UK & Europe
Whilst the financial close celebrations of the 1990s and early 2000s might feel like only yesterday for those involved, an increasing number of UK PFIs are starting to prepare for handback at the end of the project term. Project companies and service providers are starting to recognise the potential risks and challenges which arise from handback, some of which we outline below.
The general duty on the project company (passed down to the service providers) is to ensure that all assets and equipment forming the project are handed back to the public sector client in accordance with the required standard. Whilst some projects may have a (usually brief) specific handback schedule setting out this standard, in its absence the required standard will likely be a condition consistent with Project Co having complied with any and all maintenance, service and lifecycle obligations under its contract with the public sector client. Preparing for handback therefore requires a detailed understanding of project-specific obligations in relation to the assets being handed back, including any differing requirements for new build facilities versus retained estate facilities.
Whilst they may seem obvious, there are some very simple questions that parties should ask themselves in preparing for handback. Do the project documents reflect all amendments/extensions during the course of the project to the extent relevant to handback of the assets? Are the assets and equipment to be handed over clearly identifiable? In practice, many projects will have undergone a number of changes (and challenges) since financial close, and parties may feel that the handback provisions are not fit for purpose, or are so vague as to be more likely to cause disputes than to facilitate a seamless transfer of assets. In such circumstances, the parties may wish to agree and implement more detailed processes or protocols, subject to lender approval (to the extent lenders are involved by that stage).
Linked to handback, it is usual to find an obligation on project companies to carry out a handback survey between 12 and 36 months prior to expiry of the project term. There is then a requirement to carry out any necessary rectification work identified by the survey to meet the required standard of handback (or pay the costs of the public sector client in procuring such work), with either the retention of a proportion of the unitary charge payment or the requirement for a handback bond until the completion of the rectification works. There is also likely to be a general duty of co-operation relating to transferring assets on handback, and delivery to the public sector client of all required materials and documents, and the assignment of warranties where applicable. To the extent that rights to survey and instruct rectification works are time-specific or conditional upon contractor processes, parties need to ensure that they comply with the terms of the project documents, and may wish to obtain specialist advice relating to transfer of employment obligations and other areas.
Whilst the risk of handback varies for each project party, for both project companies and service providers there is a potential cash flow risk related to the retention of payments. Project companies should also consider the risk of service provider insolvency, leaving the project company with the handback liabilities, especially if such insolvency would also involve the insolvency of any guarantors. Parties also need to be aware that usually a number of contractual obligations survive expiry of the project documents. This will restrict winding up the project company if there are existing or contingent liabilities under the project documents.
As always, parties should also be aware of the importance of maintaining records of all relevant correspondence, the careful use of Without Prejudice communications (where commercial settlements are being sought), and to avoid any escalation of disputes parties may wish to obtain early legal opinions on substantive points of principle which might otherwise cause significant disagreement in relation to handback.
With the costs and liability for the assets and equipment forming the PFI project reverting to the public sector client at the end of the project term, the handback requirements are likely to be scrutinised by all the parties involved.