Introduction
Public land is a public asset that must be priced correctly when rented out to third parties. The problem is that in most cases rented out plots of public land are either too large or are in unusual places. In either case, comparable commercial transactions are difficult to find, especially if transactions in such plots are infrequent. In these circumstances, the safest method for determining the market rate of rent is through an auction or bidding procedure. Although it is the safest method, it is not necessarily the most useful method. This is because often the request for the renting of public land comes from companies with specific needs or plans.
The Commission had to grapple both with the assessment of an auction procedure and the determination of a market price in its investigation of a lease of public land to Tartu Agro, an Estonian agricultural producer. After receiving a complaint in 2014, the Commission, following a formal investigation, found in 2020 that Tartu Agro benefitted from rent below market rates for a plot of public land that it had leased since 2000. On appeal, in 2022, the General Court, in case T-150/20, Tartu Agro v Commission, annulled the Commission decision on the ground that the Commission omitted to take into account the value of the improvements to the land that Tartu Agro was obliged to effect. The judgment of the General Court was reviewed here on 19 July 2022 [It can be accessed at: https://www.lexxion.eu/stateaidpost/the-state-behaving-like-a-private-land-owner/].
The new Commission decision on case SA.39182 that was made public a few weeks ago corrects the mistakes identified by the General Court but still finds that Tartu Agro received incompatible State aid that must be recovered.[1]
The Commission decision identifies three measures in favour Tartu Agro:
“(28) […] (a) a lease contract based on the outcome of a restricted tendering procedure […] for a duration of 25 years, namely its advantageous initial rent price (‘rental fee’) and provisions relating to the fee adjustments during the duration (‘the initial lease of the land’);
(b) renegotiated or unilaterally increased advantageous rental fee since 1 May 2004 […]; and
(c) derogations from normal market practices […], namely the fact that the annual rental fee increases were not enforced in accordance with the lease contract and the rental fee was not increased by Estonia”.
New or existing aid?
Given that the lease was signed in 2000, before Estonia’s accession to the EU, the Commission had to determine first whether aid was granted before or after 1 May 2004. Because, according to the lease contract, the amount of the rent was subject to a review once a year and the fee could be increased, but was never increased in line with market conditions, the Commission considered that new aid was granted every year the Estonian authorities failed to adjust the rent.
Existence of State aid
Once the Commission found that aid was granted after the accession of Estonia to the EU because State aid was granted every year the rent was not raised – which lasted until 2020 when the contract was re-negotiated – it proceeded to demonstrate that the four conditions of Article 107(1) TFEU were satisfied.
Since the state forwent potential rent revenue and the award of the contract to Tartu Agro was imputed to the state, the measure was financed by state resources.
Moreover, Tartu Agro was an undertaking as it produced and sold agricultural products. The production and sale of such products are economic in nature. The fact that Tartu Agro used to be owned by the state was irrelevant.
The measure was selective as it favoured exclusively Tartu Agro, given that the land was not leased on the generally applicable market terms and conditions. The measure was also capable of affecting trade and distorting competition as agricultural products are extensively traded in the EU.
The focus of the Commission’s assessment was the presence of advantage which was analysed in detail in more than 250 paragraphs spanning 35 pages.
Concept of advantage
First, the Commission examined whether the tender procedure through which the land was leased was a competitive, transparent, non-discriminatory and unconditional.
At the time of the tender, Tartu Agro which was owned by the state was obliged to carry out certain tasks in the public interest such as the management of a seed bank. The Commission noted that the tender required continuation of the activities of Tartu Agro.
“(257) As regards the conditionality of the tender procedure, a tender is unconditional when a potential buyer is generally free to acquire the assets, goods or services to be sold and to use them for its own purposes irrespective of whether or not it runs certain businesses. Applied to the case of a tender for a lease, this means that the lessee needs to be free to use the land in question for whatever purposes it intends to.”
“(258) If there is a condition that the buyer or lessee is to assume special obligations for the benefit of the public authorities or in the general public interest, which a private seller would not have demanded – other than those arising from general domestic law or a decision of the planning authorities – the tender cannot be considered unconditional”.
“(260) The Commission notes that the announcement of the tender did not specify that the potential tenderer had to propagate and store certain seeds, it specified only that the agricultural activity of one specific company – Tartu Agro AS – had to be continued after leasing the land. The Commission considers that to be a condition attached to the tender. The context, where the only eligible participant in the tender was ultimately that same undertaking, reinforces that tailor-made, biased, hence conditional nature of the tender.”
