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The EU State aid and sport saga: The Real Madrid Decision (part 2)

This is the second and final part of the ‘Real Madrid Saga’. Where the first part outlined the background of the case and the role played by the Spanish national courts, the second part focuses on the EU Commission’s recovery decision of 4 July 2016 and dissects the arguments advanced by the Commission to reach it. As will be shown, the most important question the Commission had to answer was whether the settlement agreement of 29 July 2011 between the Council of Madrid and Real Madrid constituted a selective economic advantage for Real Madrid in the sense of Article 107(1) TFEU.[1] Before delving into that analysis, the blog will commence with the other pending question, namely whether the Commission also scrutinized the legality of the operation Bernabeú-Opañel under EU State aid law. By way of reminder, this operation consisted of Real Madrid receiving from the municipality the land adjacent to the Bernabéu stadium, while transferring in return €6.6 million, as well as plots of land in other areas of the city. 

The Commission’s ‘pragmatic’ solution regarding the Operation Bernabéu-Opañel

As was explained in part 1 of this blog, during the formal investigation period (i.e. from 18 December 2013 until 4 July 2016), the operation Bernabéu-Opañel (referred to by the Commission as the ‘2011 urban development agreement’) was firstly suspended by the Madrid High Court (31 July 2014) and later completely annulled (2 February 2015) by that same Court. It is worth reiterating that the Court believed there to be a sufficient link between the 2011 settlement agreement and the operation Bernabéu-Opañel in order to examine the agreements together.[2]

The Commission, however, was actually surprisingly brief on this matter. As can be read from paragraphs 79 and 80 from the decision, “(a)s a result of (the judgment of 2 February 2015), the 2011 urban development agreement has been cancelled between the parties. Consequently, that agreement will no longer be implemented so that the Commission assessment of the 2011 urban development agreement has become without object. The present Decision therefore only examines the 2011 settlement agreement under State aid rules”.[3]

From an EU State aid law perspective, declaring the operation Bernabéu-Opañel “without object” makes sense. With the agreement annulled, there has been no transfer of resources from the State to Real Madrid of any sorts, nor could Real Madrid have obtained an economic advantage from an annulled agreement. Therefore, removing all the problematic aspects of the agreement from a State aid perspective. Yet, it does remain slightly ironic that that the ‘standstill obligation’ was applied to an agreement that was later on never analysed by the Commission. True, the subsequent annulment (based solely on Spanish administrative law) made Commission scrutiny redundant, but one does wonder what the Commission would have decided had the Madrid Court not annulled the operation. 

The 2011 settlement agreement under Article 107(1) TFEU

By way of reminder, in the opening decision, the Commission primarily doubted whether:

1) It was impossible for the Council of Madrid to transfer the Las Tablas property to Real Madrid;

2) This legal impossibility automatically led to an obligation for the Council of Madrid to compensate Real Madrid;

3) A market value of the Las Tablas plot of land has been sought;

4) And whether the value of the properties which were transferred to Real Madrid by the 2011 settlement agreement were market conform.[4]

In reaction to the opening decision Spain argued that transferring the plot in Las Tablas was illegal based on the local urban law 9/2001 of 2001, this interpretation was later confirmed by the Spanish High Court in 2004. Yet, this was already the case in 1998 when the Madrid Council agreed to transfer the land to Real Madrid.[5] Given that Real Madrid had legitimate expectations that it was the owner of the land, it has suffered damages as a consequence of the transfer’s invalidity. As a consequence, Real Madrid needed to be compensated by an amount equal to the market value of Las Tablas in 2011, namely €22.693.054,44. Since this sum was calculated on the basis of an objective model set by the Ministry of Economy and Industry[6], Spain considered that it matched the market value and could not constitute State aid.

The economic advantage criterion according to the market economy operator principle

The Commission’s State aid assessment essentially revolved around the question whether the 2011 settlement agreement between the Council of Madrid and Real Madrid resulted in an economic advantage to the benefit of Real Madrid.[7] As is standard Commission practice[8], “to determine whether a particular transaction carried out by a public authority has been carried out in line with normal market conditions, it is necessary to compare the behaviour of that public authority with that of a similarly situated hypothetical “market economic operator” operating under normal market conditions. If the “market economy operator” would have entered into that transaction under similar terms, then the presence of an advantage may be excluded as regards that transaction”.[9] Referring to EU case law[10], the Commission argued that a prudent market operator would carry out his own ex ante assessment on the basis of sound economic and legal evaluations, when entering such transactions. Public authorities cannot claim that evaluations made after the transaction, based on a retrospective finding that it was actually economically rational, like the Madrid Council did in this case, is the course of action that a prudent market operator would take under similar circumstances.[11]

In continuation, the Commission indicated the two criteria it used in order to determine whether the amount of compensation offered to Real Madrid was in line market conditions:

1) The probability that the Madrid Council would be held liable for its inability to perform its contractual obligations;

2) And the maximum extent of its financial exposure resulting from finding such a liability.[12]

Though these criteria are clearly cumulative, it should be noted that the Commission did not support the criteria with a reference to case law, its own decisional practice or documents of (soft) law. Be that as it may, based primarily on these criteria the Commission concluded that a market economy operator in a similar situation to the Madrid Council would not have entered into the 2011 settlement agreement.

