Public bodies must behave like private creditors with sports bodies to avoid EU state aid action, says expert

This approach should be rigorously adopted even if at face value the arrangements appear to be compatible with the state aid rules, said sports law specialist Trevor Watkins of Pinsent Masons, the law firm behind Out-Law.com. He said that this was particularly important in the light of recent information published by the European Commission.

Watkins said that details of the Commission's probe into financial support offered by authorities in the Netherlands to struggling football clubs had demonstrated that both the terms of financing deals and the authorities' ongoing treatment of professional sports clubs under those arrangements were subject to Commission scrutiny.

State aid is an advantage or incentive granted by a national or local government to commercial companies, and can take a variety of forms including grants, tax reliefs, guarantees, government holdings of all or part of a company or the provision of goods and services on preferential terms. To ensure fair competition across the EU, state aid is generally prohibited unless it can be justified for general economic development reasons.

Member states must apply to the Commission for clearance on a case by case basis before they can offer funding or incentives which amount to state aid, although some types of aid may fall within the General Block Exemption Regulation and there is a de minimis threshold under which aid is automatically exempted from the rules. Member states can be required to recover illegal aid from companies which have received public support in breach of the state aid rules.

The European Commission recently announced that it was to open an in-depth investigation into financial aid given by local authorities in the Netherlands to five professional football clubs in the country.

In one of the cases, the municipality in Eindhoven is being investigated over the arrangements it formed when it bought land from former European Cup winners PSV Eindhoven for more than €48 million and then leased it back to the club.

The Commission has said that the "measures" of support in each of the five cases "seem to constitute state aid". The measures "provide an advantage to entities carrying out economic activities" in a way that is "likely to distort competition and to affect trade between Member States," it said.

However, the Commission absolved the local authority in Arnhem from providing illegal state aid to Vitesse Arnhem when it accepted the non-payment of more than €11.7m owed to it from the club when it was facing financial difficulty. This is because the Arnhem authority had accepted the non-payment "in the context of a formal suspension of payments procedure regarding Vitesse" and that the "Dutch authorities have demonstrated that a private market creditor would have acted in the same way".

"The Commission's assessment of the Vitesse case shows that national and local authorities have to continually ask themselves what a private market operator would do in their position," Watkins said. "The Commission's assessment pre-supposes that the original financial arrangements between Vitesse and the Arnhem authorities were in line with state aid rules."

"This demonstrates that even where the Commission deems it to be legitimate to use taxpayers' money to selectively support professional sports clubs, the arrangements for doing so must be at private market rates. It also demonstrates that authorities that fail to treat those clubs as the private market operators would throughout the period that state aid applies can potentially be found in breach of state aid rules," he said.

The European Commission has previously ruled out establishing a state aid block exemption regulation in the context of sport. It said that there were insufficient court rulings on the issue of state aid in sport to use as a basis for shaping the terms of such an exemption.

However, the Commission has previously given guidance on the issue of state funding to assist in the construction of stadiums or other sports infrastructure. It said that state aid rules would not be broken in this context if authorities could meet three criteria first established by the Commission in a letter advising Germany about the financing of a football stadium in Hanover.

Under those criteria the authorities have to show that "the type of infrastructure involved is generally unlikely to be provided by the market because it is not economically viable"; that the infrastructure will be multi-purpose built and rented out to tenants at "adequate market based compensation"; and that the facility that it seeks to support the building of is "needed to provide a service that is considered as being part of the typical responsibility of the public authority to the general public". Watkins added, "This raises the spectre of numerous sports bodies across Europe fearing that sums will have to be repaid or proposed projects unable to be progressed. Uncertainty in the market is incredibly unhelpful."

Last year the Commission wrote to EU member state governments asking them for details about state aid to professional football clubs. The letter made specific reference to the potential move by West Ham to the Olympic Stadium, according to a report by the Mail on Sunday at the time.

In a separate development, Leyton Orient have announced that they have launched legal proceedings in the High Court in a bid to obtain a judicial review of the London Legacy Development Corporation's handling of its bid to ground share with West Ham at the Olympic Stadium. It has said that the way its ground share bid has been rejected is not in line with LLDC's bidding rules. The club has claimed that it will go out of business if it is not allowed to share tenancy at the Olympic Stadium with West Ham.

Watkins said the judicial review proceedings were distinct from state aid issues relating to occupancy of the Olympic Stadium.

"All facilities that involve the provision of public money are under scrutiny," Watkins said. "The European Commission is likely to be supportive of every effort to lessen the burden on the public purse to find appropriate commercial tenants rather than leave a stadium empty and derelict. In the case of the Olympic Stadium it is a question of finding tenants on the best deal possible for taxpayers and this is clearly being done. The Leyton Orient challenge simply contributes to further delay but with the proposed solution of a joint tenancy that would be groundbreaking in the United Kingdom."