The State Behaving Like a Private Land Owner

A private land owner changes rent at market rates. But it may accept lower rent if the user of the land incurs costs to improve it.

Comparative analysis to determine the market value of land must take into account not only the particularities of the various land plots, but also the particularities of the various rental contracts.

Introduction

When the state rents or leases out public land, it normally ensures that the rent or lease agreement is free of State aid in one of two ways: either the right to use the land is auctioned or the rental or lease fee is set at the prevailing market rate on the basis of a valuation by an independent expert.

But, when the land is not auctioned and the land or the contract has unusual features or clauses, respectively, expert valuation becomes difficult and is no more than educated guess. In such a situation, the General Court ruled on 13 July 2022, in case T-150/20, Tartu Agro v European Commission, that the Commission should apply the private owner test. Would a private owner of the land accept lower rent in order to induce the tenant or user of the land to maintain and improve it?

The case before the General Court arose from Commission Decision 2021/104 which found that Estonia had granted incompatible State aid to Tartu Agro [TA]. Estonia had signed a 25-year lease which granted the right to TA to operate a large plot of agricultural land. TA was chosen through a competitive selection procedure.

The Commission found that the selection procedure was defective and that the rent at which the land was leased was below market rates. The Commission Decision was reviewed here on 6 April 2021. It can be accessed at: Lease Contracts and Competitive Selection – Free State Aid blog article – Read now (lexxion.eu)

TA was a state-owned agricultural company in Estonia. In 2001 it was privatised. Just before privatisation, the Ministry of Agriculture leased to TA more than 3000 ha of agricultural land for a period of 25 years.

The lease agreement provided for a rent of EEK 10,000 per year [approximately EUR 640], or EEK 3.24/ha [EUR 0.20/ha]. TA was responsible to maintain the land [i.e. prevent it from becoming fallow], improve soil quality, protect certain strains of crop, invest in drainage systems and pay all taxes.

In 2017, after receiving a complaint, the European Commission initiated the formal investigation procedure. In January 2020, the Commission adopted Decision 2021/104 by which it found that TA had benefited from incompatible State aid that had to be recovered.

Was the land lease on market terms?

TA claimed that the Commission made mistakes in calculation of the market rent.

The General Court recalled, first, that the supply of goods or services on preferential terms may constitute State aid within the meaning of Article 107(1) TFEU. [paragraph 36 of the judgment].

In the case of the leasing of land at an alleged preferential price, which, according to the General Court, is comparable to the sale of land by a public authority to an undertaking, it must be ascertained whether the price paid by the alleged beneficiary of the aid corresponds to a price which it would not have been able to obtain under normal market conditions. In those circumstances, the amount of the aid is equal to the difference between what the beneficiary actually paid and what it should have paid at the time under normal market conditions. [para 37]

Then the General Court summarised the Commission’s two-stage process to determine whether the lease complied with market conditions. First, it ascertained whether the amount of the rent alone was lower than the market price. Second, it examined whether that amount increased by the implied cost of additional contractual obligations of TA, still remained lower than that market price.

The benchmark market rate

In order to compare the agreed or actual rent with the market rate, the Commission obtained a report from firm Uus Maa and relied on data from the Estonian statistical office. It compared the rent paid by TA with the average of rent rates for agricultural land in the same period.

According to the Uus Maa report, the rent for agricultural land during the period from 2000 to 2004, was between EUR 6 and 10/ha, during the period from 2005 to 2009, was between EUR 10 and 20/ha, and, during the period from 2010 to 2014, was between EUR 25 and 60/ha. However, in that first period, the TA paid rent of EUR 0.20/ha, in the second period the rent was increased to EUR 1.66/ha and then to EUR 5.21/ha, and, in the third period, the rent was further increased EUR 8.68/ha. [para 44]

The Commission also found that according to data from the Estonian statistical office, in the period 2015-17, the average of rent rates for agricultural land varied between EUR 52/ha and EUR 65/ha. By contrast, in that same period TA paid rent varying between EUR 26.86/ha and EUR 27.28/ha. [para 45]

On the basis of that comparison, the Commission concluded that the rent alone was lower than the market price throughout the period from 2000 to 2017. It considered, that the advantage for TA consisted in the difference between those average market rates the rent that was actually paid. [para 46]

Then the General Court confirmed that the case law accepts that ex post expert reports can be used to determine the market value of land. But methods other than expert valuations may also be used. For example, the Commission may take into account the average rent prices reported by the Estonian statistical office based on a methodology approved by Eurostat. [para 47]

However, the General Court faulted the Commission for relying on rent estimates in too broad bands and for just comparing those rents without establishing first a rental rate that would be as close as possible to the terms of the lease agreement. Moreover, the Commission failed to take into account all the relevant information that was available at that time. [para 48]

