Special Report No 5/2000 on the Court of Justice's expenditure on buildings (annexe buildings Erasmus, Thomas More and Annexe C), together with the Court of Justice's replies
Date: 2000-02-24
Institutions: European Court of Auditors
Subjects: Court of Justice of the European Union, EU expenditure, Luxembourg, property leasing

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I

(Information)

COURT OF AUDITORS

on the Court of Justice(cid:146)s expenditure on buildings (annexe buildings Erasmus, Thomas More and
Annexe C), together with the Court of Justice(cid:146)s replies

SPECIAL REPORT No 5/2000

(pursuant to Article 248(4), second subparagraph, of the EC Treaty)

(2000/C 109/01)

CONTENTS

Paragraph

Page

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Launch of the construction programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 to 2

3 to 6

Execution and occupation of the buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7 to 11

Agreement with a view to purchasing the buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12 to 19

Legal and financial aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12 to 14

Construction costs and financial costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15 to 18

Rent for the Palais . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19

20

Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21 to 22

The Court of Justice(cid:146)s replies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2

3

3

3

3

4

4

4

5

7

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Introduction

1. On 15 November 1994, the Court of Justice of the European Communities concluded a rental agreement
with the Luxembourg administration with a view to buying (1) three buildings annexed to the main building,
the (cid:145)Palais(cid:146), situated on the Kirchberg plateau, which this institution has occupied since 1972.

2. Between 1986 and 1994, the Luxembourg administration arranged for the construction (2) of these three
buildings (see photo below), covering a total surface area of 65 949 m2, in accordance with the Court of Jus-
tice(cid:146)s specific requirements (3). These constructions have gradually been added on to each other in response to
the Court of Justice(cid:146)s constantly developing needs and, since completion of the work in 1994, one single build-
ing complex has thus been able to accommodate all the Court of Justice(cid:146)s staff, which had previously been
dispersed over a number of sites. The expenditure relating to this construction programme (Annexe A or
(cid:145)Erasmus(cid:146), Annexe B or (cid:145)Thomas More(cid:146) and Annexe C) amounted in total to LUF 9 200 million (i.e. about ECU
200 million, excluding VAT) (see Table 1). This expenditure was the subject of a Court of Auditors(cid:146) audit which
focused on the construction of these three annexe buildings, the conclusion of the Agreement of 15 November
1994 and its implementation up until 1998.

Annexe B

Palais

Annexe C

Annexe A

Table 1

Construction cost

Cost factors (inclusive of VAT)

(million LUF)

Amounts

Variation

Authorising Laws

(a) Total costs initially planned
First law (Annexe A)
Second law (Annexe B)
Third law (Annexe C)

Initial total ceiling
Increase in ceiling for additional work

(b)

Fourth law

(c) Ceiling finally authorised

Situation as at 31.12.1998

(d) Construction cost found
(e) Overrun of initial ceiling
(f) Overrun of final ceiling
(g) Total financial expenses
(h) Total construction cost
(i) Updating (1)
(j) Updated total cost (1)

(k) Updated total of the amounts paid by the Court of Justice (1)
(l) Updated VAT total (1)
(m) Amount still outstanding

1 320
1 750
870
3 940

740
4 680

5 848
1 908
1 168
3 320
9 168
2 038
11 207

7 138
1 177
2 892

((d)-(a))
((d)-(c))

((j)-(k)-(l))

+ 49 %
+ 25 %

(1) The figures are updated on the basis of the weighted average of the rates charged on the loans granted for financing the construction.
Source: Law of 25.7.1985 (Annexe A)

Law of 1.6.1989 (Annexe B)
Law of 18.12.1990 (Annexe C)
Law of 28.12.1992 (increase in ceiling)
Rental agreement 15.11.1994
KPMG calculation of the selling price: Updated at 31.12.1998.

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Launch of the construction programme

3. By 1979, the Court of Justice(cid:146)s workload and staff had expanded
to such an extent that it was obliged to rent office accommoda-
tion outside its main building. From the early 1980s onwards, it
entrusted the Luxembourg administration with the task of carry-
ing out on its behalf a construction programme that was defined
piecemeal in the course of the years that followed. At the time, no
contracts were concluded with the Luxembourg administration
governing the financial arrangements for this programme or how
it was to be monitored and audited.

4. The Court of Justice launched and proceeded with this con-
struction operation, which involved long-term financial obliga-
tions for the Communities, without first submitting it to its Finan-
cial Controller for examination. It also failed to inform the
Budgetary Authority about the scale of the planned operations
with a view to obtaining its prior authorisation.

5. The legal (4) and financial (5) arrangements agreed between
the Court of Justice, the Luxembourg administration and the
property developer, a wholly-owned subsidiary of the construc-
tor, made it virtually impossible for the Communities to exercise
technical and financial control over an operation for which, in the
end, they would bear the final cost (6).

6. The whole programme was organised by the Luxembourg
administration without abiding by the spirit of the Community
procedures for public contracts (7). The invitation to tender was
particularly limited. The constructor of Annexe A was chosen by
means of a restricted invitation-to-tender procedure whereby the
tenderers had only 20 days, in August 1985, to submit their bids.
In 1989 when it came to building Annexe B and again in 1992
for Annexe C, the contract was awarded to the same constructor,
without the contract being genuinely put out to tender.

Execution and occupation of the buildings

7. The conditions under which the buildings were constructed
(adaptation to meet the Court of Justice(cid:146)s needs) and the cost of
this work were directly affected by poor coordination and by the
fact that the Court of Justice had little power to exercise any con-
trol during the course of the work (especially as regards the extra
costs arising from putting right defects caused by bad workman-
ship and from design and execution errors).

8. The expenditure ceilings (totalling LUF 3 940 million, inclu-
sive of VAT, or about ECU 100 million) initially laid down by the
laws (2) authorising the Luxembourg administration to have the
annexes built were not complied with. The overall financial bud-
get had to be increased, as of 1992, by LUF 740 million (about
ECU 18 million) to cover the additional work requested by the
institution, and also to cover the work on public roads and the
remedying of bad workmanship, the cost of which looks likely to
end up being borne by the Court of Justice.

9. The Court of Justice put itself into a situation from which it
was unable to extricate itself: as of September 1988, without first
agreeing any lease, it went ahead with gradually occupying build-
ings for which it did not know the exact cost and where the finan-
cial conditions concerning its tenancy had been neither defined
nor approved beforehand by the parties concerned

10. Between 1989 and 1994, the Court of Justice, which was
occupying the buildings without a lease, paid over LUF 1 500 mil-
lion (about ECU 35 million) by way of advances on rent payments
to be adjusted. These amounts corresponded to the total budget-
ary appropriations available under the budget item (cid:145)Rent(cid:146). The
Court of Justice(cid:146)s Financial Controller granted his approval to the
commitment proposals and the corresponding payment orders
even though these practices were irregular under the Commu-
nity(cid:146)s Financial Regulation, which allows rent to be paid only on
the basis of adequate supporting documents, in this case, a lease
agreement.

11. At the time, the Court of Justice was in the situation of rent-
ing and not yet of buying the buildings. Even though the Luxem-
bourg administration clearly expressed its intention of setting the
rent at a level sufficient to offset the construction costs (6), the
amounts thus paid for the annexes were not fixed on the basis of
a prior assessment, involving consultation of the parties con-
cerned, of the true costs of each of the buildings, but in accor-
dance with the amount asked for by the Luxembourg administra-
tion, whose requests the Court of Justice passed on to the Budgetary
Authority. This being so, the amounts paid by the institution are
not the result of verified economic parameters but mainly of the
appropriations it was thought likely the Budgetary Authority
would grant.

Agreement with a view to purchasing the buildings

Legal and financial aspects

12. An Agreement was signed on 15 November 1994 between
the Luxembourg administration and the Court of Justice whereby
the Luxembourg administration rents out Annexes A, B and C to
the Court of Justice, with a view to their purchase by the Euro-
pean Communities. The Agreement expires on the date on which
the European Communities take over ownership of the buildings,
at the latest in 2015. It can be revoked prior to that, in the event
of the seat of the Court of Justice being moved outside Luxem-
bourg by a decision taken on the basis of Article 289 of the EC
Treaty. There are some grave inconsistencies in this Agreement.
The Luxembourg administration undertakes to sell buildings
which, at the time, it does not yet own. The Agreement also con-
tains clauses (8) which derogate from ordinary law and are likely
to do grave damage to the Communities(cid:146) financial interests, and
it is vague on the crucial matter of the arrangements for deter-
mining and checking the selling price.

