UK: Planning By Numbers

Last Updated: 21 January 2014
Article by Roy Pinnock

Onerous section 106 requirements can tip schemes into unviability, but new rules could see the sums adding up for more development projects.

Viability debates increasingly shape development: its size, quality and tenure. Getting the tipping point right, between demanding too much and securing too little, remains a fundamental challenge. Hardening in the residential market and the creation of a new viability appeal through the Growth and Infrastructure Act 2013 are changing the game.

Enduring power

Planning requirements agreed under section 106 of the Town and Country Planning Act 1990 are usually intended to secure critical infrastructure (including affordable housing). Reduced grant funding for housing and less debt funding for development have shone a light on the realism of some of these burdens. So too the wisdom of some land deals.

Once agreed, section 106 obligations have been tricky to unpick. The ability to ask for modification or discharge of obligations with a right of appeal to the Planning Inspectorate in the background only arises after five years (under section 106A(3)) – three years in some cases. This is not a "lock out" though – authorities cannot behave unreasonably in refusing requests made within the five years (R (on the application of Batchelor Enterprises Ltd) v North Dorset District Council [2003] EWHC 3006; [2003] PLSCS 267). There are, however, hurdles, including the requirement that obligations "no longer serve" a useful planning purpose.

Judgment calls

Applications to vary planning conditions or extend time for implementing schemes result in a new consent. They can provide an alternative way to renegotiate section 106 packages, but still remain subject to an overall judgment about planning merits. The question remains whether applicants have done enough to maximise viability and demonstrate need and whether shortcomings in provision deserve to be fatal in light of other benefits. A need for affordable housing will often outweigh the need for market housing, notwithstanding viability constraints, assuming that there is an adequate local housing land supply: see Dallow Road, Luton (APP/B0230/A/12/2183021, 23 March 2013).

Growth and infrastructure

Things are changing. Planning for Growth (ministerial statement, 23 March 2011) reflects government concerns about unrealistic burdens. It remains significant in its own right: the secretary of state's failure to refer to it when refusing permission was fatal in Oxford Diocesan Board of Finance v Secretary of State for Communities and Local Government [2013] EWHC 802; [2013] PLSCS 66. The housing strategy (Laying the Foundations, November 2011) took Planning for Growth further, setting objectives for unlocking stalled schemes. The Growth and Infrastructure Act 2013, which came into force on 25 April this year, is now intended to deliver this commitment.

In addition to "special measures" powers for underperforming authorities and changes to the highways, national strategic infrastructure projects and village green regimes, the Act provides a new route for reviewing section 106 burdens (see box).

Sweet, the uses of adversity

The new regime opens up several opportunities for applicants. The accompanying guidance emphasises that there is no place for planning merits in the review. A modification or discharge must be granted if the viability test is met (see box). Changes can be sought at any time after an agreement is signed. The process will be quick and is meant to be simple. Authorities have 28 days to determine an application. There is a right of appeal (under section 106BC) where it either refuses or proposes a different approach. The Planning Inspectorate will then deal with appeals within 28 days of receiving written representations (meant to be due two weeks after submission). Altogether, the process should take around 12 weeks. The guidance is clear that previous appraisals are the starting point, to be updated where possible. Little further evidence is envisaged.

Although authorities "must" deal with an initial application under section 106BA so that the scheme "becomes viable", this duty falls away for subsequent applications and appeals.

The guidance says more than the NPPF on viability testing, particularly on the need for market value to recognise policy requirements. Like the NPPF, though, it ties values back to a "competitive return to the willing owner/developer". How land value and policy should adjust to each other is not clarified. It also leaves open the question of how best to evaluate developer's profits in different circumstances (e.g. differences between profits where schemes are equity, not debt, driven; return on land price; and profit on the provision of affordable housing).

Notes and queries

The guidance suggests that applicants will need to evidence financing costs (external or internal). This could be an unwelcome addition.

Applicants should also bear in mind that they may lose control of their affordable housing package when they submit a section 106BA application. Authorities can respond to a request by determining that affordable housing obligations should be changed or replaced. That determination is effective unless appealed. While the changes cannot be "more onerous" than the original, the boundaries to the powers to modify the obligations or reimpose new ones in this way are not clear. An applicant seeking a shift from social rent to affordable rent (or from affordable to not affordable) could in theory end up with a very different package of tenures, further review or "catch up" requirements.

Authorities will need to be careful about what assumptions they accept during the application process, even where a reasonable level of provision is being shown. Lazy assumptions will come back to bite them if the appraisal is simply updated in a section 106BA context. Equally, applicants will need to be careful about claiming that schemes are unviable per se during the planning process.

