Editor’s Note: Shervine Nafissi (@SNafissi) is a Phd Student in sports law and teaching assistant in corporate law at University of Lausanne (Switzerland), Faculty of Business and Economics (HEC).

Introduction

The factual background

The dispute concerns a TPO contract entitled “Economic Rights Participation Agreement” (hereinafter “ERPA”) concluded in 2012 between Sporting Lisbon and the investment fund Doyen Sports. The Argentine player was transferred in 2012 by Spartak Moscow to Sporting Lisbon for a transfer fee of €4 million. Actually, Sporting only paid €1 million of the fee while Doyen Sports financed the remaining €3 million. In return, the investment company became the owner of 75% of the economic rights of the player.[1] Thus, in this specific case, the Portuguese club was interested in recruiting Marcos Rojo but was unable to pay the transfer fee required by Spartak Moscow, so that they required the assistance of Doyen Sports. The latter provided them with the necessary funds to pay part of the transfer fee in exchange of an interest on the economic rights of the player.

Given that the facts and circumstances leading to the dispute, as well as the decision of the CAS, were fully described by Antoine Duval in last week’s blog of Doyen vs. Sporting, this blog will solely focus on the decision of the Swiss Federal Supreme Court (“FSC”) following Sporting’s appeal against the CAS award. As a preliminary point, the role of the FSC in the appeal against CAS awards should be clarified.

Scope of the Federal Supreme Court’s review as for the international arbitral awards

Since the CAS has its seat in Lausanne, Switzerland, it has adopted its procedural rules in accordance with the 12^th chapter of the Swiss Private International Law Act[2], which provides a general legal framework for international arbitration in Switzerland. Under the relevant provisions of the Swiss PILA, arbitral awards are final upon their notification and can only be challenged before the Swiss Federal Supreme Court on a very limited number of grounds in order to prevent the parties to arbitrate again the dispute before a state Court.[3] Besides, in Swiss law, there is only one level of appeal against an international arbitration award before the Federal Supreme Court.[4] Thus, the FSC “ensures a uniformity in the review of arbitral awards and the development of a consistent court practice” be being the only one instance for appeals.[5] In this way, “arbitral awards are always reviewed by the same State court, ensuring consistency”.[6]

Setting aside the award may only be possible where the sole arbitrator has been improperly appointed or where the arbitral tribunal has been improperly constituted, where the arbitral tribunal has wrongly accepted or denied jurisdiction, where the arbitral tribunal has ruled beyond the claims submitted to it, or failed to decide one of the claims, where the principle of equal treatment of the parties or their right to be heard in an adversary procedure has not been observed, where the award is incompatible with public policy.[7] In casu, the examination of Sporting Lisbon's claims is based on the incompatibility of the award with public policy within the meaning of Art. 190 para. 2 let. e PILA.

As a reminder, an award is inconsistent with public policy if it disregards those essential and broadly recognized values which, according to the prevailing values in Switzerland, should be the founding stones of any legal order.[8] “An award is contrary to substantive public policy when it violates some fundamental principles of the law applicable to the merits to such an extent that it is no longer consistent with the notions of justice and system of values; among such principles are, in particular, the sanctity of contracts, compliance with the rules of good faith, the prohibition of abuse of rights, the prohibition of discriminatory and confiscatory measures, as well as the protection of incapable persons. (…). If it is not easy to define substantive public policy positively and to set its boundaries with precision, it is easier to exclude one item or another from it. The entire process of interpreting a contract and the legal consequences logically drawn therefrom are excluded; so is the interpretation of the statutory provisions of a private law body by an arbitral tribunal. Furthermore, it is not sufficient to show incompatibility with public policy – a concept more restrictive than arbitrariness – by showing that the evidence was wrongly assessed, a factual finding manifestly wrong, or a rule of law clearly violated”.[9]

Thus, the examination of this international arbitral award by the FSC is limited to the question of the compatibility of the said award with public policy, a notion more restrictive than arbitrariness.

