concluded agreement on the sale of municipal property to a market party, which did not follow the Supreme Court’s criteria, be void or voidable under the law?
A concluded agreement may be void or voidable because it is contrary to the law, public order or morality. Void is a legal act (such as the conclusion of an agreement) that is contrary to public order or morality because of its content or purport (Article 3:40 paragraph 1 of the Civil Code). This also applies to a legal act that violates a mandatory statutory provision (Article 3:40 paragraph 2 of the Civil Code). The point of the latter is that the purpose of the legal provision in question is to affect the validity of the legal act. If the provision in question serves to protect only one of the parties to a contract, the legal act is not void, but voidable. The difference is that nullity arises by operation of law; voidability must be invoked by one of the parties.
To be clear, there are no mandatory legal provisions that require a public sale procedure in cases where a government wants to sell real estate. This means that an already concluded (anterieure) agreement of which the sale of municipal real estate is part, is not void under Article 3:40 paragraph 2 of the Civil Code. If it had, the Supreme Court would have been quickly finished in the Didam case.
We also expect that a court will not rule that such an agreement is void for being contrary to public policy or morality (Article 3:40 paragraph 1 of the Civil Code). To do this, we first make a comparison with procurement law. Under procurement law, the court ruled on the status of a contract that was improperly untendered. The Supreme Court considered in the Uneto/De Vliert[17] ruling that procurement law does not have the purport to affect the validity of contracts concluded in violation of procurement law (cf. Article 3:40(2) BW). In that case, there is also no reason to deem the contract null and void on account of being contrary to public order or morality (Article 3:40 paragraph 1 BW). We believe that this case law also applies to agreements that were agreed upon in violation of the rules for application of the equality principle given by the Supreme Court in the Didam ruling.
Should a concluded contract be deemed contrary to public policy or morality on other grounds? It is not obvious. If acting in violation of a statutory provision does not in itself constitute a violation of public order or morality, it is not likely that violation of a general principle of proper administration (the principle of equality) will lead to that consequence. Nullity of a contract requires qualified violation of general principles of good governance. Qualified means that in addition to the violation of the principle of equality, there are additional (“aggravating”) circumstances[18]. An example of aggravating circumstances could be if both the municipality and the market party knew or could suspect that a concrete other market party could be considered a candidate. However, we are not familiar with such practical examples.
Conclusion
Third parties (who have not been able to compete in the sale of land by the municipality) and also the municipality itself, in our opinion, cannot invoke the nullity of a concluded antecedent agreement on land sale to a market party that does not take into account the Supreme Court rules on the application of the principle of equality.
That said, acting in violation of general principles of good administration, such as the principle of equality, is in principle unlawful, even in private law relationships[19]. Thus, a government that, in violation of the requirements in the Didam ruling, enters into a sale agreement with a party must be mindful that it is liable for the damages of potential other applicants. We note that cases involving liability and damages for a plaintiff are tricky issues because proving actual damages is not easy.
7. Dissolution or modification
A contract may be rescinded or modified based on unforeseen circumstances.[20] There is a statutory provision for this, but contracts that municipalities enter into with market participants often include a provision for this as well.
The contingency is then the obligation to comply with the principle of equality adopted by the Supreme Court. If unforeseen circumstances are invoked by the government, it must compensate the intended purchaser for any damages suffered as a result.[21] [22] We question here whether the Didam ruling can count as a contingency. There have long been omens pointing to the existence of an obligation, on the grounds of the principle of equality, to provide competitive leeway in the distribution of scarce rights. Previously, we pointed to Heijnsbroek’s 2013 dissertation and various rulings by administrative law judges.[23] If a (legal) development was already known or foreseeable at the time the contract was concluded, the government will not readily be able to rely on that development to invoke the regulation of unforeseen circumstances.[24]
Assume that the Didam ruling is a contingency. Many government contracts contain a contingency provision. Usually, an obligation to consult then comes into effect, and if those consultations fail to produce a result, there is quite often provision for the parties to have the power to terminate the agreement. It is not inconceivable that a bidder who is out of the running could summon a municipality to invoke this clause and possibly even terminate the contract under that provision. We make another foray into procurement law. There, by virtue of the legal system[25], no such general notice requirement has been adopted in case law.[26] That an indication that such a notice requirement is not a general principle of law that can be invoked in court. All the less so since the out-of-state market participant serves the damages claim.
8. Conclusion
Our conclusion is that the Didam ruling has no impact on situations in which an agreement providing for an obligation of sale (conditional or otherwise) between the government and a market party was concluded before the date of the ruling.[27] We do not consider it likely that this agreement can be successfully challenged in court. A market party can successfully claim performance against the municipality with whom it has contracted, in our estimation.
However, this does not alter the fact that the government may be liable to (potential) applicants who have been left out of the race for violation of the principle of equality.
If, based on the Didam ruling, a municipality considers it undesirable to still fulfill the (unconditional) obligation to sell, the ruling could possibly be considered an unforeseen circumstance. In that case, a claim for performance may be barred. However, the buyer will have to be indemnified in that case.
9. In conclusion
This article came about through a collaboration between the undersigned, which collaboration in turn came about through a spontaneous mutual exchange of thoughts via LinkedIn. Would you like further advice for your specific practice situation or need help in shaping the rules of the game in land sales or contracts between the government and a market party? Then we will be happy to help you.
