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The Beginning of the End for Section 106?

Article Cover Image

About The Author

Amy Ling (Former Private Law Manager)

Amy graduated with a first in Philosophy from The University of Manchester in 2012. Following three years working within the social housing sector, Amy is currently studying for her LPC and will begin a training contract at a city firm in September 2016. Amy is an accomplished mooter, and was on the winning team in the 2015 JustCite International Mooting competition. Outside of the law, Amy is a keen runner.

Image © Mariano Mantel

The UK is in the grips of a housing crisis, and someone really ought to be doing something about it. 

This is perhaps most acutely true when it comes to social housing, with an estimated 1.8 million people on waiting lists awaiting a home and building programs which cannot keep up with demand. Although many housing associations are undertaking large-scale regeneration projects across London, these are estimated to have actually resulted in a deficit of up to 8000 social homes over the last decade.

Unlike the massive government grants used to stimulate the building boom of the 1960s and 1970s, the government response to this supply problem includes:

  1. amending planning regulations in an attempt to encourage councils and housing associations to build (see 'Development in the Law of Permitted Developments'), and
  2. requiring developers to contribute through what are known as ‘section 106 requirements’.

However, with proposals to remove the requirement from small developments, lack of transparency with viability assessments and the 'vacant buildings credit', has this legal mechanism to provide new homes been fundamentally undermined?

What is Section 106?

Section 106 of the Town and Country Planning Act 1990 (‘s106’) gives local planning authorities the power to place planning obligations on certain developments, with the aim of mitigating the impacts of any such development on the local area. These planning obligations sit alongside the Community Infrastructure Levy ('CIL'), which was introduced by Part 11 of the Planning Act 2008 as a way of the local authority imposing a monetary tariff on new developments for a similar purpose.

Planning obligations may come in different forms, with four main categories:

  1. Restricting the use or development of the land;
  2. Requiring specific operations or activities to take place in, on, over or under the land;
  3. Requiring the land to be used in a certain way; or
  4. Requiring certain payments to be made to the local authority.

The legal test for an obligation in one of these categories is set out in s122(2) of the Community Infrastructure Levy Regulations 2010, which require that the obligations must be:

  1. Necessary to make the development ‘acceptable in planning terms’;
  2. Directly related to the development; and
  3. Fairly and reasonably related to the scale and kind of the development.

Further, the National Planning Policy Framework (NPPF) requires that any s106 planning obligation should only be used where it is not possible to achieve the same aim with a planning condition, to mitigate negative effects through improving the quality of the development itself. It should be noted that it is not permitted for a s106 planning obligation and CIL to be imposed for the same infrastructure.

Typically, s106 requirements come in the form of roads, schools or affordable housing for those whose needs are not served by the housing market or proposed development. The ability to enable spending on crucial local services in this way has become increasingly important in recent years given the pressure on local authority budgets.

For example, as part of their development of nuclear reactors at the Hinkley Point site in Somerset, EDF have agreed to provide £64 million towards local services, including: £16 million on road improvements, £4 million on accommodation and housing and £4.1 million on skills and training opportunities.

Such obligations, enacted by deed, may be enforced against whoever signs the agreement and any subsequent owners. Where a developer fails to keep such obligations, the local authority may seek an injunction. West Berkshire Council has reportedly started legal action against developer Standard Life Investments under breach of contract, for failing to let affordable housing units completed in 2013.

Unfortunately, changes in regulation have meant that far fewer conditions are being imposed than needed to meet demand.

Rural Developments

Following consultation in the wake of the Autumn 2013 budget, in November 2014 it was announced that changes had been made  to the Planning Policy Guidance in order exempt developments of ten or fewer properties from the s106 requirements, although a lower threshold could be set for developments in National Parks or Areas of Outstanding Natural Beauty.

Despite acknowledging that ‘Local Authority responses generally opposed both the principle of a national threshold for affordable housing contributions and the size of the proposed threshold’, the Housing Minister, Brandon Lewis, argued ‘[o]ur reforms are helping the country's small house builders'. By removing the cost of s106 obligations (which are imposed on top of the unit build cost), Mr Lewis claims the cost of building a home will reduce by a not insignificant £15,000.