The judgement of the Federal Supreme Court of Switzerland - the merits

Sporting Lisbon’s defence

First, the Portuguese club tried to demonstrate that the CAS award violated material public policy by giving effect to one-sided and usurious contracts including excessive restriction.[10]

The claim is based on figures from the ERPA contract. Considering that Doyen Sports invested €3 million at the beginning, the company managed in all cases with 12.36% of minimum return insofar as it activated the Put Option, or 40% if the company requested payment of the Minimum Interest Fee. These two scenarios did not take into account the possibility that the player concerned by the ERPA be transferred with a capital gain, thus enabling Doyen Sports to get an investment return of about 400%, as was the case for the transfer of Marcos Rojo to Manchester United.

Sporting Lisbon compared this investment return to its own, as it would only be left with €1 million, i.e. the 5% of the transfer fee once the 75% for Doyen Sports’s share and the 20% for Spartak Moscow’s share deducted. Therefore, according to the Portuguese club, the ERPA, which it describes as a partiary loan[11], infringes the provisions on usury, would be a one-sided contract and, accordingly, would be null and void under Swiss law.[12]

Secondly, Sporting Lisbon explained that it gave up its freedom of action in an unacceptable manner under and art. 27 of the Swiss Civil Code (protection of one’s legal personality against excessive restrictions).[13] Indeed, some clauses of the ERPAs required Sporting Lisbon to accept a transfer offer deemed sufficiently high, if not Sporting would be forced to pay Doyen Sports 75% of the proposed transfer fee without receiving any fee, precisely because of the absence of any transfer.[14] According to the Portuguese club, Doyen Sports was not only in a position to ask Sporting Lisbon to transfer Marcos Rojo even if the club preferred to keep the player in its squad for purely sporting reasons, but also to require the club to make its best efforts to transfer the player before the end of his employment contract. Sporting Lisbon further underlined that the ERPA is made up of clauses stipulating that the club, conscious of the harshness and the severity of the consequences of certain clauses, takes the commitment to consider these clauses as fair and a necessary condition to Doyen’s interest in the player’s economic rights.

Thirdly, the club considers that the award of the CAS violates material public policy because it gives effect to contracts that seriously disregard the personality rights and the fundamental rights of the players. ERPA contracts would seriously undermine the players by putting pressure on the club by various clauses, including a clause obliging it to pay to Doyen Sports a minimum amount of €4.2 million (the Minimum Interest Fee) in the event that Marcos Rojo is not transferred to another club before the end of his employment contract. Such a clause would force Sporting to do everything possible to encourage the player to leave the club before the expiration of the employment contract. Thus, the player, even though he is not a party to the contract, would see his right to free economic development restricted, if not annihilated, in particular his ability to take the appropriate decisions for his sporting career and to freely choose the club for which he intends to play.[15] As regards fundamental rights, Sporting Lisbon argues that the ERPA-mechanism allows a third party to indirectly decide whether the player concerned by the ERPA must continue to play for his club or whether he must accept the conclusion of a contract with another club. Such a situation would violate the prohibition of forced labor set out in Art. 4 para. 2 ECHR and, more generally, human dignity.[16]

Finally, according to Sporting Lisbon, there should be a shared conception of moral standards in the field of sport in general and football in particular. These standards should not only prevent players from becoming an object of speculation, but also prevent investors to take advantage of the financial difficulties of the clubs. By taking advantage of clubs in financial difficulty, investors make indecent profits, while the clubs lose control of the situation from the sporting point of view. The standards would help to strengthen contractual stability, which is a cardinal principle of the transfer system.