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13. The financial arrangements made for building the annexes
impose upon the Court of Justice the obligations of a borrower,
without granting it the corresponding advantages in return (for
example, ownership of the buildings thus financed). Formally, the
intermediaries, the Luxembourg administration and the property
developer, are legally responsible. However, they do not bear the
cost of the commitments they have entered into. Quite apart from
the fact that the Communities(cid:146) Financial Regulation does not make
any provision for having recourse to borrowing in order to make
purchases of property, under such an arrangement the Communi-
ties are in the position of being unable to exercise any control
over the financial costs they are obliged to bear, whatever their
amount.

14. Within the framework of the implementation of the Agree-
ment of 15 November 1994, the Communities are currently find-
ing that they are being obliged to bear numerous items of expen-
the buildings
diture related to the construction costs of
(expenditure for work outside the buildings, construction of a link
road). The Communities had to negotiate in order finally to obtain
the exemption from VAT stipulated in the Protocol on the Privi-
leges and Immunities of the Communities. Before they finally
become the owner of these buildings, the Communities will also
have to pay for the land at a price which was not fixed in the
Agreement. The fact that the Communities have to bear the bur-
den of these costs goes beyond what was initally agreed (9) when
the two partners were still in a renting situation. In addition, there
is no justification whatsoever for meeting the cost of the road.

18. The audit reveals shortcomings in the checks on the invoices
submitted by the property developer (supporting documents for
certain additional work, allowances made for less costly work/
materials than originally estimated). In view of the amounts
involved (just over ECU 2,5 million) and the risk that the Com-
munities will continue to have to bear them, the Court of Justice
should institute additional inquiries.

Rent for the Palais

19. Contrary to a commitment, made in 1984 within the frame-
work of the negotiations concerning the building of the annexes,
to reduce the rent for the main building, the Palais, by an amount
equivalent to the repayment of loans on this building, in 1994
payment in full of the sums due under the initial rental agreement
continued to be demanded, even though the Palais had by then
been paid off. The Court of Justice then decided to suspend pay-
ment of this rent as from 1995. Subsequently, in 1996, the Court
of Justice agreed to resume paying this rent as from 1997. The
Court of Justice(cid:146)s motive at the time went beyond the mere obli-
gation to fulfil its contractual commitments and had more to do
with its assessment of what was acceptable in budgetary terms in
respect of the total amount of rents demanded than with an
evaluation of their justification. Such an attitude, which results in
the Communities having to bear financial costs according to the
amount of appropriations entered in their budget, is not in itself
indicative of sound financial management.

Construction costs and financial costs

Conclusion

15. The task of determining and checking the construction costs
was put in the hands of an expert. These costs were supposed to
be determined and checked on the basis of data received by the
Luxembourg administration, but in this particular case, these data
do not on the whole give adequate information on the nature of
the work carried out. The Court of Justice did not ask for docu-
ments to be provided which could have supplied documentary
proof of additional work amounting to LUF 629 million (approxi-
mately ECU 15 million) although the expert brought them to its
attention.

16. The construction costs for the annexes were not kept under
control. On the basis of the calculations made by the expert, they
exceeded the initial estimate by 49 % and were 25 % in excess of
the new ceiling fixed in 1992 to allow additional work to be car-
ried out on the three annexes (see Table 1).

17. The documentation compiled to date by the expert to justify
the financial expenses and financial revenue booked to the opera-
tion remains inadequate and his checks incomplete. The docu-
mentation still does not give adequate assurance that these costs
and products have been calculated correctly. The financial costs,
which represent 36 % of the cost of the operation, appear high.
They include considerable charges connected with the advance
financing of the operation by the property developer.

20. The Court of
Justice undertook a major property-
development programme in order gradually to extend the pre-
mises it occupies on the Kirchberg plateau under circumstances
which call for the following comments:

(a)

implementation of the programme was entrusted to the Lux-
embourg administration without adequate information hav-
ing been passed on beforehand to the Budgetary Authority
and without the financial, administrative and technical condi-
tions for its implementation having been laid down in a con-
tract between the parties concerned;

(b) the implementation of this programme was in turn subcon-
tracted to a property developer within the framework of legal
and financial arrangements which have proved costly;

(c) the arrangements accepted by the Court of Justice, the user of
the buildings, made it virtually impossible to monitor the
implementation and to control the costs;

(d) as from September 1988 the Court of Justice occupied the
buildings placed at its disposal without a rental agreement
and made (cid:145)payments on account(cid:146) for these buildings which
were in contravention of the Community(cid:146)s Financial Regula-
tion;

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(e) subsequently, in November 1994, it concluded a lease-option
agreement in respect of which we must express the following
reservations:

transparency and efficiency possible, the creation of a multi-
annual investment budget, to which differentiated appropria-
tions should be allocated, appears indispensable;

(i)

in particular, in order to become the unconditional owner
of the buildings, the Court of Justice will have to pay the
market price for the building sites, which were initially
supposed to be made available to it free of charge;

(ii) the task of determining the selling price of the buildings
was entrusted to an independent expert but the restric-
tions imposed on his checks mean that no assurance can
be given that the selling price truly reflects the real costs
of the operation;

(iii) certain costs which the Communities were not supposed
to have to pay have to date been entered in the accounts
as being charged to the Communities;

(f)

lastly, invoicing irregularities involving significant amounts
have been discovered, which should necessitate additional
inquiries by the Court of Justice to ensure that the Communi-
ties do not end up having to pay for them.

Recommendations

21. The circumstances surrounding the construction and acqui-
sition of the Court of Justice(cid:146)s annexes are a graphic illustration
of the problems encountered by the European institutions in try-
ing to carry out their building projects in accordance with the
principles of legality and regularity and sound financial manage-
ment. Recurrence of such situations could be avoided by means
of appropriate measures (the need for which has already been
pointed out on several occasions by the Court of Auditors (10)),
which would put the Communities(cid:146) buildings policy on a trans-
parent, efficient footing. Consideration should, in particular, be
given to the following recommendations:

(a) the Community institutions must always obtain the prior
approval of the Budgetary Authority before embarking on a
large-scale building project, whatever form this takes and
whatever the purpose (rent, lease-option, acquisition, etc.);

(c) the Communities must have complete administrative, technical
and financial control over their building projects and must equip
themselves with the necessary legal, technical and financial
means. In this connection,
interinstitutional Community
departments should be set up on the initiative of the Com-
mission, for example, in order to assist each Institution in
defining and managing the administrative, technical and finan-
cial aspects involved in the overall control of the construction
project. Consideration should also be given to amending the
Community regulations in order to allow the Communities,
where necessary, to finance their building programmes by
borrowing directly under better conditions of transparency
and cost than those which can be observed today in respect
of the intermediaries and the financial arrangements to which
they have recourse;

(d) in the event of the Communities nevertheless wishing, by way
of an exception, to delegate their powers of overall control of
a project to third parties, a watering-down of responsibilities
and the risk of cost overruns must be avoided. For this pur-
pose, the terms and conditions of the delegation should be agreed
in advance with the representatives of the parties concerned,
on a contractual basis, and the latter should comply with the
same obligations, in particular in respect of complying with
competition rules, as those to which the Communities are
subject. The way in which the respective responsibilities are to
be shared out during the various phases of implementation of
the programme must be clearly laid down. In particular, it
should be compulsory for such contracts to contain a clause
fixing a price ceiling, and to define meticulously the condi-
tions under which it may be amended. This should not be
allowed to take place without the agreement of the client
institution and the prior approval of the Budgetary Author-
ity.

(b) the purely annual budgetary approach to expenditure on
buildings does not satisfy the criteria of sound management. It
induces the institutions to launch their building projects with-
out taking a sufficiently long-term perspective and, subse-
quently, to confront the Budgetary Authority with a fait accom-
pli. In order to plan their property policy with the greatest

22. Lastly, in the specific case of the annexes to the Court of Jus-
tice(cid:146)s main building, the Court of Justice should approach the
Luxembourg administration to renegotiate those aspects of the
1994 Agreement which are causing problems (in particular, the
question of who bears the cost of the work done outside the
buildings and the question of the provision of the building sites).

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 23 and 24
February 2000.

For the Court of Auditors

Jan O. KARLSSON

President

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NOTES

(1) According to the terms of Article 1 of the Agreement of 15 Novem-

ber 1994.

(2) According to the terms of the Luxembourg Authorisation Laws of 25
July 1985, 1 June 1989, 18 December 1990 and 28 December 1992.
(3) According to the terms of the preamble to the Agreement of 15

(6)

(7)

November 1994.

