Summary and implications
Improving viability is crucial to delivering many developments. One area of focus will be to consider whether section 106 planning obligations can be varied or discharged. In this article, the following will be considered:
- the options available for varying or discharging section 106 obligations;
- what local planning authorities will require before agreeing or approving changes to section 106 obligations; and
- the constraints and pitfalls.
Introduction
Planning obligations are entered into by persons with a land interest and the local planning authority (LPA) under section 106 of the Town and Country Planning Act 1990 (TCPA). They can be entered into as an agreement or as a unilateral undertaking. Unilateral undertakings are only signed by the persons with a land interest, but they are equally enforceable by the LPA. The obligations are generally entered into in connection with a planning application and the purpose of the obligations is to secure mitigation, financial contributions or other planning gain that is necessary to make a development acceptable in planning terms.
An LPA requirement for an unnecessary obligation is both unlawful and contrary to planning policy, but there are surprisingly few appeals or court proceedings lodged with the specific purpose of seeking to challenge the LPA's judgement. Section 106 obligations are still largely the result of negotiations between developers and LPAs behind closed doors.
In parts of the country where the Community Infrastructure Levy (CIL) has been introduced, the focus of section 106 obligations is on-site specific mitigation. The CIL is intended to cover infrastructure that is not directly associated with any particular development. The LPA retains a list under regulation 123 of the CIL regulations that identifies this infrastructure and regulation 123 prevents section 106 obligations being used to fund it.
Deeds of modification
The principal method used in practice for varying or discharging section 106 obligations is through a deed of modification agreed with the LPA under section 106A of the TCPA.
This provides a wide discretion for the parties to agree modifications, but in practice the developer or other person seeking to vary or discharge the section 106 obligation will need to satisfy the LPA that the development would be acceptable in planning terms with the section 106 obligation varied or discharged.
A constraint on using a deed of modification, particularly on large developments, is that the deed of modification must be entered into by the LPA and all persons against whom the section 106 obligation is enforceable. The latter includes not only the original signatories, but also their successors in title. It may become practically impossible after many plots or units on a large development site have been sold or leased to procure all persons with a land interest to agree and sign the deed of modification.
Application to vary
A section 106 obligation can also be varied or discharged by an application lodged with the LPA by a person against whom the obligation is enforceable under section 106A of the TCPA.
The application route is particularly useful because the application can be lodged by one person without the need for obtaining the agreement of all other persons with a land interest against whom the obligation is enforceable. It overcomes the potential difficulty, particularly on large developments, with agreeing a deed of modification in accordance with section 106A.
The application route can also be used where the LPA may not be willing to agree a deed of variation because the applicant can appeal a refusal to the Secretary of State for Communities and Local Government.
In order to succeed on an application under section 106A, the applicant must demonstrate that either:
- the section 106 obligation no longer serves a useful purpose, in which case it is to be discharged; or
- the section 106 obligation continues to serve a useful purpose, but would serve that purpose equally well if it had effect subject to modifications.
The legislation does not say that the obligation must serve a useful planning purpose, but in practice that is generally understood to be the effect of the provision and there is some case law to support that interpretation.
The main constraint on this route is that the application cannot be made until five years has expired after the section 106 obligation was entered into. The applicant must also notify all other persons against whom the obligation is enforceable of the application. On large developments, this can be both time-consuming and relatively expensive.
Viability variations
Until 30 April 2016, an application can also be lodged with the LPA to vary or discharge affordable housing section 106 obligations under section 106BA of the TCPA if the obligations mean the development is not economically viable. If this is the case, the LPA is obliged to deal with the application so that the development becomes economically viable.
An application can be lodged at any time and there is no requirement to wait until five years has expired after the section 106 obligation was entered into. The process is quick, with the LPA required to give its decision within 28 days.
The Secretary of State's guidance states:
"The test for viability is that the evidence indicates that the current cost of building out the entire site (at today's prices) is at a level that would enable the developer to sell all the market units on the site (in today's market) at a rate of build out evidenced by the developer, and make a competitive return to a willing developer and a willing landowner."
In practice, a "competitive return" is often an internal rate of return of around 17 to 20 per cent.
An important point is that the LPA cannot seek to scrutinise the reasons why the development is unviable, for example, to consider whether the development is unviable for some non-affordable housing reason. The LPA also cannot increase the affordable housing obligations so there is little risk to a developer pursuing an application.
If the LPA refuses the application, the applicant can appeal to the Secretary of State. There have only been a handful of appeals to date and surprisingly there appear anecdotally to have been relatively few applications to LPAs.
This might be explained by the general approach of using the original viability appraisal as a reference point as explained in the Secretary of State's guidance:
"A revised appraisal that underpins the case for reduced affordable housing provision should be prepared in the same form using a methodology as close as reasonably possible to that provided in relation to the application for planning permission, or (if relevant) the most recently agreed modification, whichever is later. Any changes in the methodology should be explained and justified.
The revised appraisal should be based on current market conditions. It should make the same policy assumptions and should assume that all other obligations remain the same as the permitted scheme..."
This application route may be particularly useful either where no viability appraisal was submitted originally (probably leading to the full policy-compliant amount of affordable housing) or the LPA originally required more affordable housing or other section 106 obligations or planning gain than was viable. An application can now be made to scale back the affordable housing obligations so that the development becomes viable, including a competitive return.
Comment
The introduction of the CIL regime has not significantly reduced the role of section 106 obligations and they look destined to be used long into the future. The risk now is with overlapping liabilities or demands for section 106 obligations in addition to CIL that are unnecessary and potentially undermine viability. There are options available to vary or discharge section 106 obligations, including by agreement with the LPA or lodging an application or appeal. The most useful for improving the viability of development is likely to be by a deed of variation agreed with the LPA or, if the development is unviable and includes affordable housing obligations, by an application or appeal under section 106BA or section 106BC of the TCPA. That application and appeal route is only available until 30 April 2016.
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.