The FSC’s Decision

The FSC first considered the figures provided by Sporting Lisbon with regard to the calculation of the minimum return of 12.36% (insofar as the Put Option is activated) and 40% (in case Doyen requests payment of the Minimum Interest Fee), and found that these figures were based on a calculation over three and five years respectively. Consequently, if the calculation of the investment return was made over one year, this would have given interest rates lower than 15%, which would be lawful under Swiss law. In addition, the arguments based on Doyen Sports’ investment return of about 400% with the transfer of Rojo were considered as irrelevant. These figures cannot be qualified as interests, but only as a kind of remuneration of the lender, which depends on the amount of the transfer fee, thus being similar to a partiary loan paid by giving a share to the lender on the profit realized by the borrower in a subsequent transfer operation.[17] Therefore, assuming that the relationship between the two parties is a lender-borrower relationship, the fact that Doyen Sports could acquire 75% of the future transfer fee of the player for whom it had initially financed the transfer at Sporting Lisbon for an equivalent share (i.e. €3 million out of €4 million), is not an usurious, one-sided contract, nor immoral.

Finally, the particular aspect of this type of contract relates to the enormous capital gains that can be made with the transfer operation, in casu about 400%. Nevertheless, the FSC considers that this capital gain depends on predominantly random elements.[18] The fact that Marcos Rojo played well at the 2014 World Cup, and that the Argentine selection reached the final of this competition, could not be foreseen. Thus, the sudden increase in his value on the transfer market is totally uncertain and cannot be invoked as a claim against Doyen Sports.[19] Moreover, the FSC recalled that the opposite situation was also possible, i.e. a drastic loss of the value of the player based on his performance in selection and club. These elements can therefore not be objectively taken into account by the parties. At the end of its reasoning on this issue, the FSC took the liberty to criticize Sporting Lisbon by saying that the club would not have been offended by such capital gain if it had been the sole beneficiary of the transfer fee.[20]

Secondly, the FSC analyzed the argument put forward by Sporting Lisbon that the ERPA contract would seriously undermine its freedom under Art. 27 CC. It should be kept in mind that, according to case-law, a breach of that provision does not necessarily mean a violation of public policy. Such a violation is instead conceivable only in case of a blatant and grievous violation of a fundamental right.[21] It must be considered in this respect that a contractual limitation of economic freedom is disproportionate within the meaning of Art. 27 (2) CC only when the debtor submits to someone else’s arbitrariness, gives up his economic freedom or restricts it in such a way that the foundation of his economic existence is jeopardized.[22] In casu, the FSC recalls that Sporting Lisbon is not inexperienced in the sharing of economic rights insofar as Marcos Rojo was not the only Sporting player affected by this type of contract.[23] It was the club that took the initiative to contact Doyen Sports to request its financial assistance. The conclusion of the contract was also preceded by lengthy negotiations during which the club was assisted by experts and lawyers. Finally, the dispute with Doyen Sports concerning Marcos Rojo was not in itself able to deteriorate the club’s financial situation, and thus preventing it from pursuing its economic activities.

Thirdly, the FSC examined the claim concerning the personality and fundamental rights of the players concerned by an ERPA.[24] The judges considered that the club limited itself to purely theoretical reflections without, however, demonstrating in concrete terms how the ERPA contract would seriously undermine the aforementioned rights. To the extent that the FSC has limited power to review international arbitral awards, it is hardly theoretical arguments that will demonstrate that a CAS award violates public policy according to Art. 190 para. 2 let. e PIL. Moreover, Sporting Lisbon’s argument concerning the personality and fundamental rights of Marcos Rojo is incompatible with the fact that the club has used the TPO mechanism for several other players. Again, the FSC questioned the sincerity of this argument had Sporting Lisbon received the full amount of the transfer fee. Furthermore, although the FSC recognizes the quality of the club to report a violation of the player’s personality rights[25], it is not established by the judges that the players themselves have complained of any such violation. On the contrary, when he signed for Manchester United, Marcos Rojo would have welcomed the fact of joining one of the best clubs in the world. Marcos Rojo, who was earning the equivalent of €1.14 million in Sporting Lisbon, currently earns about €4 million per year at the English club. Therefore, it is somewhat bold on the part of Sporting Lisbon, according to the FSC, to put forward the prohibition of forced labor or the violation of human dignity in such circumstances.