So, there were two problems here: the conditionality of the tender and the fact that it was not open as it excluded anyone else who was not Tartu Agro. However, the Commission decision leaves open the question whether a public authority can impose a public policy obligation on lessees without conferring to them an advantage [its brief reference to this matter in paragraphs 283-285 skirts around it]. Indeed, a costly obligation depresses the rent that can be obtained. Following the judgments in C-331/20 P, Volotea v Commission and C-343/20 P, easyJet v Commission, I believe a competitive procedure should ensure that the reduction in the rent does not exceed the cost of the obligation. For example, without the obligation assume that a lessee pays market rent of 100. With an obligation costing 20, it would be willing to pay rent up to 80. Although the revenue of the public authority is only 80, the lessee obtains no advantage in relation to what it would have to pay in the absence of government intervention.
It should also be noted that at this point in the decision, the Commission referred to paragraph 94 of the Notion of State Aid as a source of guidance. Perhaps that paragraph needs updating after the judgments in cases C-331/20 P and C-343/20 P.
Market economy operator principle
At any rate, the Commission concluded that the procedure could not be presumed to result in an outcome that was equivalent to the market rate. Therefore, it proceeded to apply the Market Economy Operator Principle [MEOP]. It added that “(267) when applying the MEOP, the Commission assesses the entire lease contract and its amendments”. “(268) Therefore, the Commission considers that in the case at stake, in addition to the agreed annual rental fee it has also to consider other features of the contract such as the context in which the measure was adopted, the prevailing market price for similar transactions at the time, the size and quality of the leased area, the revenue generated from the different parts of the leased land, the duration, the financial obligations and the terms of the lease contract that stipulate the conditions for amendments of the lease contract as well as how the lease contract was enforced”.
“(270) In the case at stake, the Commission notes, as regards the 25 years duration without any indexation conditions […] that a rational market economy operator may prioritise prospects of profitability in the long term but that should require adequate compensation for the risk and time value.” “(272) The Commission notes that, in the case at hand, the impact of the Estonian accession on the lease fees in agricultural sector was not foreseen at the time of the initial lease contract. If [sic] follows the mere fact that market rental fee increases during the 25 years duration of the lease contract does not alone establish an advantage.” [I think here the word “absence” is missing between “establish” and “an advantage”.]
“(274) The Commission considers, taking into account that the agreed low initial rental fee did not adequately take account of the duration and that the Estonian authorities have not utilised all their possibilities for rent increases that the initial lease contract enabled […] that a rational market economy operator would not have entered into a 25-year lease contract that does not include an indexation condition or other provisions that would have enabled unilateral or automatic annual rent increases without the parties’ agreement.”
“(275) A hypothetical rational market economy operator in a comparable position would not have had an economic rationale for such a long duration in the contract. The mere fact that the quality of the leased land is maintained or even increased through active farming does not justify the 25 years duration as the same positive impact for the quality of the leased land could have been achieved using shorter lease agreement and comparable terms to those used by the Land Board.”
“(276) As regards the conditions that the lessee was liable to pay all taxes relating to the subject matter of the lease […] the Commission considers that a rational market economy operator lessor would have had an interest to include such a condition in its lease agreements as the condition concerns expenses that are a statutory liability to the lessor. […] However, the Commission notes that when the advantage is assessed, it is decisive whether that obligation is an additional obligation to Tartu Agro AS compared to other undertakings.”
“(277) As regards the commitment for maintenance expenses […] the Commission considers that a rational market economy operator lessor would have had no interest to include such a condition, which guides the operations of the lessee, in monetary terms in its lease agreements as the condition concerns operative expenses of an undertaking operating in primary agriculture sector and it does not concern reduction of the State’s expenses.”
“(278) Similarly, as regards the sales contract […] a rational market economy operator would have had no interest or reason to include conditions on detail investments or average number of employees on the sales contract.”
“(279) As regards the commitment for investments […] since those investments were important to ensure that the quality of the land is preserved, the Commission considers that a rational market economy operator would have had an interest on carrying out the investment itself (in line with the practice and applicable statutory obligations of the lessor) or, if left for the lessee, verified that they are implemented.”