As regards the first criteria, the Commission argued that the Madrid Council should have sought legal advice so as to establish the likelihood that it was indeed liable for not performing its contractual obligations. Without legal advice, the Commission found it hard to believe that a prudent market operator would have assumed full legal liability, especially considering “the legal uncertainties surrounding the potential impossibility to perform (the land transaction), the legal consequences of that potential impossibility, and the Madrid Council’s ability to remedy that legal impossibility through other means”.[13] The Commission seems definitely correct in questioning the chain of events that eventually led to the compensation of more than €20 million. Even though, as Spain now claims[14], it was already legally impossible to transfer the land in 1998, why did the Madrid Council sign this agreement in the first place? After the introduction of local urban law 9/2001, shouldn’t the parties have been aware of the legal impossibility at that moment, or in any case after the 2004 judgment of the Madrid High Court? Consequently, why did the Council wait until 2011 before compensating Real Madrid? In paragraphs 103 and 104, the Commission also drew an interesting comparison with the operation Bernabéu-Opañel. Although this latter operation was declared void by a Spanish Court for not being in line with the general interest, it simultaneously shows that reclassifying a terrain from public to private (sport) use is not entirely legally impossible. In other words, by analogy, the plot in Las Tablas could have been reclassified for private use (provided the reclassification served the general interest) and be legally transferred to Real Madrid.

With regard to the second criteria, i.e. the maximum extent of the Madrid Council’s financial exposure resulting from finding such a liability, the Commission firstly argued that the different valuations of 1998 and 2011 of the land in Las Tablas were based on the mistaken assumption that this land could have been transferred in 2011, which, in hindsight appeared to be legally impossible. “Assuming the Madrid Council could not be held liable for that legal impossibility, for which it never solicited legal advice, it is at least arguable that the market value of the plot in its relationship with Real Madrid would be zero, since the land in question cannot be transferred”.[15] On the other hand, and assuming the Madrid Council is liable and Real Madrid had a right to a compensation, this amount should have been way less than €22 million as a Commission-assigned study concluded. Taking into account the Commission’s consideration that the correct parameter for the valuation of the concerned plot is the long-term exploitation of the land for sport use, the study arrived at a valuation in 2011 of €4.275 million.[16]

For all the above reasons, the Commission established that the Madrid Council had not acted as a prudent market operator. It had not sought legal advice before entering the 2011 settlement agreement, and the subsequent compensation granted to Real Madrid too high. In conclusion, by means of the 2011 settlement agreement, a selective economic advantage was granted to Real Madrid and the State aid criteria of Article 107(1) TFEU were fulfilled. As a result, the amount of aid that Spain was required to recover from the football club amounted to €18.418.054,44 (€22.693.054,44 - €4.275.000) plus interests.[17]

The aftermath

On 2 September 2016, the municipality of Madrid officially ordered Real Madrid to repay €20.3 million, an obligation complied with by the club in early November. Nonetheless, the Real Madrid ‘saga’ has not come to an end. In fact, now that Real Madrid’s appeal is registered by the CJEU, it has become clear that it could take several more years until the case is finally closed. The pending questions are; what are the grounds of Real Madrid’s appeal and could the appeal be successful?

As a preliminary remark, neither Spain nor Real Madrid have claimed that the 2011 settlement agreement falls, or could fall, under one of the exceptions of Article 107(3) TFEU. In principle, this does not prevent Real Madrid from advancing a compatibility plea in front of the General Court, even though it did not raise the argument during the formal investigation.[18] Nonetheless, given the Commission’s wide discretion in applying the exceptions of Article 107(3)[19], the review of the legality of its decision is restricted to determining whether the Commission committed a manifest error in its assessment of the facts or misused its powers.[20] Moreover, as the Commission indicates in paragraph 135 of the decision, the aid granted to Real Madrid is considered as operating aid.[21] In other words, the aid releases an undertaking from costs which it would normally have to bear in its day to day activities.[22] Both the Commission and the CJEU have been very reluctant in permitting operating aid since it rarely facilitates the development of certain economic activities without adversely affecting trading conditions.[23]

In a press-release following the Commission’s announcement of its recovery decision, Real Madrid inter alia argued that the valuation method used in the 2011 settlement agreement is the “only objective method, as it is based in the cadastral value, legally obliging for all Spanish City Councils, and therefore is applied in all transaction between City Councils and third parties whether they are public or private”.[24] The Commission’s final decision takes note of the criticism expressed by Real Madrid regarding the Commission-assigned valuation study, especially concerning the (in its eyes erroneous) valuation method used for the study.[25] Though the Commission rebutted Real Madrid’s criticism[26], it will be up to the General Court of the EU (and potentially later the Court of Justice) to decide whether the Madrid Council used the correct valuation method when determining the 2011 value of las Tablas. This will not be completely new territory for the General Court, given the rich jurisprudence available on valuation methods.[27] As regards the standard of review applied by the General Court, Conor Quigley argues that “where the Commission is found by the Court to have committed a sufficient error of assessment, the decision will be annulled”.[28] It is settled EU case law, that the valuation method must be based on the available objective, verifiable and reliable data, which should be sufficiently detailed and should reflect the economic situation at the time at which the transaction was decided, taking into account the level of risk and future expectations.[29] The General Court remains, however, entitled to fully review and assess the valuation methods presented by the Commission and the interested parties.[30]