Finally, The FSC did not want to admit a notion of moral standards in the field of sport in general, and football in particular, in relation to the definition of the concept of material public policy.[26] Apart from the fact that it seems difficult to determine what is a moral standard in football, to adapt the concept of material public policy in relation to a particular activity and, more importantly, to a particular branch of the activity concerned - in this case, sport or football - would in some way soften the force and reduce the scope of the concept by leaving to FIFA the task of defining the notion of morality proper to football. The result would be a dilution of the notion of material public policy and, consequently, an increased difficulty in defining the contours of this concept, not to mention the formation of a casuistry that is not favorable to the predictability of the law.

In conclusion, the FSC recalls that the high mobility of professional footballers and their frequent transfers are caused by FIFA regulations, in particular the rules relating to the maximum duration of an employment contract binding a Player to a football club and the conditions of a subsequent transfer of that same player to another club, but also by the manner in which the transfer system is applied.[27]

For all these reasons, the Federal Supreme Court rejected Sporting Lisbon’s appeal against the CAS award of 21 December 2015.

Conclusion

Following the award of the CAS, the FSC confirmed the validity of the ERPA contracts under Swiss law. The mechanisms that make up the agreements signed by Doyen Sports and other companies that invest in the player transfer market are based on traditional legal instruments, including the assignment of future receivables. Thus, from a Swiss legal point of view, TPO agreements do not undergo the same moral reprimand administered by the highest football bodies, such as FIFA, UEFA or FIFPro.

Consequently, the legal battle that resulted in a victory for the “pro-TPOs” and the model proposed by the third parties, challenges the legitimacy of FIFA regulations and, more specifically, Art. 18^ter RSTP. The arguments used by Sporting Lisbon to justify the early termination of the ERPA contract are very similar, or even identical, to those presented by FIFA to justify the formal ban of the TPO in May 2015.

Nevertheless, the fact that Swiss contract law is quite liberal does not exclude the invalidation of an ERPA for material public policy reasons. As we have seen with Football Leaks, the TPO mechanism can constitute a definite threat to the financial situation of clubs, such as FC Twente. It all depends on the case brought before the courts. Indeed, the case of Sporting Lisbon was not necessarily the best opportunity to challenge the validity of the contract, as the action of Art. 21 CO was time-barred (as mentioned in the previous blog on the initial CAS award) and the player joined, voluntarily, one of the best clubs in the world.

I believe that Art. 21 of the Swiss Code of Obligations (unfair advantage) as well as Art. 27 CC and 28ss CC (personality rights) may, depending on the case before the CAS, be a legal basis for the invalidation of the contract. To the extent that a dispute arises between an inexperienced club and an investment company, the application of Art. 21 CO is not totally excluded. In addition, if a player whose economic rights have been assigned to a third party is obliged to leave the club against his will or even join a club for whom he does not wish to play, the provisions on personality rights may find an echo at the CAS.

All eyes are on other courts where ‘TPO-cases’ are pending. Most importantly, the CAS should soon issue an award in the Doyen Sports and FC Seraing United v. FIFA case. As a reminder, in January 2015, the Belgian club and Doyen Sports concluded an ERPA contract despite the FIFA ban being enacted in December 2014. As a result, the FIFA Disciplinary Committee sanctioned the Belgian club with a transfer ban (for four complete and consecutive registration periods) and a fine of CHF 150.000 for breaches relating to the third-party ownership and third-party influence. The CAS is therefore seized of an appeal against a disciplinary sanction imposed by FIFA and will be obliged to take Art. 18^ter RSTP into consideration and to judge whether the sanction is justified. It remains to be seen whether the arguments based on EU law by Doyen Sports and FC Seraing United will be taken into consideration. Indeed, both parties also filed a complaint, based on EU law, before the Belgian Courts to challenge the TPO ban.[28] For now, all these procedures have failed. It will be interesting to see how the CAS will judge the Seraing case that relates to the same mechanism although the two cases are fundamentally different. The Rojo case dealt with a contractual dispute before the ban, while the Belgian club and Doyen Sports challenged a sanction issued by FIFA and the ban as such.