The General Court noted that the Uus Maa report set out rental estimates in wide price ranges. The Commission then took the arithmetic average of the ranges without providing more detailed explanation. [paras 50-51]

But, since a price range shows various rental values which are all market rates, the General Court stated explicitly that the Commission should have taken not the average but the minimum values as a benchmark for comparison. [para 52]

The Uus Maa report was drawn by comparing properties with similar characteristics. The General Court acknowledged that the comparative method is a standard method for assessing market value. [para 54]

However, the wide margin of error of the Uus Maa report, according to which the actual market rent could by plus or minus 20%, did not justify the use of that arithmetic average. The arithmetic average did not correct the problem of price ranges that were too wide. [paras 56-57]

The General Court concluded that the Commission did not show that the arithmetic averages of the price ranges in the Uus Maa report were capable of determining the price as close as possible to that of the market, nor did it take sufficient account of the margin of error and the particularly wide price ranges of that report. On the contrary, the Commission’s approach necessarily led to an overestimation of that price. [para 59]

Land lease was not a common market practice

The General Court also faulted the Commission for not taking into account that at that time in Estonia land leasing was rare. Land owner who wanted to prevent their land from going fallow, made it available to third parties for zero or very small charge. [para 60] The lease agreement signed by TA did contain obligations concerning the maintenance of land and improvement of soil quality. [para 61]

In addition, the data of the Estonian statistical office were not the result of expert valuation of rental land, but constituted average prices for the rent of agricultural land which did not take account of the particular characteristics of the land in question. [para 71]

The General Court reiterated established case law that the onus is on the Commission to prove the existence of State aid within the meaning of Article 107(1) TFEU and, therefore, also to prove that the condition for granting an advantage to the beneficiaries is fulfilled [here the General Court cited case C-362/19 P, Commission v Fútbol Club Barcelona, paragraph 62]. Even if the Member State concerned fails in its duty to cooperate, the Commission must base its decisions on reliable and consistent information which provide a sufficient basis for concluding that an undertaking has benefited from an advantage constituting State aid. Given that the recovery of the aid at issue from its beneficiary is intended to eliminate the distortion of competition caused by a particular competitive advantage and thus to restore the situation prior to the payment of that aid, the Commission cannot assume that an undertaking benefited from an advantage constituting State aid simply on the basis of a negative presumption, based on the absence of information enabling the contrary conclusion to be reached. The Commission must rely on evidence capable of establishing positively the existence of such an advantage [here the Court cited case C-244/18 P, Larko v Commission, paragraphs 69 and 70]. The Commission could not justify the inaccuracies in the data of Estonian statistical office on the sole ground that the applicant and the Estonian authorities had not demonstrated that the land at issue had a lower value than the average agricultural land in Estonia. [para 76]

The weight of contractual obligations

TA also argued that the Commission failed to take into account properly the rent-reducing effect of the obligations imposed on itself by the land lease agreement.

The agreement required, in addition to the payment of rent, annual investments in drainage systems, maintenance of the land, improvement of soil quality, crop protection and the payment of all taxes related to the land.

The Commission took into account only half of the annual investments in drainage systems because the Estonian state was relieved of certain maintenance costs which it would have had to bear as owner of the land. But because TA also benefitted, the Commission considered that it ought to pay for half of that expenditure. In addition, it took into account the annual amounts of property tax paid by TA because they fell on land owners. Then it adjusted downwards the derived market rent by the sum of those amounts. It found that the adjusted market rent still exceeded the rent actually paid by TA.

The General Court went on to fault the Commission for not considering the financial burden imposed on TA by those contractual obligations and for arbitrarily concluding that only half of the drainage investments ought to be taken into account. [paras 95-99]

Application of the private owner principle

TA argued that it was conceivable that the Estonian state acted as a private owner who was willing to accept lower rent in order to induce the user of the land to maintain and improve it.

The General Court recalled that it is the Commission that bears responsibility to examine whether the private investor principle is applicable. [para 100] [By contrast, it is the responsibility of the Member State that invokes that principle to prove that it actually applies in its particular case.]

Then the General Court reasoned as follows. Given that a private owner is guided by longer-term profitability prospects and that it is apparent from the Uus Maa report, first, that, at the time of the conclusion of the lease agreement, the land was generally made available free of charge in order to prevent it from becoming fallow and, second, that the lease agreement was intended to maintain the use of the land in accordance with its purpose and to preserve its productivity, it is not inconceivable that such an owner may impose additional contractual obligations in order not to have to make the necessary investments itself, such as those in drainage systems, in the maintenance of land and in improving the quality of soil, which also made it possible to increase the value of land in the long term. [para 101]

The General Court concluded that the Commission was wrong not to consider the financial impact of all the investments in drainage systems as an integral part of the Estonian state’s rental income. [para 103]

Given that the Commission’s overall approach was defective, the appeal was upheld in its entirety and Commission Decision was annulled.

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About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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