(4) For the purpose of constructing the extensions, the Luxembourg
administration granted the property developer the surface rights and
the right to the subsoil in respect of the land on which each building
was to be constructed, in order for the property developer to arrange
for the construction of the buildings of which he would become the
owner. Upon expiry of the concession contracts, which were con-
cluded for a period of 20 years starting from the provisional accep-
tance of the buildings, the contracts stipulated that ownership of the
buildings would revert to the Luxembourg administration. Further-
more, the Luxembourg administration concluded with the property
developer a leasing-purchase agreement for each building whereby, as
of the provisional acceptance of the buildings, they would be rented
to the Luxembourg administration for a period of 20 years. The
agreements made provision for the possibility of the Luxembourg
administration subletting or transferring its rights. The price of the
leasing-purchase was fixed in accordance with the amount of the
loans granted to the property developer. Under this arrangement, the
Court of Justice has the status of sublessee.

(5) The constructions were financed by means of bank loans granted to
the property developer, the terms of which were negotiated by the
Luxembourg administration. However, some items of expenditure,
such as the architects(cid:146) fees, were paid directly by the Luxembourg
administration. The loans were used by the property developer to
settle the invoices submitted by the general company in charge of the
work, once they had received the prior approval of the public works
administration, and for the annual loan repayments during the con-
struction stage. In reality, as soon as each construction was accepted,
the Luxembourg administration directly paid off the amounts still due
to the bank in respect of the loans granted to the property developer.
In order to regularise this transfer of obligations, in 1994 the property
developer officially passed over to the bank the claims he held on the
Luxembourg administration under the leasing-purchase agreements.

Initially, the amounts of rent to be paid by the sublessee (the Court of
Justice) were supposed to be fixed taking into account both the period
of repayment of the loans that would have to be taken out and the
rates of interest to which these loans would be subject.
In particular, Council Directive 71/305/EEC concerning the coordina-
tion of procedures for the award of public works contracts (OJ L 185,
16.8.1971), which was transposed into Luxembourg law by means of
the Law of 4 April 1974 (MØmorial grand-ducal A Issue No 36 of 13
May 1974).

(8) Basically, a clause whereby, if the Court of Justice does not announce
its intention of purchasing the land on which the annexes are built at
the market price, these annexes will become the property of the Lux-
embourg administration upon expiry of the surface rights granted in
the Agreement (49 or 98 years, depending on the case).
In June 1983, the Chairman of the Coordinating Committee for the
setting-up of European institutions and bodies had told the Court of
Justice that the Luxembourg government would be prepared to bear
the cost of the price of the land and the development of the surround-
ing area and to grant a special VAT exemption.

(9)

(10) See previous work by the Court of Auditors on this subject:

(cid:151) Special Report on accommodation policies of the institutions of

the European Communities (OJ C 221, 3.9.1979);

(cid:151) Annual Report concerning the financial year 1987, paragraphs

10.41 to 10.77 (all the institutions);

(cid:151) Annual Report concerning the financial year 1992, paragraphs

15.7 to 15.9 (Parliament);

(cid:151) Annual Report concerning the financial year 1993, paragraphs

17.1 to 17.38 (Parliament) and 18.1 to 18.19 (Council);

(cid:151) Annual Report concerning the financial year 1995, paragraphs

13.16 to 13.39 (Commission);

(cid:151) Special Report No 5/95 concerning the signing without prior
approval of the contract for the building of the European Parlia-
ment(cid:146)s new chamber in Strasbourg, paragraphs 5.1 to 5.16 (OJ
C 27, 31.1.1996);

(cid:151) Annual Report concerning the financial year 1998, paragraphs

6.13 to 6.17 (Commission).

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THE COURT OF JUSTICE(cid:146)S REPLIES

The Court of Justice wishes to state, at the outset, that it endorses the finding made by the Court of Auditors,
following its examination of the Court of Justice(cid:146)s expenditure on buildings, that the budgetary and financial
framework within which the European institutions have to meet their accommodation requirements is inap-
propriate; it therefore fully concurs with the recommendations made by the Court of Auditors with a view to
remedying the situation.

Nevertheless, it is within that framework that the Court of Justice, in collaboration with the Luxembourg
authorities, has been constrained, over the last twenty years, to take steps to cope with its constantly and
rapidly growing accommodation requirements, which have been determined by a substantial increase in its
caseload, the creation of the Court of First Instance and the growth in the number of staff employed in the
institution.

The Court of Justice wishes to emphasise that it is has no control over the number of cases to be dealt with or
over the amount of work which those cases generate, and that, if it is to ensure continuity in the judicial task
entrusted to it by the Treaties, it must have the necessary premises and infrastructures to enable the administra-
tion of justice to function properly.

It is against that background (cid:151) which is, in essence, common to all the institutions but which is also char-
acterised by certain specific factors peculiar to the Court of Justice (cid:151) that the comments set out below, which
are submitted in response to the report of the Court of Auditors on the Court of Justice(cid:146)s expenditure on build-
ings (hereinafter referred to as (cid:145)the Court of Auditors(cid:146) report(cid:146)), need to be read. Those comments deal with the
following topics:

1. Changes in the accommodation requirements of the Court of Justice between 1979 and 1994, and the ways

in which those requirements have been met;

2. The occupation of the annexes to the Palais without a written contract;

3. The relations between the Court of Justice and the Budgetary Authority;

4. Monitoring of the cost of constructing and financing the buildings annexed to the Palais;

5. The lease-option agreement of 15 November 1994;

6. Conclusion.

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CONTENTS

1. Changes in the accommodation requirements of the Court of Justice between 1979 and 1994, and the

ways in which those requirements were met. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.1. Provisional solutions in response to constantly and rapidly evolving requirements . . . . . . . . . . . .

1.2. An unsatisfactory state of affairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.3. An appropriate response: the construction of the annexes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.4. A buildings policy evolving in parallel with that of the other Community institutions . . . . . . . . .

2. The occupation of the annexes to the Palais without a written contract . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. The relations between the Court of Justice and the Budgetary Authority . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.1. Straightforward lettings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.1.1. Information regarding the intention of the Court of Justice to occupy the new premises as a

lessee, and the consequences arising from this . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.1.2. The grant by the Budgetary Authority of the appropriations needed to cover the costs of renting

3.1.2.1. The involvement of the Budgetary Authority in the drawing up of the annual budget . . . .

3.1.2.2. The information provided to the Budgetary Authority within the framework of

multiannual estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.2. The lease-option agreement of 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. Monitoring the cost of constructing and financing the buildings annexed to the Palais. . . . . . . . . . . . . . . .

4.1. The conditions in which monitoring was carried out . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.1.1. Internal conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.1.2. Relations with the Luxembourg authorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.2. A gradual intensification of monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.2.1. The intensification of monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.2.2. The control mechanism introduced by the lease-option agreement . . . . . . . . . . . . . . . . . . . . . . . . .

5. The lease-option agreement of 15 November 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.1. The genesis of the agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.2. The mechanism set up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.3. The purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.3.1. The constituent elements of the purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.3.2. The inclusion of payments on account of rent made between 1988 and 1994 in the absence of a
written contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.3.3. The procedures for determining the purchase price and the task of the independent expert. . . . . .

5.4. The treatment of the undertakings given by the Luxembourg authorities in 1984 . . . . . . . . . . . . .

5.4.1. The problems connected with the land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.4.2. The road system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.5. The rent payable for the Palais . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.6. Preservation of the financial interests of the Communities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ANNEX: BRIEF CHRONOLOGY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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14.4.2000

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1. Changes in the accommodation requirements of the Court
of Justice between 1979 and 1994, and the ways in which
those requirements were met

needed for the activities of the Court of First Instance, which had
been created in the interim and was inaugurated in September
1989.

For the purposes of considering the remarks made in the Court
of Auditors(cid:146) report, it is necessary briefly to recall the context in
which the accommodation requirements of the Court of Justice
evolved between 1979 and 1994 (see the annexed brief chronol-
ogy).

Annexe B (the Thomas More building), the construction of which
commenced when the Financing Law was passed in June 1989,
was handed over in 1992, enabling the requirements arising from
the 1986 enlargement to be met in part.

1.1. Provisional solutions in response to constantly and

rapidly evolving requirements

It became apparent as early as 1979 that the main building of the
Court of Justice (the Palais) was inadequate to accommodate all
the staff of the institution, which was growing rapidly. As a result
of the 1981 and 1986 enlargements and the setting-up of the
Court of First Instance in 1989, the number of members of staff
of the Court of Justice increased from 363 in 1980 to 733 in 1989
(cid:151) a rise of 102 %. In order to cope with that increase, it became
necessary to rent 40 offices in the Jean Monnet building in 1979,
followed by a further 80 in 1980. Towards the end of 1985, 140
offices were installed in prefabricated huts at Weimershof. Follow-
ing the 1986 enlargement and the abandonment of the prefabri-
cated buildings on the Weimershof site in 1988, it became neces-
sary to rent a further 150 offices in the BAK building.