In any event, TPO deals have rarely been so much under the public spotlight since their ban, and the legal suspense goes on…

[1]     Economic rights are the rights to future transfer fees from the transfer of the player to another club, and, unlike federative rights, economic rights can be divided between multiple parties. See, among others, W. Tyler Hall, After the Ban: The Financial Landscape of International Soccer After Third-Party Ownership, Oregon Law Review, Vol. 94, 2015, pp. 179 – 221.

[2]     Hereinafter “PILA”.

[3]     Mavromati, Despina, The Role of the Swiss Federal Tribunal and Its Impact on the Court of Arbitration for Sport (CAS), 29 September 2016.

[4]     Antonio Rigozzi, L'arbitrage international en matière de sport, Bâle, (Helbing & Lichtenhahn), 2^ème édition, 2005.

[5]     Niederer Kraft & Frey, Swiss Arbitration – Practical Aspects and New Developments, Publication 19, 2015, p. 28.

[6]     Ibidem.

[7]     Art. 190 para. 2 PILA.

[8]     ATF 132 III 389 consid. 2.2.3.

[9]     Judgment of the FSC, 4A_116/2016, December 13rd 2016, par. 4.1. The English translation is based on the Judgment of the FSC, 4A_304/2013, March 3rd 2014, par. 5.1.1 made by http://www.swissarbitrationdecisions.com (emphasis added).

[10]    Judgment of the FSC, 4A_116/2016, December 13rd 2016, par. 4.2.1.

[11]    Under Swiss law, the “partiary” loan is a form of loan in which the remuneration of the lender consists in a share of the borrower’s earnings. The “partiary” loan has a random element: the remuneration of the lender depends on the success of a specific business or transaction of the borrower. In casu, the ERPA can be qualified as a “partiary” loan insofar as the transaction depends on the profit made by Sporting in case of a transfer of Marcos Rojo and provides for a share of Doyen in Sporting’s success. See, Bovet / Richa, CO 312 N 6 in : Commentaire romand Code des obligations I, Pierre Tercier / Marc Amstutz (édit.), 2^ème édition, Bâle, 2012 ; Pierre Tercier / Laurent Bieri / Pascal G. Favre, Les contrats spéciaux, 5^ème édition, Genève Zürich Bâle (Schulthess) 2016, N 2539.

[12]    Judgment of the FSC, 4A_116/2016, December 13rd 2016, par. 4.2.1.

[13]    Hereinafter “CC”.

[14]    Judgment of the FSC, 4A_116/2016, December 13rd 2016, par. 4.2.1.

[15]    Judgment of the FSC, 4A_116/2016, December 13rd 2016, par. 4.3.1.

[16]    Ibidem.

[17]    Judgment of the FSC, 4A_116/2016, December 13rd 2016, par. 4.2.3.

[18]    Ibidem.

[19]    Ibidem.

[20]   Judgment of the FSC, 4A_116/2016, December 13rd 2016, par. 4.3.3.

[21]    Judgment of the FSC, 4P.12/2000, June 14^th 2000, par. 5b. aa.

[22]    Ibidem.

[23]    In March 2013, 35 to 40 players' economic rights were shared with various investment funds. See CAS 2014/0/3781, par. 217.

[24]   Judgment of the FSC, 4A_116/2016, December 13rd 2016, par. 4.3.3.

