LEISURE PARTNERSHIPS: MANAGING THE CRISIS
AM – CONTRACTUAL CONSIDERATIONS (LEISURE TRUST OPERATOR PARTNERSHIPS)
PM – CONTRACTUAL CONSIDERATIONS (LEISURE OPERATOR PARTNERSHIPS)
30 APRIL 2020
Summary Report – Morning session
The Sport, Leisure and Culture Consultancy (SLC) facilitated an online Think Tank – Leisure Trust Partnerships: Managing the Crisis – Contractual Considerations for Local Authority Client Officers that have Leisure Trust Operator Partners on 30 April 2020 from 11.00am – 12.30pm.
The session was introduced by Duncan Wood-Allum, SLC Managing Director and facilitated by Iain Greenshields, Womble Bond Dickinson LLP Partner and Andrew Hirst, Womble Bond Dickinson LLP Projects and Procurement Lawyer, supported by Michelle Payne, SLC Consultant.
The delegates who attended the morning session were:
- Geoff Caine (Stevenage BC, Culture, Wellbeing and Leisure Services Manager)
- Peter Ashworth (Stockport MBC, Head of Culture and Leisure)
- David Hopkins (Stockport MBC, Legal Team)
- Iain Greenshields (Womble Bond Dickinson, Partner)
- Andrew Hirst (Womble Bond Dickinson, Projects & Procurement Lawyer)
- Duncan Wood-Allum (SLC, Managing Director)
- Mark Tweedie (SLC, Associate)
- Michelle Payne (SLC, Consultant)
Key themes explored in the session were:
- Getting through to re-opening your facilities – should you look at your contract? The application of contractual remedies, consideration of Government PPNs and transparency / open book requirements
- Addressing the “new normal” – making your contract fit for purpose in a post-COVID world
- Procurement considerations – extending your contract, tendering a new contract and the application of Public Contracts Regulations under COVID-19
- Reviewing legal principles in the light of COVID-19 – what if there is another outbreak? Do we need to look closer at contractual measures around emergency situations?
Getting through to re-opening your facilities – should you look at your contract? The application of contractual remedies, consideration of Government PPNs and transparency / open book requirements
Contract considerations that were discussed during the session included: a phased approach to reopening facilities, contract extensions, deferring contractual financial agreements, offering loans to Leisure Trust Partners, financial settlements, future management arrangements and facility investments.
In order to gain an idea of the cost of reopening facilities, a transparent approach to financial information is required. Local Authorities need to have clear oversight of what is reasonable and necessary in terms of financial support for Leisure Trust Partners, to ensure that they remain functional. There is a desire that Leisure Trust Partners are no better and no worse off after the crisis. Clarity around the central costs for Leisure Trust Partners that operate multiple sites has historically been a point of discussion and some Local Authorities, with the same Leisure Trust Partner, have begun collaborative discussions around lockdown rescue measures and longer-term financial arrangements.
Leisure Trust Partners need to engage with their Local Authorities as soon as possible to agree short term financial settlements. Without lockdown compensation some Leisure Trust Partners may become insolvent, leading to a lower supply of operators in the market. Many Local Authorities will not be able to sustain continued financial support in the long term and the true cost of recovery remains unknown.
In the event that a Leisure Trust Partner was not able to continue delivering a leisure service, the in-house option is an option many Local Authorities will need to consider. Pre-COVID, this option was considered both expensive and inefficient in comparison to other management models and many Councils are not structured to deliver their leisure service in this way. It was agreed this option has significant risks linked to increased costs, operation, VAT and reputation that need to be evaluated carefully against some of the advantages, for example bringing full control back to the Local Authority.
Local Authorities may also consider forming a Local Authority Trading Company (LATC) as a temporary or permanent management vehicle. This would ensure that the service continues and assets and staff are protected, subject to affordability; it would likely be a slightly lower cost option compared to delivering the service in-house. In the case of an LATC, a proper specification and performance management framework would still need to be in place and some Councils may already have a trading arm that could be expanded to include leisure. VAT de minimis considerations would need to be factored into any options appraisal exercise.
After the recovery phase Local Authorities that have used either option above would then be able to re-tender their leisure contract if they wish, in what is hoped will be a market that has survived COVID and is keen to take on new partnerships. The costs passed on to any external operator will vary considerably based on the model used as a temporary holding position.
Addressing the “new normal” – making your contract fit for purpose in a post-COVID world
The immediate impact of COVID will inevitably lead to discussion and negotiation on the long-term financial performance of a Leisure Trust Partner. This could take the form of regular reviews of a medium-term financial plan. More generally, Local Authorities are beginning to have conversations with Leisure Trust Partners about the impact of COVID on future financial performance and how to manage this.