1.2. An unsatisfactory state of affairs

The renting of those various office premises outside the precincts
of the institution, at locations some distance from the Palais, was
unsatisfactory from a functional standpoint; for an institution
such as the Court of Justice, whose activities are closely intercon-
nected, the scattering of its departments over a number of differ-
ent sites gives rise to a substantial loss of time and efficiency.

Moreover, the prefabricated buildings rented at Weimershof did
not fulfil current criteria in terms of hygiene and comfort.

It further became apparent, from 1985 onwards, that the Palais
was inadequate not only as regards office space but also, and
above all, as regards the institution(cid:146)s requirements with respect to
courtrooms equipped with interpreters(cid:146) booths, particularly in
anticipation of the creation of the Court of First Instance.

1.3. An appropriate response: the construction of the

annexes

Annexe C was completed and occupied in October 1994; its con-
struction had been decided on in 1989 and the corresponding
financing law was passed in December 1990, not only with a view
to coping with the future enlargement in 1995 but also on account
of the presence of asbestos in the Palais and the European Parlia-
ment(cid:146)s insistence on recovering possession of the premises occu-
pied by the Court of Justice in the BAK building. It was not until
that building was handed over that it became possible, for the first
time in 15 years, to accommodate all the staff within one and the
same complex of buildings.

The annexes to the Palais, successively constructed and handed
over as described above, have therefore replaced a series of make-
shift facilities, thereby providing the Court of Justice with pre-
mises suitable for its task and its operation. As indicated in para-
graph 2 of the Court of Auditors(cid:146) report, those buildings were
constructed one after the other in order to meet constantly evolv-
ing requirements. They have not from the outset formed part of a
comprehensive building programme.

1.4. A buildings policy evolving in parallel with that of

the other Community institutions

In seeking to resolve its accommodation problems in such a way
as to enable it to perform its judicial functions to the best of its
ability, the Court of Justice, like all the other Community institu-
tions, initially chose the option of renting, having considered and
then rejected the idea of financing certain buildings itself. Prior to
1992, at a time when the seats of the Community institutions had
not been definitively fixed and the Budgetary Authority had not
yet adopted its policy in favour of the purchase of premises, the
Court of Justice was not in a position to spearhead a new build-
ings policy, which it was for the political institutions of the Com-
munity to define.

Thus, it was only when that new buildings policy had been clearly
defined by the Budgetary Authority in 1992 that the Court of Jus-
tice could begin to consider the possibility of purchasing the
annexes.

The observations contained in the Court of Auditors(cid:146) report must
be read in the light of that situation.

The first annexe (Annexe A or the Erasmus building), the con-
struction of which was decided in 1984, was handed over in
October 1988, nine years after the Court of Justice had formally
notified the Council of its accommodation problems. The further
space provided by Annexe A, amounting to some 300 offices,
meant that the prefabricated premises in Weimershof could be
vacated; in addition, it comprised the offices and courtrooms

2. The occupation of the annexes to the Palais without a

written contract

In paragraph 9 of its report, the Court of Auditors criticises the
Court of Justice for having entered into occupation of the annexes

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to the Palais without first signing a written contract. The follow-
ing comments need to be made in that regard.

In the circumstances described above, the Court of Justice was
faced with the choice of either:

Once the plans for the construction and leasing of a first annexe
had taken shape, the Court of Justice informed the Luxembourg
authorities of its wish to reach agreement as to the rent to be paid
by the institution.

However, it was not possible to enter into proper negotiations
concerning the precise amount of the rent until 1989, six months
after the entry into occupation of Annexe A, when the Court of
Justice received from the ComitØ de Coordination pour l(cid:146)Installation
d(cid:146)Institutions et Organismes EuropØens (cid:224) Luxembourg (CCIIOE), the
relevant Luxembourg interministerial coordinating body, a draft
lease in respect of that annexe. The Court of Justice thereupon
insisted on the conclusion of a lease of Annexe A as soon as pos-
sible and on the immediate opening of discussions concerning
the terms for the letting of the future Annexes B and C, with a
view to avoiding the occupation of those buildings without any
written agreement (letter from the Registrar to the President of
the CCIIOE of 8 May 1989).

The discussions were initially concerned exclusively with the
amount of rent. To that end, comparative studies were prepared
showing, in particular, the rents charged for the buildings occu-
pied by the other institutions in the Kirchberg area. The represen-
tatives of the Court of Justice and the Luxembourg authorities
reached agreement on the rent for Annexe A in May 1992.

The Court of Justice had meanwhile received draft lease agree-
ments in respect of Annexes B and C. The rent per square metre
was much higher than that agreed for Annexe A, and was well in
excess of the rents charged in the Kirchberg area. The Court of
Justice was concerned, first, to conclude agreements which
accorded with the principles of sound financial management, par-
ticularly those of economy and cost-effectiveness (see Article 2 of
the Financial Regulation of 21 December 1977 applicable to the
the European Communities (OJ L 356,
general budget of
31.12.1977, p. 1)), and, second, to follow the course outlined by
the Court of Auditors in its 1979 report (1) by ensuring that the
lease included a purchase option. It therefore rejected those draft
lease agreements.

(cid:151) sacrificing the requirements of sound financial management
by signing contracts at any price (that is to say, accepting
without demur the firm and elevated demands put forward by
the other contracting party); or

(cid:151) allowing the ad hoc arrangements referred to in 1.1 and 1.2
above to continue, with the disadvantages that these entailed
in terms of continuing and increasing disruption of its func-
tioning; or

(cid:151) meeting the most pressing requirement by entering into occu-

pation of the annexes.

Mindful of its duty under the Treaties to ensure the continuity of its judi-
cial task, and faced with the impossibility of concluding written leases on
favourable terms, the Court thought it best to opt for the third of
the above solutions pending the conclusion, on 15 November
1994, of the lease-option agreement (see point 5).

In the view of the Court of Justice, the formal irregularity result-
ing from the occupation of buildings without a written lease must
be considered in the light of the constraints described above.

Occupation of the annexes without a written lease justified the
payment of some financial consideration. This took the form of
advances on rent, calculated on the basis of market rental levels
and by reference to the rents paid by the other Community insti-
tutions in the Kirchberg area. The advances paid between 1988
and 1994 were taken into account as accrued instalments of the
purchase price of the annexes (see point 5.3.2).

In paragraph 11 of its report, the Court of Auditors states that
those advances were paid in accordance with the availability of
budgetary funds and not on the basis of verified economic param-
eters. In actual fact, for as long as the Court of Justice remained in
a renting situation, the advances paid by it were calculated by ref-
erence to the rents charged for comparable buildings occupied by
the other institutions in the Kirchberg area (2). It was only when
the Court of Justice envisaged the purchase of accommodation
that the advance payments exceeded the rents charged for com-
parable premises in the Kirchberg area, in such a way as to cor-
respond to the appropriations granted by the Budgetary Author-
ity.

As the policy that the Community institutions should purchase
their buildings was firmed up, the thinking of the Court of Justice
at this juncture was directed to the prospect of purchasing, which
warranted the inclusion in the contract under discussion of a
clause permitting deferred purchase. Since that clause necessitated
negotiations between the Court of Justice and the Luxembourg
State, the signature of a lease was postponed.

The Court of Auditors also states in paragraph 11 that the advances
were not fixed on the basis of a prior, bilaterally negotiated assess-
ment of the true costs of each of the buildings. However, for as
long as the parties were in a lessor/lessee situation, the Court of
Justice, as a mere lessee, was not in a position to require informa-
tion as to the total construction cost and the financial arrange-
ments adopted by the Luxembourg authorities, particularly as

(1) Special Report of the Court of Auditors on accommodation policies
of the institutions of the European Communities, in particular point
7.5.3 (OJ C 221, 3.9.1979, p. 1).

(2) See, in particular, the Annual Report of the Court of Auditors con-
cerning the financial year 1987, point 10.50 (OJ C 316, 12.12.1988,
p. 1).

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Official Journal of the European Communities

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regards the period of amortisation of the capital sums invested (1).
As a lessee, it sought to negotiate an acceptable rent. It was legiti-
mately entitled to assume that the host country would choose an
adequate amortisation period and that the amount of the rent
would remain reasonable and at a level commensurate with that
which a Community institution may expect from a host country
which is seeking to develop a policy of providing seats for inter-
national organisations.