[25]    According to the exceptio de jure tertii principle, see Judgment of the FSC, 4A_304/2013, March 3rd 2014, par. 3.

[26]   Judgment of the FSC, 4A_116/2016, December 13rd 2016, par. 4.2.3.

[27]    Judgment of the FSC, 4A_116/2016, December 13rd 2016, par. 4.3.3.

[28]   Patricia Moyersoen, La décision du TAS du 21 décembre 2015 à propos des contrats de TPO passés entre le Sporting Club du Portugal et la société Doyen Sports Investments, http://www.droitdusport.com/; http://www.rfc-seraing.be/audience-au-tas-de-lausanne/.

This is the first part of a blog series involving the Real Madrid State aid case.

Apart from being favoured by many of Spain’s most important politicians, there have always been suspicions surrounding the world’s richest football club regarding possible financial aid by the Madrid City Council. Indeed, in the late 90’s a terrain qualification change by the Madrid City Council proved to be tremendously favourable to the king’s club. The change allowed Real Madrid to sell its old training grounds for a huge sum. Though the exact price for the grounds remains unknown, Real Madrid was suddenly capable of buying players like Figo and Zidane for record fees. However, the European Commission, even though agreeing that an advantage was conferred to the club, simply stated that the new qualification of the terrain in question does not appear to involve any transfer of resources by the State and could therefore not be regarded as State aid within the meaning of article 107 TFEU.

Agreements between the club and the Council have been a regularity for the last 25 years.  A more recent example concerns an agreement signed on 29 July 2011 (Convenio29-07-2011.pdf (8MB). The agreement regularizes two earlier agreements between the Council and Real Madrid dating from 1991 and 1998 respectively. The commitments deriving from those earlier agreements were not followed by the relevant parties and therefore had to give way to a new agreement. A closer look at the 29 July 2011 Agreement exposes a bizarre chain of events. It turned out that in 1998 Real Madrid transmitted an undivided half of their old training grounds to the municipality. Apart from a large sum of money, the club was to receive a number of terrains spread out over the municipality, including a terrain located in the area called Las Tablas valued at €595.194 in 1998. However, due to its qualification for sporting usage, the Council concluded in 2011 that the parcel could not be transferred to the club due to the fact that Madrid’s urbanity laws only permit a transfer of urban or urbanizable terrains. For that reason, the Council agreed to compensate the football club not for the original value of €595.194 but for a staggering €22.693.054,44! Real Madrid was not compensated in the form of a sum, but rather it was presented with a packet of terrains including four terrains of a total area of 12.435 m/2 in the street Mercedes Arteaga in the Carabanchel district of Madrid.

The year 2011 also saw a second agreement between the Council of Madrid and the football club, this time concerning construction works on the Real Madrid stadium Santiago Bernabéu. This agreement, dating from November 2011, is known as operation Bernabeú-Opañel and includes the following plans. The Council is to transfer to the club a terrain constituting a 12.250 m/2 buildable surface which borders the west-side of the Bernabéu stadium. This acquirement permits Real Madrid to cover the stadium with a roof, to build a shopping centre and a hotel on the façade situated on the Paseo de la Castellana (one of Madrid’s most important streets). In return, the club firstly agreed to transfer to the Council the shopping centre Esquina del Bernabéu, which is situated at the South-East-side of the stadium with a buildable surface of 6.858 m/2. The Council would then demolish the shopping centre and convert it into a public park. Secondly, the club is to transfer back to the Council part of the four terrains located in the street Mercedes Arteaga that it received as part of the 29 July 2011 Agreement.  In addition to the transfers of the old shopping centre and the terrains located in the street Mercedes Arteaga, Real Madrid is also to pay €6.6 million to the Council. The Council, however, encountered an obstacle in its own urban laws. The Plan General de Ordenación Urbana de Madrid de 1997 (PGOU) did not permit private parties, like Real Madrid, to construct on public terrains owned by the Council. Therefore, on 16 November 2012, the Government of the autonomous region of Madrid announced that the PGOU is to be modified ad hoc for the operation Bernabeú-Opañel.