The recent Poplar Business Park appeal (APP/E5900/A/12/2178920, September 2013) is an example of this approach, where the secretary of state accepted an offer of 20% affordable provision despite being unviable on the appellant's own evidence. On a section 106BA/BC application or appeal, an updated appraisal would presumably still show an unviable scheme. The applicant's proposal would fail to meet the legal requirement for section 106BA/BC determinations to ensure scheme viability. Given that the changes are meant to drive delivery, this makes sense.

Developer incentives

The new regime is intended to provide opportunities and incentives to get building. On a section 106BC appeal, affordable housing modifications only endure if the scheme – or the relevant parts of it – have been "completed" within three years of the appeal. If not, the obligations will revert back to the original in relation to the uncompleted part.

The regime also allows inspectors to impose any other changes "necessary or expedient to ensure the effectiveness" of the obligation at the end of the three years. This could potentially include a review based on realised sales values, IRR or similar measures (and, arguably, deferred payment obligations to ensure the overall result is financially and policy neutral). This kind of "catch up" approach has been recognised by the secretary of state as an appropriate way to address uncertainty for some time (Clay and Glebe Farm appeal decisions, February 2010, APP/Q0505/A/09/2103592 & 99). The guidance also emphasises the need for authorities to actively consider such mechanisms when dealing with a review.

Behavioural shift

Market practice is changing as residential values continue to rise. Review mechanisms are now more frequently sought by authorities, more convoluted and more disliked by developers. They will begin to be invoked more as the market improves, albeit that in reality many are open to abuse.

The new regime will be used for wider value engineering. On outline and PRS schemes and appeals, it will be tempting to bank consents with a policy–compliant mix, then use a "numbers only" application or appeal under section 106BA/BC. The new regime will also be used in combination with the existing routes for changing obligations. On mixed–use schemes, for example, section 106BA can be used for affordable housing obligations while section 106A applications are used to seek changes to other obligations.

Many authorities will struggle to resource the 28–day turnaround time and will look to planning conditions to secure affordable housing (to provide immunity from the new regime and lock in some level of merits–based assessment where variations are sought). It remains to be seen whether a carefully drafted section 106 mechanism – which aims to preserve viability, based on robust evidence – will exclude the operation of section 106BA and BC altogether.

Back to the future

The new section 106BA process will allow quick changes to tenures and triggers that would otherwise have been bogged down. It also opens up a rich seam of wider value engineering. Ultimately, the diversion of resources to haggling over affordable provision highlights the limitations of requiring developers to "mitigate" by delivering affordable housing, especially in the absence of central grant. The best solution for consistent and quick delivery is to be clearer about the relationship between policy and land value and put funding for affordable housing on a clearer basis.

Authorities must have a sound viability basis for adopting policies and allocations. High Court judgments in Linden Homes v Bromley [2011] EWHC 3430 and the recent DB Schenker Rail (UK) Ltd and Towngate Estates Ltd v Leeds City Council [2013] EWHC 2865 confirm that their allocations should fail where they do not. The current draft NPPG note on viability recommends the use of a value "buffer" when assessing the effects of local plan policies on developer returns. If this 
allows the NPPF requirement to "ensure viability throughout the economic cycle" to be met, land values should, as with CIL, adjust accordingly. Viability debates should taper off.

New right to review (section 106BA)

  • modify or discharge section 106 "affordable housing requirements"
  • no prescribed form, but updated appraisal and evidence of financing costs required
  • authorities "must" make changes if tests met (where it is the first application)
  • authorities may agree or propose different ways to achieve the same objective (i.e. modifying quantum or tenure mix)
  • counter–offers no worse than the original obligation
  • 28 days to determine, unless extended
  • not applicable to rural exception sites
  • no new evidence, hearing by a short single meeting

Viability test (April 2013 guidance – section 106 review
and appeal)

  • Unviable in current market conditions
  • Cost of building (at today's prices/sales values), developer's build rate
  • "Open book" appraisal, updating values in the original wherever possible
  • Land values benchmarked against market value using local comparables "disregarding that which is contrary to the development plan"

In practice

  • Clifton Heights, Holsworthy (Redrow): 151 home scheme, 40% promised on appeal; 20.5% now sought under section 106BC
  • Mast Pond Wharf, Woolwich (Mast Pond Wharf Ltd): 16 storey 100 unit proposal increased by 7% in 2012 to assist affordable provision, 14% said to be viable, 20% secured by section 106; zero provision now sought under section 106BC
  • University College Hospital, London/London Borough of Camden: refusal of section 106BA application on 28 August 2013 to entirely release an affordable housing deal done in 2004 in relation to non–residential development of various sites. The agreement includes an obligation to transfer land to the London Borough of Camden at £1 if a minimum requirement is not met.

This article was published in Estates Gazette, 17 December 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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