Moving through the recovery phase, income might start to increase which should have shared benefit to the Leisure Trust Partner and the Local Authority. However, Trust Partners and Council Members may have different views on which facilities to reopen and when, potentially leading to a need to account for losses. Expectations will need to be managed.
Procurement considerations – extending your contract
By extending a contract a Local Authority could gain valuable information about the leisure landscape post-COVID and what revenue position they could expect from their facilities, before tendering a new contract. This presents risks due to social distancing restrictions and the potential for reduced income through limited operating capacity and changes in consumer behaviour. No Operator can guarantee income levels. Extending a contract can be more costly than re-procuring a new one, subject to the market’s ability to bid – this is unknown at the present moment in time.
Any investment into facilities in the near future would also be at risk. However, delaying capital investment could lead to increased building costs, which would need to be factored into any risk calculation within the decision-making process. A new facility would also need to be factored into a leisure contract/agreement, requiring financial forecasting based on robust evidence. This could provide some political impetus and support for difficult decisions relating to mothballing or closures. It may be a good time not to reopen a facility and focus on its replacement, whilst the market recovers.
Reviewing legal principles in the light of COVID-19 – what if there is another outbreak? Do we need to look closer at contractual measures around emergency situations?
Local Authorities will take on a much higher level of financial risk in any leisure contract or partnership for the time being. The government furlough scheme could be removed or more heavily restricted in the near future, potentially leading to job losses and Leisure Trust Partners becoming unsustainable. When facilities reopen with social distancing measures in place they will have lower capacity and occupancy levels. Less staff would be required and redundancies might be made but there is uncertainty around how these costs would be met. The best employees might be retained and redeployed. Progressive Leisure Trust Partners are already scenario planning and searching out ways to generate income without using built facilities.
Active, healthy communities and service preservation should be the main priority, above any legal discussions. Communities will need support post-lockdown and everyone will need to be pragmatic.
This discussion led to new questions, such as:
‘Should new leisure management agreements have more resilience built in?’
‘What learning from the COVID crisis can be applied to leisure contracts going forwards?’
‘Can Councils make the brave political decision to underwrite leisure for the foreseeable future?’
Summary Report – Afternoon session
The Sport, Leisure and Culture Consultancy (SLC) facilitated an online Think Tank – Leisure Operator Partnerships: Managing the Crisis – Contractual Considerations for Local Authority Client Officers with Leisure Operating Partners (multi-site operators) on 30 April 2020 from 3.00pm – 4.30pm.
The session was introduced by Toby Kingsbury, SLC Director and facilitated by Iain Greenshields, Womble Bond Dickinson LLP Partner and George Matthew, Womble Bond Dickinson LLP Solicitor – Projects & Procurement Team, supported by David Rushton, SLC Director and Caroline Brooks, SLC Principal Consultant.
The delegates who attended the afternoon session were:
- Michael Shepherd (Slough BC, Leisure Development & Client Manager)
- Nicky Boothroyd (Manchester CC, Facilities Contracts Manager)
- Louise Cary (Wiltshire Council, Head of Community Development)
- Guy Fishbourne (Bristol CC, Sport & Physical Activity Development Manager)
- Liz Slater (Plymouth CC, Leisure Partnership Manager)
- Mark Hammond (Malvern Hills DC, Contracts and Development Manager)
- Karen Whitfield (South Kesteven DC, Head of Leisure)
- Ryan Vittles (Southwark Council, Leisure Monitoring Officer)
- Iain Greenshields (Womble Bond Dickinson, Partner)
- George Matthew (Womble Bond Dickinson, Solicitor – Projects & Procurement Team)
- Toby Kingsbury (SLC, Director)
- David Rushton (SLC, Director)
- Caroline Brooks (SLC, Principal Consultant)
Key themes explored in the session were:
- Getting through lockdown period to re-opening your facilities – should you look at your contract? The application of contractual remedies, consideration of Government PPNs and transparency / open book requirements.
- Addressing the “new normal” – making your contract fit for purpose in a post-COVID world.
- Procurement considerations – extending your contract, tendering a new contract and the application of Public Contracts Regulations under COVID-19.
- Reviewing legal principles in the light of COVID-19 – what if there is another outbreak? Do we need to look closer at contractual measures around emergency situations?
Getting through lockdown period to re-opening your facilities – should you look at your contract? The application of contractual remedies, consideration of Government PPNs and transparency / open book requirements.
There are varying contractual positions being adopted and varying levels of success in negotiating an agreed position with operator partners, during the lockdown period. Some agreements have been reached on liabilities and some are still being negotiated.