By means of the operation Bernabeú-Opañel, Real Madrid expressed that it hopes to “convert the Club in a sporting institution of reference in the world. The aim is for the stadium to have a maximum level of comfort and services superior to the most modern and advanced sporting stadiums in the world” (PropuestaRealMadrid.pdf (914.2KB)). According to the Council, the operation will not only improve sporting and leisure facilities in the city, it will also create up to 9.546 m/2 of “green zones”. Moreover, the investment for the construction works will be borne only by Real Madrid and it is expected that the construction works will give employment to more than 2 000 people and the exploitation to 600 people.

In 2012, the ecological movement Ecologistas en Acción found several legal irregularities with regard to the 29 July Agreement operation Bernabeú-Opañel and (unsurprisingly) concluded that the agreements appeared to be very beneficial for Real Madrid. It therefore started legal proceedings in front of the Spanish administrative Court claiming that the ad hoc modification of the PGOU was illegal. It would later on launch on appeal in front of the Tribunal Superior de Justicia de Madrid, or Madrid High Court (TSJM-Order-31-07-2014.pdf (112.3KB)). Simultaneously, it informed the European Commission of potential unlawful State aid granted by the Council of Madrid to Real Madrid. To Spain’s outrage, on 18 December 2013, the Commission declared that it had enough reasons to believe that the incriminated transactions might involve State aid and launched a formal investigation in accordance with Article 108(2) TFEU. Concretely, the Commission expressed the following concerns:

1) The Commission doubts whether it was impossible for the Council of Madrid to transfer the Las Tablas property to Real Madrid;

2) The Commission doubts that a market value of the Las Tablas plot of land has been sought;

3) The Commission doubts the market conformity of the value of the properties which were transferred to Real Madrid by the 2011 Agreement and at the occasion of the subsequent further exchange of land around the Bernabéu Stadium, and;

4) The Commission doubts that there is an objective of common interest, which could justify selective support to a very strong actor in a highly competitive economic sector. 

The Commission’s doubts seem, in light of the facts at hand, reasonable. To decide whether or not the land transactions qualifies as unlawful State aid, however, the four cumulative criteria of Article 107(1) TFEU need to be fulfilled. (1) The aid must confer an economic advantage on Real Madrid; (2) it must be granted by a Member State or through State resources; (3) the advantage must be selective and distorts or threatens to distort competition; and (4) it must affect trade between Member States.

Advantage to Real Madrid over its competitors

As the Commission pointed out in paragraph 21 of its notice initiating the infringement procedure against Spain, “Real Madrid appears to enjoy an economic advantage from the fact that a plot of land, which at the time of its acquisition was valued at €595,194, appears 13 years later, in an operation to offset mutual debts, with a value of more than €22 million”. Furthermore, there are also doubts regarding the market conformity of the lands transferred in the operation Bernabéu-Opañel. In situations where the public authorities wish to sell public property to private investors, it should make sure that the revenue obtained from the sale is comparable to market level. This criterion is also known as the “market economy vendor principle”. In accordance with the Land sale Communication, should the public authorities wish to avoid any advantage to the recipient over its competitors during a land sale transaction, it should apply one of the two following procedures: (1) an unconditional bidding procedure or (2) a procedure where the land is valued by one or more independent asset valuers prior to the sale negotiations. The Court of Justice has ruled that other methods may also achieve the same result, but in order to comply with EU State aid rules, the national provisions establishing rules for calculating the market value of land must in all cases lead to a price as close as possible to the market value.[2] Special obligations for the buyer, such as urban planning requirements, do play a role when determining whether or not the land was sold at market value. Furthermore, land transfer deals, which often consist of more than just one land transaction, have to be scrutinized in their entirety.[3] Therefore, to determine whether an advantage was conferred to Real Madrid, both agreements between the club and the Council have to be take into account with a special focus on the valuation methods used.

