How to handle capacity requirements in landlord procurements

The gap between requirements and reality

Procurement documents are typically drafted on the assumption that tenderers are well-known national or regional property companies with consolidated capacity under a single roof. The reality is different. Property groups are generally structured so that capacity – staff, experience, certifications and financial strength – is spread across the group, whilst individual properties are owned by separate subsidiaries whose sole business consists of owning and managing a property. It is these subsidiaries that submit tenders, as they are the entities that will become the contracting party as landlord.

This structure is not the result of poor organisation, but of well-considered corporate and commercial reasons: risk isolation, financing flexibility and the possibility of future disposals. It does, however, create a collision with the fundamental principle of public procurement law that the entity submitting a tender and entering into a contract must, as a starting point, itself possess the capacity required.

The consequence is that a tenderer in a landlord procurement will regularly need to rely on the capacity of another entity – typically other group companies – in relation to turnover, reference projects, property management experience and certifications. The qualification process thereby shifts from an assessment of who the supplier is to an assessment of which group the supplier belongs to.

Quality and environmental management systems

The view that a parent company's quality and environmental management system resolves the ISO question is widespread among property owners. This approach is not, however, supported by case law. The common arrangement within property groups is that quality and environmental management work is carried out by the companies that have staff, and that only the parent company is typically certified. The property-owning subsidiaries are, where relevant, registered as geographical units in a multi-site certificate.

The problem arises when the procurement assesses the tenderer as a standalone legal entity rather than as part of a wider context. In a landlord procurement, it is typically a property-owning subsidiary that submits the tender and is to become the landlord and contracting party. Where the ISO certificate is issued to the parent company and the subsidiary appears only as a "site" or organisational unit, it can be difficult to reconcile the evidence with a qualification requirement stipulating that the tenderer must be certified or have its own implemented management system. What functions in the group's day-to-day operations as a unified management system appears, under the formal assessment of procurement law, as a system belonging to someone else.

The Administrative Courts of Appeal in Gothenburg, Stockholm and Sundsvall have, in several decisions, emphasised that a quality and environmental management system is tied to the legal entity that is certified, and that reliance on another company's management system is not normally accepted – even where the companies are within the same group. The reason is that a management system is not a resource in the ordinary procurement law sense, but an organisational structure that must be implemented and adhered to in the operations that are to perform the contract.

The consequence may be that a tenderer that materially meets the requirements is nonetheless disqualified, because the relevant capacity happens to be placed with a different legal entity.

Changes of ownership in the tendering entity

Leases relating to public service properties typically run for 15–20 years. Over such periods, changes of ownership in property companies are the rule rather than the exception. This raises a concrete question: what happens to the capacity that was relied upon at the time of the tender and was decisive for the award, when the property-owning company changes owner and leaves the original group structure?

Under procurement law, qualification requirements are assessed at the time of the tender. For a requirement to be maintained during the contract period, it must have been expressly formulated as a contractual condition. If it has been so formulated and the condition is no longer met following a change of ownership, this may constitute a breach of contract. If the contracting authority chooses to disregard the situation, there is a risk that it will instead be assessed as an unlawful material amendment. The consequences are serious in both directions. If not handled proactively in the drafting of the lease, difficult assessment issues will inevitably arise in hindsight.

Key considerations

For contracting authorities: Adapt qualification requirements to the actual organisational structure of the property sector. Conduct market dialogues at an early stage. Clarify what applies during the contract period and build in appropriate contractual conditions. Consider changes of ownership and ensure that the lease remains robust even if the "counterparty" changes, without making the requirements so restrictive that they deter serious operators from participating in the procurement.

For tenderers: Identify capacity gaps at an early stage. Ensure that commitments from entities whose capacity is being relied upon are binding and properly documented. Have a well-founded strategy for the ISO certification issue. Do not assume that the parent company's quality and environmental management work will be accepted without further consideration. Analyse whether the lease or the procurement conditions place restrictions on future changes of ownership. Make active use of the question period during the tender phase to shape the contracting authority's understanding of your situation.

Landlord procurement sits at the intersection of public procurement law and property law. The questions rarely have straightforward answers, but they can to a large extent be managed proactively if both parties understand each other's reality.