Why did Coventry City FC’s State aid claim fail?

Published 13 August 2014 By: Marc Delehanty

Coventry_Richo_Stadium
In this blog, Marc Delehanty analyses and reflects on the recent State aid decision relating to Coventry City FC’s previous stadium, the Ricoh Arena.

Background

The High Court recently handed down judgment1 in a challenge brought by the owners of Coventry City Football Club (“Coventry”) against the legality of a £14.4m loan that Coventry City Council (the “Council”) provided to the leaseholders of the Ricoh Arena (“ACL”) – the stadium that Coventry used to play its home games at until 2013.
 

Allegation that the loan was an unlawful subsidy

The claim failed; Hickinbottom J held that provision of the loan was lawful. The action was by way of a judicial review of the decision of the Council – a public body – to make the loan and the main substance to the challenge was that the loan amounted to State aid (i.e., subsidy) within the meaning of Article 107(1) of the Treaty on the Functioning of the EU (“TFEU”)2. Any such State aid would have had to have been notified to the European Commission in advance, as required by Article 108(3) TFEU.
 
Essentially, the claim was that a rational private investor in the shoes of the Council would not have made the loan in the amount and on the terms (fixed interest rate of 5% and a 41 year term) agreed with ACL.
 

Coventry’s stadium-move to the Ricoh Arena

The background to the provision of the loan is the sorry tale of Coventry’s decline following its 2001 relegation from the Premier league (losing to Aston Villa on the final day of the season after taking a two-goal lead3).
 

 

Before that had happened, Coventry had entered into a joint venture with the Council to develop a new stadium, the Ricoh Arena.4 The Council was the freeholder of the stadium and ACL, the joint venture vehicle, was the long leaseholder from whom Coventry itself would take a lease. Coventry owned half of ACL but a few years after their 2001 relegation it sold its interest in ACL, encompassing the right to stadium revenues, to relieve financial pressure (see paragraph 9 of the Judgement). Nevertheless, the development of the Ricoh Arena went ahead and Coventry began to play home games there from the 2005-6 season.
 

Battle for control of the stadium revenues

The dispute over the loan in question was precipitated by Coventry’s ever worsening financial situation leading up to their catastrophic relegation to League One in 2012. The judge found that Coventry “had been seriously mismanaged5. The club’s owners wanted access to the much needed stadium revenues. It was thought that if ACL were in financial difficulty it would weaken ACL’s position and allow the stake in ACL – with the attendant revenues – to be reclaimed a cut price. With this in mind, Coventry went on rent strike from April 20126. This caused acute difficulties to ACL.
 
The way out for ACL was the loan from its 50% shareholder, the Council. This scuppered the owners’ plan. Ultimately, ACL got judgment for rent arrears and applied to put Coventry into administration. Its assets were sold by the administrator and the club was then put into liquidation. The owners wrote-off a £50m investment7. The reconstituted club currently plays its home games in Sixfields Stadium in Northampton (shared with Northampton Town FC).8
 

Dispute over the legality of the loan

Had the owners succeeded, a favourable judgment would have founded the basis for them recovering some of their losses.
 
However, in finding that the loan did not constitute State aid, Hickinbottom J noted the EU caselaw that private investors can be guided by a longer-term view of profitability. It was not irrational to loan money to ACL despite it failing because on the specific facts of the case, “the failure of [ACL] was temporary, brought on by the refusal of [Coventry] to pay any rent”.9 The judge also took into account that the Council was not a disinterested investor but an investor with a 50% stake in ACL and so with an interest in ensuring a restructuring of ACL’s business. Although by 2012 the stadium had significantly depreciated in value, he preferred ACL’s valuation of the lease of the stadium. 
 
The judge found that the major driver for the Council was the protection of its commercial interest in ACL; indeed, the owners did not pursue all of their original claims concerning alleged ulterior motives of the Council vis-à-vis the club’s owners.
 

Commercial lessons from Coventry’s plight

While the judgment necessarily focused on the State aid law argument, in his 46 page ruling, Hickinbottom J clearly sets out the complex financial arrangements that were put in place (and subsequently unravelled) and the commercial manoeuvrings relating to Coventry’s move from Highfield Road stadium and the operation of the Ricoh Arena. The judgment repays reading for anyone interested in the financial structures underpinning a modern football club and the machinations involved in exercising control over its revenues.
 
A key lesson for those negotiating commercial contracts for football clubs that emerges from the factual background is to craft the terms so as to ensure that the effect of unwelcome contingencies, such as relegation, are taken into account.



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Author

Marc Delehanty

Marc Delehanty

Marc is a barrister at Littleton Chambers, called to the Bar following First Class degrees in Mathematics and Law. His practice areas (commercial, employment and administrative law) encompass the broad range of disputes that arise in a sporting context. The Legal 500 2014 directory rates Marc as one of the leading junior barristers in the country for Sports Law, describing him as "highly regarded in this area”.

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