In those circumstances, the Financial Controller felt obliged to
approve the proposals for expenditure commitments and the cor-
responding payment orders in respect of those advances.

3. The relations between the Court of Justice and the

Budgetary Authority

At paragraph 4 of its report, the Court of Auditors expresses the
criticism that the Budgetary Authority was not provided with
prior information and that no prior authorisation was given for
the conclusion of contracts in respect of premises, of whatever
kind (renting, purchase or lease-option).

The question of the involvement of the Budgetary Authority in
decisions of the Court of Justice in regard to premises arose in dif-
ferent ways, depending on whether those decisions related to
renting or purchasing. Consequently, a distinction must be drawn
between straightforward lettings (see point 3.1) and the lease-
option agreement concluded in 1994 (see point 3.2).

3.1. Straightforward lettings

The Budgetary Authority was not only informed of the Court of
Justice(cid:146)s intention to occupy new premises as a lessee (point 3.1.1);
it invariably granted the appropriations needed to cover those let-
ting costs (point 3.1.2).

3.1.1. Information regarding the intention of the Court of Justice to

occupy the new premises as a lessee, and the consequences
arising from this

At the beginning of 1979 the Court of Justice made the Budget-
ary Authority aware of its accommodation requirements; the
Council then entered additional appropriations in the budget of
the Court of Justice for the financial year 1980, with a view to the
renting of additional offices.

(1) There was, moreover, nothing extraordinary about the fact that the
Court of Justice was ignorant of the financial arrangements of the
owners of the rented premises, particularly as regards amortisation of
the capital invested, as is apparent from the answer given by Mr Burke
on behalf of the Commission to a question from Mr Tyrell, a Member
of the European Parliament (Written question No 2039/83 (OJ C 194
23.7.1984, p. 1)).

With respect to the same financial year, the Council also granted
appropriations for the financing of studies concerning the pos-
sibility of accommodating certain departments of the Court of
Justice in a building to be constructed in the immediate vicinity
of the Palais. Subsequently, in May 1984 (see letters from the
President of the Court of Justice to the President of the Council
and from the Registrar to the Chairman of the Permanent Repre-
sentatives Committee and to the Chairwoman of the Council(cid:146)s
Budgetary Policy Committee), the Council was informed of the
Court of Justice(cid:146)s intention to rent an annexe to be constructed.
The Council indicated its agreement to this. Although that letting
was special in that the context was that of a building to be con-
structed in order to meet the specific requirements of the Court
of Justice, the Budgetary Authority could not have been under any
misapprehension as to the intention of the Court of Justice to rent
that building. That intention was clearly indicated in the letters
sent by the Court of Justice and, later on, in the Luxembourg
Financing Law of 1985 authorising the construction of the first
annexe, in which those offices were to be located. That law stated
that (cid:145)the best way of achieving the proposed extension within a
short space of time was for the Luxembourg Government to con-
struct an annexe to the Palais of the Court of Justice, to be let to
the Court, like the Palais itself, once it was completed(cid:146).

The Council was also informed of the Court of Justice(cid:146)s view that
the renting option was not to result in any increase in its budget
within the immediate future and of the Court of Justice(cid:146)s inten-
tion of approaching the Budgetary Authority as soon as any
increase in the budget proved to be necessary on account of
changes in its requirements. The view expressed by the Court of
Justice was based on the consideration that the costs of renting
the first annexe would be covered in the immediate future by the
appropriations granted for the renting of offices outside the Pal-
ais. At no time did the Court of Justice conceal the fact that its
budget resources would have to be adjusted to meet its accom-
modation requirements, which were constantly and rapidly evolv-
ing.

The Council endorsed the solution proposed by the Court of
Justice.

3.1.2. The grant by the Budgetary Authority of the appropriations

needed to cover the costs of renting

The appropriations needed to cover expenditure in respect of the
renting of premises were granted by the Budgetary Authority
within the context of the drawing up of the annual budget (see
point 3.1.2.1). The Budgetary Authority was also informed of the
multiannual forecasts of the Court of Justice as soon as an appro-
priate framework was set up to that end (see point 3.1.2.2).

3.1.2.1. The involvem ent of t he Bu dget ar y Aut hor ity

in t he dr awing up of t he annual budget

Where increased appropriations proved necessary in order to
meet the costs arising from existing or planned lettings, the Bud-
getary Authority was invariably given due notice to that effect,
within the context of the drawing up of the annual budget.

The requests for budget appropriations, accompanied by support-
ing documentation, which the Court of Justice submitted to the

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Budgetary Authority with a view to covering rental costs were the
subject, throughout the period under consideration, of systematic
and thorough discussion within the Budgetary Committee of the
Council and the Committee on Budgets of the European Parlia-
ment, on the occasion of the examination of each draft budget
submitted by the institution. Up until 1997, the Budgetary Com-
mittee of the Council carried out an examination of each heading
of the draft budget, and the heading entitled (cid:145)Rent(cid:146) generally gave
rise to detailed debate, particularly between the representative of
the Grand Duchy of Luxembourg and the representatives of the
other Member States.

As regards, more particularly, the first financial year during which
the cost of renting the first annexe was incurred (1988), the esti-
mates showed, under heading 200 ((cid:145)Rent(cid:146)), the amount needed for
(cid:145)rent of the new annexe to the Court building for four months,
less the rent of the Jean Monnet building for the same period(cid:146). The
fact that the appropriations in question were granted can be taken
to signify the agreement of the Budgetary Authority to the rent-
ing of that first annexe. The Budgetary Authority had received a
request for appropriations in the spring of 1987, and had had the
opportunity to express its comments throughout the course of
the procedure for approval of the 1988 budget. Thus, the resolu-
tion of the European Parliament on the draft budget for 1988
notes that (cid:145)the occupation by the Court of its new annexe, the
floor area of which is the same as that of its current premises, will
inevitably lead to a significant increase in its financial require-
ments(cid:146) and the Rapporteur proposes that (cid:145)the expenditure con-
nected with the occupation of its new building by the Court of
Justice should be covered by the allocation of adequate funds(cid:146).

3.1.2.2. T h e i n fo r m a t i o n p r ov i d e d to t h e B u d ge t a r y
Aut hor ity wit hin t he fr amewo rk o f mult ia n-
nual estimates

Despite the absence of any appropriate framework for the sub-
mission of multiannual budget estimates, the Court of Justice kept
the Council constantly informed of the foreseeable course of its
development and of its accommodation requirements, having
regard, in particular, to the increase in its workload, the succes-
sive enlargements of the Community, the extension of its jurisdic-
tion, the creation of the Court of First Instance and the growth in
the number of staff.

When, following a decision of the Group of the Heads of Admin-
istration, the appropriate framework for the submission of mul-
tiannual budget estimates of administrative expenditure was set
up in 1988, the Court of Justice, like the other institutions, sub-
mitted such estimates, including those relating to expenditure on
rent over the period from 1989 to 1992, to the Budgetary Author-
ity. Those estimates were accepted by the Budgetary Authority on
the basis of a communication from the Commission. They did
not, however, prompt the Budgetary Authority to establish a mul-
tiannual investment budget endowed with differentiated appro-
priations.

3.2. The lease-option agreement of 1994

purchased rather than leased. In 1981 the Council stated that it
was not opposed in principle to the purchase of premises by the
institutions. However, as noted by the Court of Auditors, the
Council refused, as budgetary authority, (cid:145)to provide the necessary
financial resources(cid:146) for the purchase of premises (Council Deci-
sion of 14 December 1981, cited in points 10.62 to 10.66 of the
Court of Auditors(cid:146) Annual Report concerning the financial year
1987 (OJ C 316, 12.12.1988, p. 1)). In July 1990 the Rapporteur
of the Committee on Budgets of the European Parliament con-
templated, in the context of that committee(cid:146)s examination of the
1991 budget of the Court of Justice, the entry in that budget of
the appropriations needed for the purchase of the Palais and Eras-
mus buildings. However, that idea never bore fruit, since, despite
the wording of Resolution A3-360/90 of the European Parlia-
ment, the appropriations entered in the 1991 budget were only
those intended to cover the rent for the two buildings in question.

Although the construction of Annexes A, B and C had taken place
with a view to the conclusion of a lease, and while the Court of
Justice was persevering with its attempts to obtain the host coun-
try(cid:146)s agreement to a reasonable rent, the new circumstances
described above prompted the Court of Justice to contemplate the
inclusion of a purchase option in the lease under discussion.

