The credit crunch and its impact on Section 106 Agreements

Seeking repayment of unspent planning contributions

With the constraints of the credit crunch taking its toll on the development industry, there has been a marked increase in the number of housebuilders re-examining the provisions of Section 106 Agreements that they entered into with local planning authorities during better economic times, with a view to assessing whether the Planning Authority has spent any contributions within the period specified in the Section 106 Agreement.

It has always been best practice to include provisions in planning Agreements which provide that if the Planning Authority has not expended or committed for expenditure a contribution within a set amount of time from the date of payment, then any part of the sum which remains unexpended or uncommitted shall be reimbursed by the Planning Authority to the developer together with any interest accrued. Whilst it may have proved difficult to agree such a clause, and commonly Planning Authorities would insist on a repayment period of a minimum of ten years, these clauses may now prove to be invaluable in light of the current economic climate. Any developer would be well advised to closely scrutinise Section 106 Agreements that it has entered into and to find out whether any contributions that it has paid have been spent in accordance with the terms of the Agreement.

Future proofing of Section 106 Agreements

A number of planning authorities are having to consider whether to make concessions in terms of their planning policy requirements for planning obligations where a development scheme would not be viable if a full range of planning obligations is imposed. The difficulty for the planning authority, particularly in terms of major schemes with a duration of more than three years, is accounting for the inevitable considerable variation of the viability of the scheme over the lifetime of the development. These changes cannot sensibly be anticipated at the outset of the scheme, particularly not for the later phases of development.

Local authorities have increasingly been expressing concern that where they have been expected to make concessions on planning obligations for economic viability reasons, they foresee that the viability justification may be undone over time by changing market conditions and the benefit will accrue entirely to the developers. For current schemes in particular, the authorities find themselves having to negotiate planning obligations from a scheme that is close to the bottom of an economic cycle in the housing market. The developer, however, can look forward to the likelihood that market conditions will improve substantially over the life of a development project.

Planning authorities are looking to deal with this issue in a number of ways but the methods have not yet been tried and tested. One of the solutions being considered by a number of planning authorities is for the planning authority to insist on periodic viability reviews and for there to be an uplift on the baseline planning obligations agreed at the outset, in the event that the viability of a scheme has improved to a certain level. The Section 106 Agreement will therefore need to include certain baseline figures so that future reviews can be easily assessed. Developers may claim that such an approach is unreasonable because it only allows a one way review, but the authority is likely to counter that it has already been asked to make concessions so is, in effect, already losing out and is simply looking for safeguards to ensure that the authority does not continue to lose out in the long term.

Another solution that is being proposed is to permit planning obligations to be discounted or deferred but for a time limited period. For example, in the London Thames Gateway Development Corporation area, the contribution that is required to be paid for each residential unit is discounted to encourage immediate development. The developer will then have three years to build out the scheme and after that period the discount no longer applies if average sales values increase beyond agreed thresholds.

Developers will need to provide robust evidence to justify any request for reduced planning obligations on viability grounds, but the indications are that planning authorities will be amenable to such requests providing that the planning authority’s position is safeguarded in the event that market conditions improve.