Subsidy Control: Two key takeaways for RPs accepting loans or other public funding

The Competition Appeal Tribunal's (CAT) recent judgment in Weis v Greater Manchester Combined Authority [2025] CAT 41 is the first occasion on which the CAT has addressed the operation of the commercial market operator (CMO) principle under section 3(2) of the Subsidy Control Act 2022 (SCA). 

The CMO principle is a core tenet of subsidy control law and applies where financial assistance provided by a public authority is on terms comparable to those that might be offered in the market by a private operator that is driven by commercial (as opposed to any public policy) objectives. In these circumstances, the terms of any financial assistance can be considered as being in line with market terms (i.e. as not more favourable than those that might be reasonably available on the market) and financial assistance may be awarded by the public authority on a ‘no subsidy’ basis.

Taking a ‘no subsidy’ approach in relation to financial assistance therefore involves the public authority establishing that a private operator in the public authority’s position and driven by commercial objectives would be willing to agree the same terms with the recipient with respect to the financial assistance.  

The Weis judgment offers insights into the correct application of the CMO principle, particularly how it applies to loans, and subsequently the outcome of the case will be of interest to RPs who are being provided with public sector finance structured on a ‘no subsidy’ basis, particularly as it is possible that a finding of an unlawful subsidy could result in the clawback of funding from the RP.

The CAT also considered the timing of a “subsidy decision” within the meaning of the SCA. 

The CAT’s decision is of interest to RPs in receipt of financial assistance on a ‘no subsidy’ basis because they face the possibility of having to repay any unlawful subsidy if there is a successful legal challenge.  It is also of interest to any RPs who may be considering challenging any financial assistance provided to their competitors. 

We set out below the case background, the CAT’s decision and the two key takeaways for RPs to consider when they receive public sector finance. 

Background

Greater Manchester Combined Authority (GMCA) resolved to give loans of £70.8m and £69.2m to Trinity Developments (Manchester) Limited and New Jackson (Contour) Investments Limited (both companies within the Renaker Group) (the Renaker Loans), respectively, from the Greater Manchester Housing Investment Loans Fund. 

Mr Aubrey Weis, who owned various property development companies with projects in and around Manchester appealed to the CAT, seeking a legal declaration that GMCA had granted unlawful subsidies to Renaker and an order prohibiting the provision of the subsidies and / or quashing of the loan arrangements on the basis that the Renaker Loans were provided at overly favourable rates. GMCA argued that the Renaker Loans did not amount to subsidies on the basis that the CMO principle applied as the loans and the interest rates that GMCA offered could be offered by a CMO.  

The interest rates for the Renaker Loans were set by the GMCA having regard to various factors, including the strength of Renaker’s security and covenant, market intelligence on what other lenders were charging in the market and a cross-check against the proxy market rates of interest specified under both the EU State aid rules and the Subsidy Control (Gross Cash Amount and Gross Cash Equivalent) Regulations 2022 (Gross Cash Regulations).  The Gross Cash Regulations provide a tool for valuing any subsidy element in a loan by stipulating a range of proxy market rates by reference to: a) prescribed base rates set out within the Regulations, b) the borrower’s creditworthiness and c) the percentage loss that a public authority may suffer if the borrower does not repay that loan (Regulation 8 Methodology).  

The CAT summarised the issues to be determined as follows:

1. Has a subsidy decision been made by GMCA within the meaning of section 70 of the SCA? If so, when was the decision taken? (Issue 1)
2. Would the 2024 Renaker Loans have been approved by a CMO and did the rates of interest and other charges applied reflect the market rate? (Issue 2)

CAT’s Decision and Key Takeaways

The CAT dismissed Mr Weis’ challenge and concluded that the Renaker Loans had not been provided on unduly favourable rates and hence Renaker had not been in receipt of a subsidy. The CAT found that “the 2024 Renaker Loans went through a proper process and the terms and rates considered by persons with significant experience in development loans.”

Issue 1: Subsidy Decision and Timing

The CAT stated that there was a clear distinction in the SCA between a subsidy decision and when a subsidy is given, concluding that "although it is not until the date of the entry of the 2024 Renaker Loans on 22 November 2024 that the borrowers had an enforceable right to financial assistance … this does not mean that there was no subsidy decision challengeable before then". 

Section 70(1) of the SCA provides that an interested party aggrieved by the making of a subsidy decision may apply to the CAT for a review of the decision. Under section 70(7) a subsidy decision means a decision to give a subsidy (or make a subsidy scheme).

The judgement confirms that there is scope for an interested party to challenge a decision to give a subsidy even if the resulting subsidy has not yet been given.

In the Weis case, the CAT did not have to rule on the limitation point, i.e. the cut-off point after which a legal challenge would have been time barred.  The limitation period for challenging a decision to give a subsidy is, in most cases, linked to publication of details of the subsidy on the Subsidy Database.  This has an unfortunate consequence if an authority wrongly believes that the CMO principle is satisfied and that it is not giving a subsidy.  Since it will not, in these circumstances, have published the subsidy on the Subsidy Database, the limitation period is not triggered, thus leaving the authority vulnerable to a subsidy challenge for an open-ended period of time.  However, it will be more difficult for a legal challenger to obtain a remedy from the CAT if there is undue delay in bringing its legal challenge.  