In 1992, as indicated above, the Budgetary Authority established
a policy in the matter of premises which unequivocally advocated
the purchase by the institutions of the buildings occupied or to
be occupied by them.

The consolidation of that new policy of the Community institu-
tions with respect to premises and the increasingly favourable
reception given by the Budgetary Authority to the idea of pur-
chasing Annexes A, B and C, coupled with the Luxembourg
authorities(cid:146) wish to calculate the rent on the basis of amortisation
of the capital sums invested over a 20-year period, speeded up the
negotiation of an agreement by which the payment of rent was
to be combined with the deferred purchase of the buildings.

That change in approach led to increased contact between the
Court of Justice and the two branches of the Budgetary Author-
ity.

The Budgetary Authority was of course duly informed that an
agreement was being negotiated with the Luxembourg authori-
ties; indeed, it decided in 1994, by way of a supplementary and
amending budget, to allocate the sum of ECU 9,476 million to the
Court of Justice before the end of the current financial year, with
a view to (cid:145)partially covering the difference between the rent
demanded by the Luxembourg State for the Court(cid:146)s new complex
of buildings, on the basis of a lease incorporating a purchase
option, and the amount which can be paid under the budget of
the institution(cid:146). Since the use of those appropriations presup-
posed the conclusion of a lease containing a purchase option, the
European Communities, represented by the Court of Justice, and
the Luxembourg State signed a lease-option agreement on 15
November 1994, following several years of negotiations.

In 1979 the Court of Auditors published a report recommending
that premises occupied by the Community institutions should be

The text of the lease-option agreement was communicated to the
Budgetary Authority.

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In 1996 the Budgetary Authority requested and obtained from
the Court of Auditors a technical opinion concerning the finan-
cial commitments governing the premises of the Court of Justice.
That opinion contained no criticism of the legal and financial
arrangements set up by the agreement, or any reservations regard-
ing the advance payment of the purchase price in addition to the
annual rental payments contemplated (see in that regard point
5.2). In consequence of that opinion, the sum of ECU 50 million
was made available to the Court of Justice in order to enable it to
make an advance payment pursuant to the agreement.

It is clear, therefore, that the Budgetary Authority was involved in
the plans for the purchase of buildings by the Court of Justice pur-
suant to the lease-option agreement.

4. Monitoring the cost of constructing and financing the

buildings annexed to the Palais

The Court of Auditors expresses the criticism that there was a
lack of monitoring of the implementation of the building projects
and the constituent elements of the construction costs (see para-
graphs 5, 7, 11 and 20(c) of the Court of Auditors(cid:146) report).

It is necessary to draw attention to the conditions in which moni-
toring could be carried out (see point 4.1) and the gradual inten-
sification of monitoring (see point 4.2).

4.1. The conditions in which monitoring was carried out

Monitoring was subject, first, to internal constraints (see point
4.1.1) and, second, to the nature of the relations between the insti-
tution and the Luxembourg authorities (see point 4.1.2).

4.1.1. Internal conditions

The task of the administrative departments of the Court of Justice
is to provide support for its judicial activities and to undertake the
day-to-day management of the institution. The staff of those
departments, relatively few in number, do not possess the exten-
sive range of skills that are necessary to ensure detailed and exten-
sive monitoring, from a technical and financial standpoint, of
construction operations on such a large scale. This led the Court
of Justice in 1986 to sign a contract with Bouwcentrum, a Neth-
erlands firm of experts; however, that firm was unable to perform
its task properly.

It was in those conditions, and at times in circumstances demand-
ing urgent action, that the Court of Justice was constrained to
take decisions in order to meet its accommodation requirements
and that the expenditure in that respect was monitored.

4.1.2. Relations with the Luxembourg authorities

In addition, monitoring by the Court of Justice was circumscribed
by the nature of its relations with the Luxembourg authorities.

The relationship, in the matter of land and buildings, between a
Community institution and the Member State in which the seat
of that institution is located cannot be judged by the yardstick of
a contractual relationship between a private lessee and a private
lessor.

The Court of Justice is in a special position as a lessee, in that it
has specific requirements in terms of construction (buildings
accessible to the public, courtrooms equipped with interpreters(cid:146)
booths, etc.) which go beyond a mere need for office space. The
Luxembourg authorities used that special position as an argument
for fixing the rent in accordance with the cost of construction.
The Court of Auditors(cid:146) report contends that such a method of
proceeding should have prompted the Court of Justice to envis-
age monitoring the cost of the construction and to require that
the detailed arrangements of the building programme be formally
set down in writing. It is further claimed that, while the parties
were in a lessor/lessee situation, the Luxembourg authorities
should have agreed to involve the Court of Justice in the defini-
tion of those arrangements.

The Luxembourg authorities did not however feel bound to involve
the Court of Justice in the working out of the financial arrange-
ments criticised in the Court of Auditors(cid:146) report, or in the selec-
tion of the architect, the property developer and the main con-
tractor.

It was not until the Court of Justice was called on to assume own-
ership of the premises that it was able to learn of the financial
arrangements. However, its relations with the Luxembourg authori-
ties continued to be affected by the situation obtaining at the out-
set. It experienced recurrent problems in obtaining the informa-
tion needed for monitoring, whether in relation to the amount of
the rent, exemption from VAT or the purchase of the land, and in
obtaining explanations concerning certain alterations and addi-
tional works. A typical example of the ambiguity characterising
the relations with the Luxembourg authorities is to be found in
the fact that, despite their agreement to transfer ownership of the
annexes on a non-profit basis, they continued to demand rent for
the Palais notwithstanding that the cost of that building had been
amortised a long time previously and despite the undertaking
given by them in 1984 to reduce the rent in question in line with
the amortisation of the cost of the building.

4.2. A gradual intensification of monitoring

Monitoring by the Court of Justice gradually increased in intensity
(see point 4.2.1) and was ultimately placed on a systematic foot-
ing within the framework of the lease-option agreement (see point
4.2.2).

4.2.1. The intensification of monitoring

The representatives of the Court of Justice attempted on several
occasions to influence the choices made by the Luxembourg
authorities, but without ever obtaining a satisfactory result. Dur-
ing the period in which the Court of Justice was in the position
of a future lessee, the points which it raised related in essence to
its operational requirements, and even they were not always acted
on.

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Following its entry into occupation of the first annexe (the Eras-
mus building) in the autumn of 1988, the Court of Justice put
forward numerous demands with a view to ensuring that that
building should be rendered more fit for its intended purpose and
that the matters thus raised should be taken into account in the
early stages of the drawing up of plans for the construction of
other buildings in the future. Those demands were intended to
avoid the substantial additional costs brought about by works of
rectification.

Once it was established that the Court of Justice was to become
the owner of the buildings, it submitted observations on the vari-
ous aspects of the cost of their construction. This was particularly
the case as regards Annexe C, the construction of which com-
menced in February 1992 and the original plans for which were
significantly modified at the behest of the Court of Justice. At that
juncture, however, the financial arrangements had already been
put in place by the Luxembourg authorities and the essential ele-
ments of the construction programme were fixed.

As regards the financial expenditure, it proved possible, follow-
ing difficult negotiations entered into after the agreement had
been signed, to persuade the Banque et Caisse d(cid:146)(cid:201)pargne de l(cid:146)(cid:201)tat
((cid:145)BCEE(cid:146)) to agree to new terms of a more favourable nature. The
Court of Justice took the view that, in the context of the lease-
option agreement, it ought to attempt, in the interests of sound
management, to renegotiate, through a representative of the Lux-
embourg Finance Ministry, the loan terms agreed between the
Luxembourg State and the BCEE.

4.2.2. The control mechanism introduced by the lease-option

agreement

The agreement provided for a mechanism of control (see point 5).

In response to paragraph 16 of the Court of Auditors(cid:146) report, it
should be noted that, in certain instances, the fact that the initial
financial estimates were exceeded is due to demands made by the
Court of Justice which were justified by changes in its require-
ments (e.g. the construction of an additional storey in Annexe C,
an increase in the number of interpreters(cid:146) booths needed, etc.).

5. The lease-option agreement of 15 November 1994

The lease-option agreement, which was adopted following lengthy
negotiations (see point 5.1), establishes a mechanism (point 5.2)
and lays down the constituent elements of the final purchase
price of the buildings (point 5.3), which does not include certain
items of expenditure which the Luxembourg authorities had under-
taken to bear in 1983 and 1984 (point 5.4); it was negotiated
independently of the lease of the Palais (point 5.5). Lastly, it safe-
guards the financial interests of the Communities (point 5.6).

