Test case for the CMO principle? Subsidy control and property development deals

The new UK subsidy control regime replaced EU State aid rules post-Brexit in everywhere except Northern Ireland, which remains within the EU’s single market. Enforcement of the new UK regime is left largely to competitors or other ‘interested parties’, who have a right of action before the Competition Appeal Tribunal (the CAT) to have subsidy award decisions judicially reviewed. Many commentators have criticised the absence of any regulatory enforcement, citing the role of the European Commission in enforcing EU State aid rules compared to the role of the UK’s Competition and Markets Authority (the CMA). Unlike the Commission, the CMA only has the power to review and comment upon subsidies given to businesses active in specified industrial sectors or where of particularly high value (over £10 million).

Test case on the CMO principle

The second case to be lodged with the CAT relates to one for the more complex areas of subsidy control: when an authority can be considered to be giving a loan on terms that can be equated with commercial market terms such as not to constitute a ‘subsidy’ as defined in the Subsidy Control Act 2022 (the Act)?  In subsidy law terms this is called the Commercial Market Operator (CMO) principle.  The CAT’s ruling on this question will be watched closely by authorities and property developers alike.

The proceedings

The proceedings concern two £70m loans issued by Greater Manchester Combined Authority (GMCA) under its Housing Investment Loans Fund. The Fund has committed over £700m into residential development, supporting the building of over 7,000 new homes.  The proceedings were brought by Mr. Aubrey Weis, the owner of property developer Weis Group, against the decision by GMCA to grant loans to two companies owned and controlled by Renaker Group, another Manchester-based developer.  

In its Notice of Appeal, Weis references a report issued by GMCA which appears to record the reasons for making the loans as being to bring forward the supply of new, high-quality housing and sustaining jobs in the construction sector and providing opportunities for apprenticeships in construction trades. While the detail of the grounds of appeal are not in the public domain, Weis is seeking to argue that the loans would not satisfy the CMO principle on the basis that no commercial operator (lender) would have made the loans on the same or comparable terms. In making out that argument, Weis would need to show that the loans have distorted the operation of the market for property investment and developments services in Manchester, enabling the beneficiaries to undertake projects they could not otherwise perform at a lower cost than would otherwise be the case and / or providing them with a competitive advantage relative to other developers.

Comment

While there have been concerns with the new UK subsidy regime “lacking teeth”, this case highlights a feature of the new rules that is likely to be contentious. The rules do give authorities greater freedom to design and grant subsidies, allowing them to self-assess subsidies against the subsidy control requirements in the Act. This is a radical change to the position under EU State aid rules, where authorities had to design and grant subsidies with defined parameters set by the European Commission (most notably in the EU’s General Block Exemption Regulation, or GBER). Authorities however still need to consider the initial question as to whether any form of financial assistance they are providing amounts to a ‘subsidy’ as defined in the Act. That requires the authority to consider a four-limb test, including the test as to whether the assistance it is providing confers an ‘economic advantage’ on the recipient that would not be one it could obtain from the market, which in essence is the CMO principle.  It is interesting that the first two cases before the CAT have both concerned the question as to whether something is a subsidy and not whether an authority’s self-assessment of a subsidy that it has given was lawful.