Key to these ongoing negotiations will be transparency on all costs and there is a need for a genuinely open-book approach, to provide clarity on costs and to build trust during this difficult time.
It is advisable that Local Authorities understand their contractual position so this can be communicated to Council Members, although the position is not always straightforward. There is the context presented by the Government’s PPN 02/20 and also the interpretation of contract terms with regard to ‘Change in Law’, which is now the main avenue under which operator claims are being made. However, the contractual provisions for ‘Change in Law’ are often open to interpretation and there appears to be no clear process for how these claims are made and how agreements are to be reached.
It is important to recognise that the cost of COVID places unprecedented financial risk upon both the client and the operator and it is likely that those parties that adopt a collaborative, partnership approach, using open-book principles, rather than adopting a formal, legal approach are likely to be the ones that achieve agreements that minimise risk and provide a firm footing for the recovery period.
Whilst the contractual position is an inevitable and important starting point for both parties, what is more important is to agree a way forward that protects these vital community services in a financially sustainable way over the long-term.
Addressing the “new normal” – making your contract fit for purpose in a post-COVID world?
There is no clear position on whether the Government’s PPN 02/20 will continue to be in place post-lockdown and how the ‘Change in Law’ position will be interpreted when facilities reopen. Local Authorities will need to consider how the effects of coming out of lockdown will be managed.
Many Local Authorities are understandably focusing, at the moment, on the claims being made by Operators relating to the lockdown period. What happens beyond this is unclear but it is acknowledged that some form of commercial settlement, to cover a recovery period until ‘normal’ trading can be achieved, will be required.
For those contracts with some form of surplus share arrangement, there may be a case for the authority to receive a greater share of any surplus over the remaining term of the contract in order to ‘repay’ financial support provided by the authority.
There is real concern that the sustainability and resilience of Operators is under threat and some Local Authorities are recognising that, regardless of the contractual position, a longer-term view needs to be taken. However, this is set against the context of unprecedented pressure on the ‘public purse’ both centrally and locally and Authorities may not be able to support Operators for a sustained period of time. No-one yet knows how long social distancing measures may be in place for or what impact COVID will have on the leisure market in the long-term.
In some cases, Local Authorities may need to make difficult decisions based on financial evidence that demonstrates it is more expensive to reopen facilities than to keep them closed. Some Local Authorities may be forced to review their portfolio of assets and consider potential rationalisation, in order to ensure an affordable and financially sustainable future for their leisure service.
Procurement considerations – extending your contract, tendering a new contract and the application of PCR under COVID-19
COVID may prompt Local Authorities to adopt a radical approach to their portfolios of leisure assets and as a result may wish to bring forth planned closures of older sites earlier than intended. This would represent a variation in the contract that could be considered material and so the procurement risks will need to be considered.
The likelihood of any challenge under procurement law is likely to be low given that Operators are pre-occupied with the current crisis. There is also the consideration of the length of time left in a contract. If it is only a year or two then there is less risk of a challenge than if the remaining contract term was much longer.
If a Local Authority is considering a contract extension as a solution to the current challenges, it is likely to be an expensive option and it is vital that the Local Authority undertakes some robust benchmarking and carefully scrutinises the Operator’s financial proposals before extending the contract. Linked to the above, there may be an opportunity to amend the scope of the services to establish an affordable position.
If a Local Authority is planning to embark on a procurement soon, because legally it cannot extend the current contract, then it needs to adopt a different approach to mitigate the real risk of having limited or no competition. Operators are understandably unable to project financial performance with any certainty but there are ways that this risk can be mitigated through the procurement process.
Reviewing legal principles in the light of COVID-19 – what if there is another outbreak? Do we need to look closer at contractual measures around emergency situations?
It is widely recognised that clients and operators have never had to deal with anything like this before and there will need to be additional terms and conditions in future contracts which cover anything similar happening in the future. This would likely involve more control over the decisions as to when sites close and a clear process of compensating the operator. Acquiring suitable insurance, albeit business interruption insurance is unlikely to cover COVID, will be important.
Further Information
Sport England is providing support to Local Authorities that will be flexible to their needs and specialist consultants are available to help, along with Sport England officers. For more information email facilitiessupport@sportengland.org.
Our next extended Virtual Think Tank exploring ‘Planning for Recovery’ is on 14 May 2020, 3pm-5pm and will be open to both clients and leisure operators.
To apply to join the session, please email us at help@slc.uk.com.
SLC’s Managing Director Duncan Wood-Allum has written thought provoking article on a Blueprint for local authority leisure services which can be viewed here.
You are welcome to join the conversation in SLC’s Online Forum on Linkedin. Please click this link.
SLC operate a free Helpline for local authorities and leisure organisations who commission services – please click here for details.