In 1998, the valuation for the terrain in Las Tablas (€595,194) was done by the administration of Madrid, on the basis of legislation which offers a technique to determine the value of urban real property. The calculated value for the same terrain in Las Tablas in 2011 amounted to €22.693.054,44. According to a valuation report released by the Municipal Valuation Department, the value was calculated in accordance the same application rules. Yet it has to be borne in mind that the Municipal Valuation Department forms part of the Área de Gobierno de Urbanismo y Vivienda del Ayuntamiento de Madrid. Not only is the Área de Gobierno de Urbanismo y Vivienda the main public authority regarding urban planning in Madrid, it is together with Real Madrid the main party in the 2011 Agreement itself.

Real Madrid was not compensated in the form of a payment, but rather it was presented with another packet of terrains valued at €19,972,348.96. In the valuation report released by the Municipal Valuation Department, a list is included with average terrain values per district calculated by the independent appraiser Tasamadrid. In continuation, the Municipal Valuation Department applied a formula based on its own legislation to determine the final value of the terrains. This packet of terrains included land in the street Mercedes Arteaga, valued at €4,360,862 which were transferred back to the municipality in the operation Bernabéu-Opañel.

The operation Bernabéu-Opañel also included the club transferring the old shopping centre Esquina del Bernabéu and added a payment of €6,6 million. A second valuation report indicates that the value of the Esquina del Bernabéu is €3,861 per square meters passed on the average values of terrains found in adjacent streets. Furthermore, the Council “requalified” the terrain between the Bernabéu stadium and the street Paseo de la Castellana by ad hoc modifying the local urban laws (PGOU) before transferring it to Real Madrid. The value of this terrain is also calculated in the second report and ads up to €1,208 per square meter. Even though two of the terrains in question can be found in the same area, the value per square meter of the Esquina Bernabéu is much higher (€3,861) as compared to the value of the land between the Bernabéu stadium and the street Paseo de la Castellana (€1,208). True, the terrain with the Esquina del Bernabéu has already been built on, thereby increasing the value, but one should keep in mind that the operation Bernabéu-Opañel consists of demolishing the Esquina del Bernabéu and turning it into a green zone. On the other, the other terrain will be used for the construction of a hotel and a new shopping centre. Secondly, a quick glance at other real estate transfers in the same area of Madrid shows that the value of the terrains is in fact much higher. In 2012, the Picasso tower was purchased by a private firm for €400 million, or €5000 m/2. Today, the building Torre Titania can be bought for €11,000 m/2 and the building Castellana 200 is for sale for €150 million.

With all the above in mind, one could legitimately get the feeling that the actual aim of the Agreement of 29 July 2011 was to pave the way for the operation “Bernabéu-Opañel”, as some media suggested. Unlike in the Konsum Nord case, where the General Court held that the presence of a link between different transactions could mean that the measure in question does not constitute State aid, the link between the agreements in the Real Madrid case only increases suspicions regarding unlawful State aid. Furthermore, the Council of Madrid has also been inconstant regarding its valuation methods. The value of the terrain in Las Tablas was calculated without an independent appraiser and the value of the Esquina del Bernabéu was calculated using the average value of terrains found in adjacent streets. In short, there are good reasons to believe that the transactions were made in order to provide a financial advantage to Real Madrid.

The remaining three criteria of Article 107(1) TFEU and possible justifications will be discussed in an upcoming blog post.

[1] Notes are omitted. A comprehensive article can be accessed at Oskar van Maren, "The Real Madrid case: A State aid case (un)like any other?".

[2] Case C-239/09 Seydaland Vereinigte Agrarbetriebe [2010] ECR I-13083, §33-35

[3] Case T-244/08 Konsum Nord ekonomisk förening v Commission [2011] ECR II-0000, §58