The Administrative Court in Stockholm noted that the lease relationship was the main subject of the contract, which is why the lease exemption was applicable despite the contract also including a construction contract

It explicitly follows from the provision in Chapter 3, Section 19 of the Public Procurement Act (LOU) that the rental of premises is not subject to procurement requirements. However, there are some uncertainties regarding the application of the lease exemption when the contracting authority, in connection with the acquisition of the rental premises, also orders a contract for extensive adaptations of the premises. Brick Advokat follows the legal developments and provides below an account of a new ruling from the Administrative Court in Stockholm (case 3202-24). In the case, the Administrative Court examined whether the procurement should have been conducted according to the regulations for construction contracts or if the lease exemption was applicable.

Background

Nacka Municipality had previously rented premises of approximately 8,155 square meters to operate a municipal high school. The school needed to expand its premises, and to meet this need, Nacka Municipality and the landlord entered into a new lease agreement in February 2023. The lease agreement means that the municipality will continue to rent the existing premises and that the landlord will additionally construct a new building of 2,120 square meters directly adjacent to the existing premises.

The Swedish Competition Authority applied to the Administrative Court in Stockholm for the imposition of a procurement fine of three million SEK, referring to the fact that Nacka Municipality had conducted an unauthorized direct procurement. According to the Competition Authority, the lease agreement includes both the rental of premises and a construction contract, which should be classified as a mixed contract where the main subject is the construction contract. The Competition Authority's position was thus that the lease exemption was not applicable, and Nacka Municipality's procurement of the lease agreement should be considered an unauthorized direct procurement.

Nacka Municipality, on the other hand, argued that the main subject of the contract is the rental of premises, referring to the fact that the parts of the agreement that involve the realization of a building are of subordinate importance in relation to the main purpose of the agreement, which is to ensure the municipality's right to use the relevant premises. Furthermore, Nacka Municipality emphasized that it was not a procurement-required construction contract since the municipality had not been involved in the planning and had not exercised decisive influence over the characteristics of the building.

Administrative Court's Judgment

In its judgment, the Administrative Court initially noted that it had not been shown that the landlord had planned to construct an extension with the same design at the relevant location and time before Nacka Municipality had expressed its need for such premises. Instead, according to the Administrative Court's assessment, it was the municipality's expressed need that was decisive for the construction of the extension and its characteristics.

The Administrative Court therefore concluded that the lease agreement includes both the rental of premises and a construction contract and is to be regarded as a mixed contract as referred to in Chapter 2, Section 1, first paragraph of the Public Procurement Act (LOU). The question of whether the lease exemption is applicable to the procurement or not should therefore be determined by examining what constitutes the main subject of the contract.

The Administrative Court considers that the main subject of the contract is the lease relationship, referring to the fact that only about 20 percent of the school's need for premises is met by the construction of the new building. The remaining 80 percent of the school's premises, which are also covered by the current lease agreement, consist of existing buildings that are not subject to construction work. Based on this, the Administrative Court assesses that the lease exemption is applicable and that Nacka Municipality had no obligation to conduct the procurement with prior advertisement. The Administrative Court therefore rejects the Competition Authority's application.

The Competition Authority has appealed the Administrative Court's judgment to the Court of Appeal in Stockholm, which has not yet decided on the issue of leave to appeal. Given the great need for clarifications in this area, it is our hope that the case will be taken up for review by the Court of Appeal.