The agreement represents a compromise resulting from pro-
tracted negotiations between the Court of Justice and the Luxem-
bourg authorities, rather than the ideal form of contract which
the Court of Justice aspired to conclude.

5.2. The mechanism set up

The Court of Auditors is fully aware of the mechanism set up by
the agreement, which it described in its technical opinion of 30
May 1996 regarding the financial commitments governing the
premises of the Court of Justice. The features of that mechanism
may be summarised as follows.

The agreement does not fall within any specific category of con-
tracts. It is sui generis, combining elements of a lease and of sale
and purchase. Under its terms, the Luxembourg State covenants
in particular to transfer ownership of the buildings to the Court
of Justice (following the transfer of those buildings to the State by
the property company responsible for their construction). For its
part, the Court of Justice covenants, by paying annual instalments,
to reimburse to the State, at cost price, the investment made by
the latter, without any profit or loss to the State. The annual
instalments are treated as advance payments towards the pur-
chase of the buildings by the European Communities (Article 8(1)
of the agreement). They continue to be payable until such time as
the total amount paid out corresponds, in the aggregate, to the
purchase price less VAT.

Although the effects of the agreement extend from 1 August 1988
(the date on which occupation of (part of) the premises first com-
menced) until the date on which the European Communities
become the owners of all three annexes, namely 31 December
2015 at the latest, the annual instalments became payable only
from 1 January 1995. The sums paid in respect of the occupation
of the buildings between 1988 and 1994 were treated as accrued
instalments of the purchase price (see point 5.3.2).

The amount of each annual instalment may be adjusted to take
into account any advance payments made, over and above the
annual instalments, towards the purchase price (Article 8(2) of
the agreement). The amount in question was initially fixed in the
sum of LUF 633 520 000 (ECU 16,3 million). Following the
advance payment of ECU 50 million made in October 1996 in
pursuance of the abovementioned opinion of the Court of Audi-
tors, the amount of the annual instalments was reduced to LUF
405 000 000. That amount is subject to adjustment in the event
of a significant increase in the rates of interest applicable to the
loans used to finance the annexes.

5.3. The purchase price

5.1. The genesis of the agreement

5.3.1. The constituent elements of the purchase price

Reference should be made in this connection to point 3.2.

The agreement does not specify the purchase price; instead, it lists
the factors by which that price may be determined.

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The reasons for this are threefold: first, the rate at which the loans
were granted is not fixed throughout the entire financing term,
which means that the financing costs may vary in line with
changes in the rate; second, certain construction costs were not
yet known by the parties when the agreement was concluded;
and, third, certain construction costs were, and still are, the sub-
ject of disputes between the Court of Justice and the Luxembourg
authorities (design faults and poor workmanship).

The tender stipulates that the information needed to determine
the purchase price as at 31 December 1994 is to be made avail-
able to the expert by the Luxembourg Ministry of Finance and
Ministry of Public Works. According to the tender,
(cid:145)the costs
specified are to be determined and checked on the basis of the
information received by the Ministries concerned. An audit is to
be carried out on the basis of supporting documentation(cid:146) (point
2.2 of the tender).

The purchase price of the buildings is determined by reference to
the expenditure incurred, whether that expenditure is financed
direct by the State or by the developer (Article 8(1) of the agree-
ment). The expenditure in question is made up of the cost of con-
struction, architects(cid:146) and engineers(cid:146) fees, costs relating to the
financing of expenditure (commissions, guarantees and interest
charges) and expenses incurred by the State as lessor.

5.3.2. The inclusion of payments on account of rent made between
1988 and 1994 in the absence of a written contract

Because of the absence of any written lease stipulating the terms
of occupation of the annexes, the parties to the lease-option
agreement found it necessary to depart from concepts strictly spe-
cific to a lease in deciding how the sums paid on account of rent
between 1988 and 1994 should be characterised. In contrast to
the situation prevailing in respect of the Palais, the occupation of
which is governed by a written lease, the Luxembourg authorities
acknowledged that it was legitimate to treat the sums paid on
account between 1988 and 1994 (see points 2 and 5.2) as accrued
instalments of the purchase price (Article 6 of the agreement)
rather than as (cid:145)irrecoverable(cid:146) rent.

5.3.3. The procedures for determining the purchase price and the task

of the independent expert

Article 9 of the agreement provides that, on its entry into force,
the parties are to appoint an independent expert whose tasks
include, inter alia, calculation of the purchase price of the build-
ings. The expert(cid:146)s fees are to be borne in equal shares by the State
and by the Court of Justice. An expert was appointed pursuant to
that Article in February 1995.

It can therefore be seen that the means placed at the expert(cid:146)s dis-
posal for making a correct determination of the construction cost
and for verifying that the purchase price reflected the actual costs
of the operation were provided for under the agreement.

The amount thus determined is then to be used as the basis for
working out the annually updated amount of the purchase price
from 1988 onwards and the balance remaining payable. To that
end, account is to be taken, first, of the sums paid in respect of
annual instalments or advance payments and, second, of the costs
and expenses incurred. The total balance payable by the Commu-
nities is to be shown for each year in the form of the updated pur-
chase price of the buildings less the updated amount of the instal-
ments paid by the Court of Justice and less VAT (Article 8(1) of
the agreement).

In order to determine the flow of funds and the balance payable,
the independent expert bases his calculations, first, on the data
produced by the accounting system of the State(cid:146)s accounts depart-
ment and, second, on the data provided by the bank statements
relating to the BCEE loan accounts or other bank accounts relat-
ing to the agreement (point 2.3 of the tender).

The Court of Justice considers that, since the cost of construction,
which serves as the basis for calculating the balance payable, is to
be determined by reference to supporting documentation (that is
to say, documents proving that the expenditure has been incurred
pursuant to Article 8(1) of the agreement), the independent
expert(cid:146)s task is not merely to check the expenditure in purely
accounting terms but also to verify that that expenditure is justi-
fied. In the event that the construction cost appears to have been
wrongly determined or the purchase price does not reflect the
construction cost, it is to be rectified and a corresponding cor-
rection is to be made to the balance payable (see the first para-
graph of point 5.6). The Court of Justice therefore considers that
guarantees are in place to ensure that only the expenditure to be
borne by the institution under the agreement is in fact borne by
it.

The tender submitted by the expert, which was accepted by the
Court of Justice and by the Luxembourg authorities and which
thus forms the contractual framework of his task, provides for the
submission by him of a report dealing in turn with four matters:
first, the determination of the calculation parameters, second, the
determination of the purchase price as at 31 December 1994,
third, the annual determination of the flow of funds (financing
costs, expenditure incurred by the Luxembourg State as lessor and
VAT) and the annual updating of the purchase price and the bal-
ance payable and, fourth, the drawing up of the final statement
of account.

5.4. The treatment of the undertakings given by the

Luxembourg authorities in 1984

The Court of Auditors regrets that the agreement does not exclude
from the total price items of expenditure which the Luxembourg
authorities had unilaterally undertaken to bear in June 1983 and
at the sitting of the Government Council on 30 March 1984.

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It should be noted, first, that, as the Court of Auditors states in
paragraph 14 of its report, those unilateral undertakings were
given in a context which was totally different from the situation
prevailing at the time of the conclusion of the lease-option agree-
ment in 1994. That agreement was the outcome of a compromise
based not on the unilateral undertakings given in 1983 and 1984
but, in essence, on negotiating points of a different nature, such
as the classification of the sums paid on account of rent between
1988 and 1994 (see point 5.3.2).

Be that as it may, the lease-option agreement exempts the Court
of Justice from having to bear various items of expenditure which
the Luxembourg authorities had undertaken to bear in 1983 and
1984, such as those relating to the occupation of the land (point
5.4.1) and the construction of public roads (point 5.4.2).

The public roads are not covered by the agreement. Consequently,
the cost of building those roads does not in any way constitute an
item of expenditure to be taken into account in the calculation of
the purchase price as determined in accordance with Article 8(1)
of the agreement.

In response to paragraphs 8 and 14 of the Court of Auditors(cid:146)
report, it should be noted that Article 8(1) of the agreement
enables the Court to exclude from the final price of the premises
the cost of providing public roads such as the link road between
the Boulevard Konrad Adenauer and the Rue du Fort Nieder-
gr(cid:252)newald, despite the fact that that road, which is designed to
facilitate the flow of traffic, was built at the suggestion of the
Court of Justice.

