Lease vs. order – how to do it right?

Lease vs. order – how to do it right?

Lease of public property (property of the state, municipalities, higher territorial units or public institutions) to the private sector is quite common. However, in practice, rights and obligations of contractual parties to lease contracts are often extended, resulting in violation of Act No. 343/2015 Coll. on Public Procurement and on amendments and supplements to certain acts (the “Public Procurement Act”), which is given priority (lex specialis derogat legi generali principle) over the regulations providing for disposition of property or general private law regulations. Application of the special law, i.e. the Public Procurement Act, must be considered in case of any disposition of the public sector assets, whether they are financial resources or tangible property. However, in practice, this obligation is often disregarded, whether knowingly or unknowingly. In this article, we are going to try to briefly describe the differences between a lease contract and an order, or concession, as specific contract types under the Public Procurement Act, which, contrary to usual lease contracts, require application of the Public Procurement Act. 

First, let's look at the basic terms. A lease contract is a contract wherein the state (acting through its bodies), municipalities, higher territorial units, or public institutions (we are going to use the term “contracting authority” from now on) act as a lessor and an economic operator as a lessee, and, based on this contract, the lessor lets the lessee to use a thing (we will focus on immovable property, i.e. land, buildings) temporarily (for an agreed period) for consideration or to take proceeds thereof. Under the Public Procurement Act, an order means a contract concluded between one or several contracting authorities, or contracting entities, on one side and one or several successful tenderers on the other side, whose subject-matter is supply of goods, execution of works or provision of services. A concession in terms of the Public Procurement Act means the same contract as the order except that consideration for executed works or provided services is either right to use the building or exploit the services for an agreed period or this right is combined with pecuniary consideration. By awarding a concession, the risk of demand, or operational risk, is transferred to the concessionaire. At first sight, it seems that these contracts cannot be confused with each other as the contracting authority does not seem to order any works or services in case of the lease. However, the opposite is true.

In practice, it often occurs that public property, which is a real estate, i.e. a building or land, is leased to an economic operator – an entrepreneur either: 

i. for the purposes of constructing municipal rental apartments or

ii. to secure its operation under the condition of its reconstruction.

Apart from the abovementioned situations, also temporary sale of public property often occurs under the condition of construction, or reconstruction, of the said property and right to its subsequent re-purchase.

These “additional” requirements that go beyond the purpose of lease (reconstruction, construction) represent the proverbial stumbling block.

The use of public property under a lease contract is based on leaving the thing being leased to a lessee in condition fit for the agreed use or (if the manner of use has not been agreed) customary use for the lessee to keep it in such condition at its own expense, or the lessee is not obliged to pay rent if it could not use the leased thing in the agreed manner due to defects of the thing that the lessee did not cause or if the manner of the use was not agreed as corresponding to the nature or specification of the thing. Also, the lessee is only entitled to make changes to the thing leased given the lessor´s approval. However, in case of an order or a concession, this right to use goes together with the fact that maintenance, repairs and often full reconstruction, or even construction, must be ensured by the lessee. These specific performances, carried out by the lessor, not the lessee, in standard lease relationships, change the lease contract to an order, or a concession, with the lessee's remuneration being provided as consideration in the form of discount on rent, proceeds from the use of the leased thing, or the lessor undertakes to buy the real estate in question after achieving the goal for which the lease was concluded (for the sake of completeness, it is illegal to give a public promise to buy a building not yet existing if it meets certain required parameters). This is how the Public Procurement Act is avoided, because it states that the nature of concluding a lease contract is not to take proceeds of ownership in the form of lease, i.e. pecuniary remuneration according to market conditions, but mostly to ensure that building works are carried out (not excluding services – e.g. public catering) in the form of reconstruction of existing buildings or construction of the new ones, with subsequent purchase.

Such “lease contract” then meets all the requirements of an order or a concession to carry out building works. To meet the definition of an order or a concession, it is not necessary for the services or building works, that are subject of the contract, to be materially or physically carried out for the contracting authority, if they bring the contracting authority direct economic benefit. Economic benefit is clearly demonstrated also if it has been agreed that the contracting authority becomes an owner of the result of the building works, that are subject of the order, or if services are provided by the lessee that would otherwise be provided by the contracting authority itself. This economic benefit is also the case if it has been agreed that the contracting authority would hold a legal title enabling it to dispose of the work, whose construction is the subject-matter of the order, given its public purpose. Therefore, the term orders, or concessions, requires that the economic operator assume, directly or indirectly, the obligation to provide a service or carry out works that are the subject-matter of the contract and that the performance under this obligation be enforceable in court in ways set forth by the national law. Profit-making nature of the contract means that the contracting authority, that concluded such contract, will be provided performance in exchange for consideration.

When concluding these lease contracts, i.e. lease contracts containing the obligation of reconstruction, construction or provision of services under certain predefined conditions, or lease contracts aimed at achievement of a predefined goal, the obligation to proceed according to the Public Procurement Act is usually breached whereby elements of an administrative delict, punishable by a fine of 5% of the contract price, are accomplished.

When considering application of the Public Procurement Act, it is always necessary to take into account the rule that legal acts are not to be regarded based on the name but based on the content. Taking into account the said rule, when an entity acting as a contracting authority concludes any contract, it is necessary to examine the purpose and the subject-matter of the contract. If the draft contract suggests acquisition of property gains by the contracting authority or transfer of performance of certain activity usually performed by the contracting authority to another person, it is very likely that, irrespective of the designation of the contractual relationship, conclusion of such contract will most probably be subject to application of the Public Procurement Act. 

The same applies for a pre-contract whereby a contracting authority undertakes to buy a building not yet existing in the future and, at the same time, defines in any way the obligation of the contractor to build such building. In this case, intentional circumvention of the Public Procurement Act occurs.

This article was prepared in cooperation with our business partner – Tatra Tender, s.r.o., company providing complex consulting services in the area of public procurement. Due to longstanding work experience at one of the largest contracting authorities, Tatra Tender, s.r.o. acquired extensive experience in public procurement of major projects in transportation, infrastructure and information technologies. Author of the article is JUDr. Marek Griga, who works in the company as a consultant and is an author of many expert articles and co-author of publications focusing on public procurement. 

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