“(283) As regards the claims that the initial lease contract has been used to acquire seed services […] the Commission notes that Estonia might have had, […], a genuine need to purchase the services related to the propagation and storage of the seeds and genuine public policy objectives.”
“(284) However, the Commission notes that the lease contract and the activity of Tartu Agro in general remains in the domain of economic activity […] Furthermore, the Estonian authorities have not provided any documentary evidence that would have shown that they had conducted any ex-ante analysis whether the services in question were priced at market terms and what would have been desired benchmark for those services.”
Assessment of the measures compared to the market conditions
The Commission examined in particular the following:
(a) the features of the tender preceding the lease;
(b) the duration;
(c) the fact that the amount of the agreed rental fee is different than the amount actually paid by Tartu Agro;
(d) the financial obligations of the parties in the lease contract;
(e) the fact that the amount of the commitment for investments actually paid by Tartu Agro is different than the amount of the agreed committed investments;
(f) the provisions on rental fee revisions;
(g) the enforcement of the right of the parties as the lease contract is not enforced as agreed;
(h) the size and the quality of the leased land;
(i) the status of the lessor as a state and its impact on the market price.
The market rate of rent
There are several methodologies for the calculation of the market rate of rent [comparative, cost+, etc]. Each methodology has its own advantages and disadvantages.
The Commission explained that “(299) to calculate the difference between the rental fee paid by Tartu Agro AS and what it should have paid under normal market conditions, the Commission:
(a) analyses the available data on market prices on land leases […] and defines the appropriate market price of rental fees benchmark;
(b) defines, taking into account the quality of the leased land […] and the circumstances of the case and the context […] the appropriate market price of rental fees benchmark at the time of the initial lease […] of Estonia’s accession to EU […] and from 2005 onwards;
(c) defines the area that is used as a denominator when annual fees are compared with euro per hectare values […] in order to ensure that comparable numbers are used;
(d) analyses […] how revenue generated from leased areas that are not included in the used denominator may be taken into account;
(e) analyses the economic impact when the selected denominator does not include 100% of the leased area and how revenue generated from that reduced area may be taken into account;
(f) analyses the economic disadvantage and market conformity of the financial obligations in order to define to what extent the annual rental fee has to be adjusted in order to ensure that it corresponds to the selected market price of rental fees benchmark […] and assesses separately each of those financial obligations: (i) the land tax […] (ii) annual maintenance expenses […] and (iii) commitment for investment;
(g) calculates the difference between rental fee paid by Tartu Agro AS and the market price of rental fees benchmark on the date of Estonia’s accession to the European Union in order to conclude market conformity of the rental fee on that date;
(h) calculates the difference between the rental fee paid by Tartu Agro AS and the market price of rental fees benchmark when the rental fee was adjusted by the parties in order to verify the market conformity of the rental fee in those periods;
(i) calculates […] the difference between the rental fee paid by Tartu Agro AS and the market price of rental fees benchmark since 2005;
(j) analyses the sensitivity of its conclusion;
(k) assesses a claim that the alleged advantage due to calculated difference was eliminated when Estonia sold its shares in Tartu Agro AS; and
(l) presents its conclusion on the presence of an advantage.”
Conclusion
Having examined all the issues listed above, the Commission concluded “(334) following a reasonable and prudent approach, that the market price benchmark was EUR 10 per hectare of arable land in 2004, to which a 20% reduction is applied to account for the sensitivity of the data”. In other words, the Commission erred in favour of Tartu Agro.
Because normally the land owner is liable to pay property taxes, the Commission also took into account, in Targu Agro’s favour as well, the fact that under the contract it was obliged to pay those taxes. The Commission followed the same approach for all other costs or investments that Tartu Agro was obliged to incur or carry out under the contract.
Despite the various adjustments made by the Commission to the rent paid by Tartu Agro, the Commission still found that it fell below the market rate of EUR 10/ha, even with a downward adjustment of 20%.
Given that the aid was operating and did not fall within a block exemption regulation or guidelines, the Commission found the aid to incompatible with the internal market and ordered its recovery.
Tartu Agro has lodged an appeal that is pending before the General Court under case T-59/25.
[1] The full text of the Commission decision can be accessed at:
https://ec.europa.eu/competition/state_aid/cases1/20256/SA_39182_284.pdf