The Real Madrid case is too complex and intertwined to draw definitive conclusions on the possible outcome of the appeal. Nonetheless, the thorough State aid assessment conducted by the Commission in its decision should not be underestimated. This will be a tough “legal match” on an entirely new turf for Real Madrid.

[1] By way of reminder, Article 107(1) TFEU reads: “Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market”.

[2] See Oskar van Maren, “The EU State aid and sport saga: The Real Madrid Decision (part 1)”, Asser International Sports Law Blog, 15 November 2016.

[3] Commission decision SA.33753 of 4 July 2016 on the State aid implemented by Spain for Real Madrid CF, paras. 79 and 80.

[4] Commission decision SA.33753 of 18 December 2013, State aid– Spain Real Madrid CF, paras. 41-43.

[5] Interestingly enough, Spain’s comments contradict Real Madrid’s comments, according to which, as can be read in paragraph 46 of the decision, Spanish law did allow Las Tablas to be reclassified for private use in 1998 and beyond until a specific law that prohibits that was introduced in 2001.

[6] Commission decision SA.33753 of 4 July 2016 on the State aid implemented by Spain for Real Madrid CF, paras. 29-36.

[7] Since it was clear State resources were transferred, that the measure was selective and that it at least had the potential of affecting intra-Union trade, the other criteria of Article 107(1) TFEU were only briefly discussed.

[8] See also e.g. Commission decision SA.41613 of 4 July 2016, on the measure implemented by the Netherlands with regard to the professional football club PSV in Eindhoven.

[9] Commission decision SA.33753 of 18 December 2013, State aid– Spain Real Madrid CF, para. 88.

[10] Case C-124/10 P Commission v. EDF ECLI:EU:C:2012:318, paras. 84, 85 and 105.

[11] Commission decision SA.33753 of 18 December 2013, State aid– Spain Real Madrid CF, para. 89.

[12] Ibid, para. 92.

[13] Ibid, para. 94.

[14] Ibid, para. 29.

[15] Ibid, para. 108.

[16] Ibid, paras. 111-112.

[17] Ibid, paras. 139-142.

[18] See for example T-110/97 Kneissl Dachstein v Commission ECLI:EU:T:1999:244, para. 102.

[19]Case T-304/08 Smurfit Kappa Group v Commission ECLI:EU:T:2012:351, para. 90.

[20] Conor Quigley, “European State Aid Law and Policy”, Hart Publishing, 3rd edition (2015), pages 738-739. See also for example T-20/03 Kahla/Thüringen Porzellan v Commission, ECLI:EU:T:2008:395, para. 115.

[21] Commission decision SA.33753 of 18 December 2013, State aid– Spain Real Madrid CF, para. 135.

[22] See for example Case C-172/03 Heiser ECLI:EU:C:2005:130, para. 55.

[23] Quigley, page 276.

[24] Real Madrid further found it surprising that the Commission used a valuation made by an architect’s office in Barcelona to dictate their decision. Though many will find this comment by Real Madrid rather amusing, it once again shows that the rivalry between the two clubs (and cities) far exceeds the performances on a football field.

[25] Commission decision SA.33753 of 18 December 2013, State aid– Spain Real Madrid CF, para. 89.

[26] Ibid, paras. 119-128.

[27] See for example T-366/00 Scott v Commission ECLI:EU:T:2007:99; and C-239/09 Seydaland Vereinigte Agrarbetriebe ECLI:EU:C:2010:778.

[28] Quigley, page 737. Based on the case law of the Court, it is not entirely clear whether a “sufficient error of assessment” by the Commission is enough for the Court to annul the decision.

[29] T-366/00 Scott v Commission ECLI:EU:T:2007:99, para. 158. See also Commission Notice C 262/1 of 19 July 2016 on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union, para. 101.

[30] Case T-274/01 Valmont v Commission ECLI:EU:T:2004:266.

Comments (1) -

  • Florentino Perez

    2/11/2017 9:19:30 AM |

    According to the ecological movement (EeA), the advantage for Real in the transfer of the plots in the Opanel district in exchange for the super prime area in front of the Bernabeu Stadium was approx. €60 million which is not unreasonable considering the actual market prices in both areas. That was the lion's share of the aid. Add this to the three years of delay in the stadium redevelopment (no IPIC naming rights at €20-25 million a year and no increase in the match day revenue) and you will see the that the Saga has been ruinous for Real that has been overtaken in the meantime by United and Barca in the revenue league.

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