This article was written by mr. C.J.R. (Rudolf) van Binsbergen (attorney at law, partner Wille Donker Attorneys at Law) and mr. C.J. (Caren) Schipperus (lawyer, director ALEX advocaten B.V.).
Footnotes:
[1] This deals with land and buildings, but in this opinion it is referred to as government land for convenience.
[2] The competition standard and the obligation of transparency derive from the principle of equality.
[3] Article 3:14 BW: A power vested in a person under civil law may not be exercised contrary to written or unwritten rules of public law.
[4] See, for example, Carry Mulder’s article for Omgevingsweb, she gives the example of strips of municipal green (“snippet green”) connecting to private land. It argues that the government may reasonably assume that this private individual is the only applicant who will want to acquire the connecting greenbelt.
[5] Area development projects include a financial negotiation and a planning track. Often these two tracks run parallel to each other. For example, there may already be – while negotiations are taking place – concrete investments by the market party (with the knowledge of the municipality) in, for example, a draft zoning plan or studies. The halting of that process may be considered undesirable by parties, for example because of performance agreements on the realization of a construction task. Even if, for example, the market party already owns part of the land and wishes to obtain the remaining land from the municipality, a risk-based approach (how likely is it that another party would be a serious candidate here) is not incomprehensible.
[6] In the usual way, as a municipality always announces decisions in the electronic Municipal Gazette, on a special web page of the municipality’s website or possibly through Tenderned.
[7] Depending on the specific facts of the case, parties to the negotiation can either make the risk assessment and accept and/or divide these risks among themselves, or reject them and restart the sale procedure entirely from the beginning, allowing the market party to compete, on par with any third parties. By virtue of the principle of equality, the government may be required to compensate for any information deficit with a new entrant through active disclosure.
[8] We therefore take as our starting point that the process of offer and acceptance between the government and the market party has progressed to the point where they consider themselves bound to each other on the basis of will and trust (under certain conditions).
[9] Prof. Dr. Ir. A.G. Bregman argues in a presentation to the VNG (posted online Dec. 22, 2021) that construction claim agreements are not affected by the ruling because a construction claim involves “displaced self-realization.
[10] Cf. directions 5.62 and 5.63 of the Instructions for Regulations.
[11] Mr. A. Farahani states this in his blog: https://www.lagrogeelkerken.nl/nl/actueel/de-gronduitgifte-van-overheidslichamen-aan-banden-gelegd and the VNG also states this on its site: https://vng.nl/nieuws/antwoorden-op-vragen-gronduitgifte-na-uitspraak-hoge-raad.
[12] See also Coen Drion’s blog in the NJB dated Oct. 19, 2015, https://www.njb.nl/blogs/de-onzichtbare-hand/, see also NJB 2015/1786, at 36.
[13] For a discussion of the classical doctrine versus the modern doctrine, see A-G Franx’s conclusion of December 6, 1985 (the text incorrectly states 1986), ECLI:NL:PHR:1986:AC9347.
[14] Construction law monographs, mr. P. Heijnsbroek “Ground for equality – Equal opportunity for works in government land grants, Institute for Construction Law 2013, chapter 12.
[15] See, among others, the December 1, 2021 FD “Ruling in Didam supermarket war threatens Dutch housing construction”.
[16] Moreover, from consideration 3.1.10 of the Didam ruling, we deduce that the HR in the case in question did not intend by the ruling to lead it to the conclusion that the agreement concluded between the Didam municipality and the buyer should be broken.
[17] HR 22 January 1999, NJ 2000/305
[18] See The Hague Court of Appeal January 29, 2013, ECLI:NL:GDHA:2013:BZ2014.
[19] See already HR March 27, 1987, NJ 1987, 727(Amsterdam/Ikon).
[20] Article 6:258 BW.
[21] Against this, however, it can still be argued that many agreements that governments enter into with market participants regarding land sales and zoning contain a provision to the effect that the government is not bound to fulfill the agreement if it is not permitted to do so on public law grounds. This often refers to third-party input that brings in interests or points to the application of, for example, environmental standards that interfere with the adoption of a particular zoning. The adoption of a zoning plan cannot be enforced privately. It is conceivable that if the government has included in a contract a provision containing such a public law exoneration, the government could argue, relying on that exoneration, that the Didam ruling also imposes such a restriction on it.
[22] Among others, HR June 23, 1989, NJ 1991, 673(GCN/Nieuwegein) and HR September 10, 1993, NJ 1996,3(Den Dulk v. Curaçao).
[23] Among others, CBb 3 June 2009, ECLI:NL:CBB:2009:BI6466(Swiss Leisure Group), CBb 15 May 2012, ECLI:NL:CBB:2012:BW6630,(Wassenaar) and ABRvS 2 November 2016, ECLI:NL:RVS:2016:2927,(Vlaardingen). See also the opinion of A-G Widdershoven in the latter case (ECLI:NL:RVS:2016:1421).
[24] See, for example, HR October 13, 2017, ECLI:NL:HR:2017:2615(Bronckhorst/X).
[25] Article 4.15 Procurement Act 2012 and the underlying European legal protection directives.
[26] See HR Nov. 18, 2016, ECLI:NL:HR:2016:2638(Xafax/RUG).
