Obliged to oblige?
Highlighted in her recent blog, Justine started a discussion on why new homes are not being built in the UK and ways in which the build process can be sped up to facilitate the growing demand.
An issue that runs hand-in-hand with the delivery of housing is the need for local authorities, be it local, county or national, to deliver the infrastructure requirements needed to support new developments. There is also the ever growing need for affordable homes to be delivered to meet the growing demand currently faced by local authorities.
The obvious way in which these items can be delivered is through the two following funding streams:
1. Through Central Government; and
2. Through planning obligations agreed with developers.
Government funding streams are a finite resource that can only go so far. They can contribute to a certain number of infrastructure projects and generally relate to the bigger ticket items such as major road and rail infrastructure projects. School projects are also supported by central funding streams but monies only go so far.
This leaves other projects within a local authority’s jurisdiction needing funding with limited avenues to source it. This is where developers are integral to assisting local authorities to deliver the growth targets and infrastructure requirements. Whilst planning permission helps deliver growth targets, Section 106 Agreements (S.106) and the Community Infrastructure Levy (CIL) are key to delivering the necessary infrastructure.
S.106 has, for a long while, been the main way in which local authorities have collected monies from developers. A S.106 is a legally binding agreement between the local authority and the person that signs the agreement. It covers more than just monetary planning obligations, including:
- restricting the development or use of the land in a specified way;
- requiring specified operations or activities to be carried out in, on, under or over the land or requiring the land to be used in any specified way; or
- requiring a sum or sums to be paid to the authority (or, to the Greater London Authority) on a specified date, dates or periodically.
The final bullet point in this list is the most relevant for this discussion.
The details of a S.106 are, in general, completely open to negotiation. Therefore there are great uncertainties over the final elements included within such an agreement when discussions start. A local authority will, and rightly so, go into discussions highlighting the policy stance and a comprehensive list of obligations that they would like to be included, only for a developer to negotiate the requirements down, most commonly on viability grounds. This often leads to local authorities falling short of what they need to achieve to ensure developments come out of the ground.
Large scale, national house builders have often argued that their projects have been used as the main source of funding for infrastructure projects that also supports the smaller scale developers and their developments. It can therefore be suggested that large developments may take on an extra financial burden which can have serious implications on the financial viability of individual schemes.
A further issue related to a S.106 is the staging of payments. It is often the case that the majority of payments are set on the number of units delivered in a scheme. If we take a large scale residential scheme as a most common example, then various payments may be required on, say, the completion of the 50th, 100th, 150th unit and so on. The following graph highlights an issue with this method.
Source: gov.uk UK Total Housing completions
Since the economic downturn there has been a sharp drop off in the number of residential units completed each year; the latest data from gov.uk suggesting some 100,000 per annum less than at the peak of the market.
This has significant implications in terms of the cash flow of planning obligations for local authorities. As less units are completed, and arguably at a slower build out rate, the amount of cash for infrastructure projects is reducing. Therefore, significant infrastructure projects begin to stall, exacerbating the issue of completion rates.
This is one of the reasons for the introduction of the Community Infrastructure Levy. A fixed charge rate, known from the outset of a planning submission, which give developers greater certainty over the levels of contributions that will be sought. There are still items subject to a S.106, however these are greatly reduced to affordable housing and on site open space.
Affordable housing contributions and on-site open space requirements therefore tend to be the only negotiable elements of a scheme within local authorities which have an adopted CIL charging schedule.
Whilst it is important that affordable housing requirements are achieved by a local authority, it must be recognised that authorities are largely reliant on private sector housebuilders and developers to deliver them. Private sector housebuilders are commercial entities that work on a profit basis, and as affordable housing is the most significant policy cost affecting viability, this is usually the item that housebuilders will seek to negotiate on.
In order to support any argument relating to the reduction of a planning obligation, be it S.106 or CIL, there needs to be robust viability evidence submitted in support of a planning application. This needs to be prepared on the back of a solid evidence base and industry standard calculations that support the argument being put forward, then following up this work with sound negotiations to ensure the best possible outcome is achieved at the point of issuing the decision notice.
NJL Consulting is able to provide clients with this service and we have a track record of helping developers achieve the planning results they need. If you want to speak to us about your development contact us through the website or you can find us on twitter.