5.4.1. The problems connected with the land

5.5. The rent payable for the Palais

When, on 14 March 1994, the Luxembourg authorities submit-
ted their initial draft agreement setting out the conditions govern-
ing the occupation of the annexes, the plan being, at that time,
that ownership of the buildings should in due course be trans-
ferred (which was not the case in 1984), they stated that (cid:145)the price
of the land is fixed at LUF 200 000 000 per hectare(cid:146).

In response to the final sentence of paragraph 19 of the Court of
Auditors(cid:146) report, the Court of Justice would point out that the
rent for the Palais is fixed in point III of the lease concluded on 5
June 1973 between the Luxembourg State and the Court of Jus-
tice.

The Court of Justice rejected that proposal, since it had at all times
taken the view that a host country which is seeking to develop a
policy of providing seats for international organisations should
include in its offer the land on which the buildings to be pur-
chased by the institution in question are located. It proved impos-
sible to secure that result, since the Luxembourg authorities
pointed out that the Court of Auditors had purchased the land on
which its building was constructed. The Luxembourg authorities
ultimately granted the Court of Justice a surface right by which it
was to have free use of the land for a term of 98 years. The Court
of Justice took the view that this was economically the most
favourable arrangement, having regard to the purchase price pro-
posed by the Luxembourg authorities.

Thus, under the 1994 lease-option agreement, the Court of Justice
has free use, pursuant to a surface right, of the land on which the
annexes are located. It is true to say, however, that it is not the
owner of that land and that it will need to become the owner of it
prior to the expiry of the surface right if it wishes to prevent own-
ership of the buildings from being transferred to the Luxembourg
State.

It will be noted in that regard that the surface right leaves open,
throughout the period of its currency, the possibility of negotiat-
ing the transfer of ownership of the land free of charge.

5.4.2. The road system

The Court of Justice has merely requested from the Budgetary
Authority the appropriations needed in order to pay the rent con-
tractually due, and has paid that rent by means of those appro-
priations.

5.6. Preservation of the financial interests of the

Communities

It is apparent from the scheme of the lease-option agreement,
from its preamble, from Article 8(1) and from the circumstances
in which it was concluded (which involved a number of items of
expenditure being challenged even before the agreement was
signed: see the second paragraph of point 5.3.1) that the balance
payable, as established on an annual basis by the expert, is merely
an estimate which is subject to adjustment in the light of fresh
information received, information not produced by the Ministries
referred to (see 5.3.3 above) in the performance of their duties or
fresh assessments of existing information.

Consequently, it cannot be concluded that the Court of Justice
agreed to bear items of expenditure which should not be taken
into account for the purposes of calculating the purchase price in
the manner laid down by Article 8(1) of the agreement. On the
contrary, the Court contested from the outset the inclusion of cer-
tain expenditure in that calculation (see the second paragraph of
point 5.3.1).

The subject-matter of the agreement is set out in detail in Article
1. It comprises the buildings and the appurtenances and annexes
thereto registered in section E C (Weimerskirch) of the cadastral
register of the municipality of Luxembourg under plot numbers
840/4284, 871/4923 and 871/4983.

As matters currently stand, there still exists a long list of points
in dispute, and the Court of Justice is continuing its negotiations
with the Luxembourg authorities with a view to excluding certain
items of expenditure from the final statement of account.

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The Court of Auditors points out, first, various inadequacies in
the checks carried out both by the Luxembourg Government and
by the independent expert (see paragraphs 17 and 18 of the Court
of Auditors(cid:146) report) and, second, the improper allocation of cer-
tain costs which has occurred as a result (see paragraphs 8, 14 and
20(f) of the Court of Auditors(cid:146) report).

In order to ascertain the extent of the invoicing anomalies found
to have occurred and of the financial costs which are not directly
linked to the financing of the building works, the Court of Justice
proposes to request the Luxembourg authorities, first, to carry
out, or arrange to have carried out, further detailed investigations
and, second, to give it access, either directly or through the inter-
mediary of an external auditor, to all documents which may be of
assistance for the purposes of determining the purchase price as
defined in Article 8(1) of the agreement.

Clarification regarding that price must be provided by no later
than the date on which the agreement expires, which is currently
expected to be in 2007. Until then, indeed, until the two parties
concerned have agreed the final statement of account, any estimate
of any loss suffered by the Communities can amount to no more than
pure conjecture.

The Court of Justice has no reason to think that performance of
the agreement will not be in conformity with the principle of
good faith in the performance of agreements, as laid down in the
third paragraph of Article 1134 of the Luxembourg Civil Code,
applicable pursuant to Article 19 of the agreement, according to
which the agreement is to be governed by Luxembourg law.

There is even less reason to think that performance of that agree-
ment is founded otherwise than on the principle of collaboration
between the Community and the Member States laid down in the
EC Treaty, of which the protection of the financial interests of the
Communities forms part.

6. Conclusion

(cid:151) From the outset, the building of each of the three annexes to
the Palais has not formed part of any comprehensive con-
struction programme; instead, each of those annexes has been
built in turn in order to meet constantly evolving require-
ments,

(cid:151) At the point in time at which the various building works were
undertaken, renting was the sole solution foreseeable for the
Court of Justice in view of the policy which the Community
institutions were then pursuing in the matter of buildings,

(cid:151) Whenever it requested appropriations in order to meet the
rental obligations envisaged, the Court of Justice provided the
Budgetary Authority with all the information which it itself
possessed,

(cid:151) The Court of Justice was not fully informed of the financial
arrangements adopted by the Luxembourg authorities until it
considered purchasing the buildings; as a lessee, it could not
demand to be so informed,

(cid:151) The Court found itself constrained to occupy the buildings
without a written contract, and, having regard to the de facto
occupation which resulted, it considers that the Luxembourg
authorities were entitled to demand a quid pro quo and that the
Court of Justice was consequently bound to make (cid:145)payments
on account(cid:146),

(cid:151) Following the adoption by the Budgetary Authority of a
buildings policy favouring the purchase of premises occupied
by the Community institutions, the Court of Justice planned
to purchase the annexes occupied by it; to that end, it signed
a lease-option agreement which was the result of a compro-
mise reached after lengthy and difficult negotiations,

(cid:151) The Court of Justice considers that the task entrusted to
the independent expert pursuant to that agreement
involves not merely checking the expenditure in purely
accounting terms but also verifying that that expenditure
is justified,

(cid:151) The Court of Justice further considers that the balance
payable, as established on an annual basis by the indepen-
dent expert, is merely an estimate which is subject to
adjustment,

(cid:151) The terms laid down by the lease-option agreement regard-
ing the purchase price payable by the Court guarantee
that the expenditure which the institution is actually
required to bear is limited to that to be borne by it under
the agreement,

(cid:151) The Court of Justice will make further inquiries without delay,
in order to satisfy itself that there has been no irregularity
adversely affecting the financial interests of the Communities.

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ANNEX

BRIEF CHRONOLOGY

August

January

January

November

Occupation of the Palais

Accession of Denmark, Ireland and the United Kingdom

Communication from the Court of
accommodation requirements (10 years)
Occupation of 40 offices in the Jean Monnet building

Justice to the Council concerning its long-term

July

Occupation of a further 80 offices in the Jean Monnet building

January

Accession of Greece

Deferral by the Council of its examination of a buildings project for the Court

In response to a proposal submitted by the Court, the Council agrees to the construction of a
building containing 300 offices

Law for the financing of the Erasmus annexe
Occupation of 140 offices in huts at Weimershof

Accession of Spain and Portugal
Work commences on the construction of the Erasmus annexe

Decision establishing a Court of First Instance of the EC
Evacuation of the Jean Monnet building
Partial evacuation of the huts at Weimershof
Occupation of the Erasmus annexe

1972

1973

1979

1980

1981

1982

1984

1985

1986

May

May

July
December

January
September

1988

October

1989

1990

1992

February
June
September

Commencement of work on the construction of the Thomas More annexe
Law for the financing of the Thomas More annexe
Commencement of the activities of the Court of First Instance
Occupation of the BAK building
Total evacuation of the huts at Weimershof

December

Law for the financing of Annexe C

February
September

Commencement of work on the construction of Annexe C
Completion of work on the construction of the Thomas More annexe
Partial evacuation of the BAK building

1994

October

November

Completion of work on the construction of Annexe C
Occupation of Annexe C by the Court of First Instance
Evacuation of the BAK building
Lease-option agreement concluded between the Court of Justice and the Luxembourg State

1995

1996

1998

1999

January

Accession of Austria, Finland and Sweden

November

Report on asbestos in the Palais

September

Announcement by the Court of Auditors of the audit concerning the expenditure of the Court
of Justice on accommodation

January
July

Occupation of the T building (temporary alternative premises)
Evacuation of the Palais