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January 20, 2014

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.
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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”

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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.

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