Takeaway 1:

RPs in receipt of a loan or other financial assistance on a ‘no subsidy’ basis should ask the authority to publish details of the funding (e.g. on its website) with the aim of flushing out any legal challenges sooner rather than later.  Even if legal challenges alleging an unlawful subsidy are not technically time barred, putting details into the public domain should at least prompt any interested parties to challenge sooner rather than later because they will want to maximise their chances of obtaining a remedy from the CAT.  

For any RPs minded to bring a legal challenge, any potential claim should be pursued as soon as possible once the RP becomes aware that the subsidy decision has been made by the authority.

Issue 2: The CMO Principle 

On the issue of whether the CMO principle had been correctly applied to the Renaker Loans, the CAT concluded:

“The process followed by the [GMCA] in reaching the subsidy decision and thereafter entering into the 2024 Renaker Loans […] appears […] to be a perfectly rational one and not inherently defective. It provides for decisions to be made in the light of input and consideration by officers experienced in making lending decisions and recommendations, as well as those on the Gateway Panel and the Credit Committee. It is only after that process has been followed that the matter goes before the GMCA Committee, which is provided with […] the proposed commercial terms. Even once the decision has been made by the GMCA Committee, that is not the end of the process as before the 2024 Renaker Loans are entered into there is due diligence and legal review leading up to the actual loan agreements signed by the Treasurer under the authority delegated to him.”

The CAT’s decision that the GMCA had correctly applied the CMO principle took account of the range of due diligence steps and the range of considerations taken into account during the rate setting process.  The CAT was satisfied that the steps the GMCA followed when setting the terms of the Renaker Loans were sufficient to demonstrate that the CMO principle was satisfied.

The case recognises the margin of discretion allowed to an authority when determining what is on-market provided it is acting reasonably, confirming the position taken by the UK courts in a 2016 State aid case (R (Sky Blue Sports) v Coventry City Council (No 1)) which established that: 

“…while the test is an objective one, the law recognises that there is a wide spectrum of reasonable reaction to commercial circumstances in the private market…”.

The CAT noted that GMCA was able to rely on the knowledge and experience of its own staff when determining the market rate for the loans and that it is not always necessary to commission an independent expert assessment of market terms or to make direct enquiries of other lenders. 

“The GMCA was not required to make direct enquiries of potential lenders or market participants of what finance and their terms were available to the Renaker Group. Instead, it used its knowledge to price the loans at rates that one may reasonably conclude are in fact within the range of reasonable commercial rates that lenders would be prepared to lend.”

Other public authorities may not have the necessary in-house experience to be able to do this and so may need to rely on external expertise. 

Importantly, the CAT was of the view that it would not have been sufficient for GMCA just to apply the Regulation 8 Methodology without any wider analysis.  It said that “the mere fact that the rate may have been compliant with the [Regulation 8 Methodology] is not in itself determinative of whether the rates adopted were market rates within the meaning of s3(2) of the SCA 2022”.

Takeaway 2:

When an RP is receiving a public sector loan for a development, it has an interest in ensuring that the public authority takes a robust and defensible approach when checking that the loan is on market terms.  This is because the CAT may make a recovery order if there is a successful legal challenge, meaning that the RP bears the financial risk if the CMO principle is not satisfied.  If there is found to be an unlawful subsidy, it is likely that the terms of the loan will also need to be adjusted going forwards to ensure there is no further subsidy, resulting in greater borrowing costs for the RP than it might have allowed for in its business plan for the development.  This can be fatal to project delivery or even cause a project to fail altogether if alternative funding cannot be found to plug any resulting viability gap.  

We would recommend that, for any loan being provided on a ‘no subsidy’ basis, the RP asks the authority for evidence that it has taken a well-documented, rational and detailed approach to determining the commercial interest rate.  It will be important to look for evidence that all the terms of the loan have been considered, and not just the interest rate in isolation, and that a range of factors have been considered rather than the interest rate being set simply using the Regulation 8 Methodology because the Weis case suggests this won’t be enough.    

Making this check should give the RP a degree of comfort that the authority will be in a position to resist and, in a worst-case scenario, successfully defend any legal challenge alleging that the loan involves an unlawful subsidy.

In summary, RPs should be mindful of a public authority’s due diligence and decision making procedures when accepting “non-grant” financial support for development and other projects, to minimise the risk of third-party challenge, most likely from disgruntled private developers not offered such support. This might include seeking specialist legal advice to review the authority’s internal decision-making processes, to avoid future surprises – even if this appears to be looking the proverbial gift horse in the mouth.

Permission has been granted for the CAT’s decision to be appealed to the Court of Appeal.  It will be interesting to see in due course whether the Court of Appeal agrees with the CAT’s view on the correct application of the CMO principle. 

If you would like to discuss public sector finance and subsidy control compliance on your projects, our Subsidy Control specialists can assist. Please get in touch with Bethan Lloyd, Helen Feinson, Edward Reynolds or Isobel Williams. 

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