Whilst it is likely that lower build costs will stimulate house-building, contrary to the assertions of the Housing Minister, it is unlikely that these will benefit those needing affordable housing. As argued by Nick Chase, Head of Rural Insight at Action in Rural Communities England:

There will, no doubt, be an increase in housing in rural areas as a result of these changes – but we expect to see developers only building housing at market prices to obtain the greatest profits. More executive homes won’t provide a sustainable future for our communities.

Further, in January this year it was announced that Reading Borough Council and Berkshire Borough Council have made a joint application for judicial review of the changes due to the disproportionate impact on rural areas where plot sizes are often only able to accommodate developments of ten units or less, with Reading BC estimating a loss of £650,000 per year in community benefits as a result of the amendments. Hilary Cole, executive member for West Berkshire, also claims that other local authorities are considering similar group action, which may be launched shortly.

At this early stage, it is difficult to make a confident assessment as to how successful these challenges may be. What is more certain is that, if the changes deliver the savings and boost to house-building claimed by the government at least in the short and medium term, the relaxing of the s106 provisions are unlikely to lead to an increase in delivery of affordable housing. If a developer is able to build a home with a higher profit margin, it is in their interests to do so: it is only the overall increase in demand over time that may lead to lower, and therefore more affordable, prices.

A policy based around an arbitrary number of ‘ten’ or ‘five’ also seems to be a particularly clunky method for tackling the perceived problems of s106, given that developers already have considerable ability to negotiate to reduce or become exempt from the requirements by demonstrating that to meet the requirements would make development unviable.

Viability and Transparency

The NPPF specifies that local authorities ‘should take account of changes in market conditions over time and, wherever appropriate, be sufficiently flexible to prevent planned development being stalled’. Further, changes introduced by s27 of the Growth and Infrastructure Act 2013 bring an appeal system regarding affordable housing so that modifications can be requested if it can be demonstrated that the specified requirements would risk the economic viability of the building scheme.

In layman’s terms, this means that if a developer can show that providing affordable housing within a development has the potential to make the whole project unviable financially (typically anything below 20% profit margin), then they should be released of these obligations. This seems perfectly reasonable, as it would not make any sense to put conditions onto a developer that would prevent them delivering homes at all.

However, there have been growing concerns from journalists such as Oliver Wainwright that, particularly in markets such as London where there is a huge pressure to build, ‘authorities are allowing planning policies to be continually flouted [and] affordable housing quotas to be waived’.

Part of the reason for this, it seems, lies in the ‘dark art’ of assessments demonstrating economic viability of a scheme, which are often highly complex spreadsheets that local authorities lack the expertise to properly unpick. Further, the documents are often kept confidential (to maintain the trade secrets of developers), preventing scrutiny by those in the local community who will be impacted by the development, with only intervention by the Information Commissioner enabling access.

Southwark Council recently came under fire for its redevelopment of the Heygate estate with developers Lend Lease. The redevelopment of the scheme would have reduced the number of social rented homes from 1200 to 79 with a total of 25% of the new 2300 homes classed as ‘affordable’, well below the 35% target in Southwark’s core plan for the area. Southwark originally refused to release the viability assessment for the scheme due to its commercial sensitivity; however, in May 2014 the First-Tier Tribunal of the General Regulatory Chamber ruled in favour of the Information Commissioner that the majority of the documents should be released:

the importance, in this particular project, of local people having access to information to allow them to participate in the planning process outweighs the public interest in maintaining the remaining rights of Lend Lease and those subcontractors who contributed to the document

Similarly, Greenwich Borough Council has been ordered by the tribunal to release information relating to a large regeneration scheme in the area.

In a further twist, it has come to light that some developers are seeking to become exempt from s106 requirements by arguing that schemes are only viable if affordable housing tenants are kept separate from other tenants (a practise known as including ‘poor doors’) or even that the expense of keeping tenants of affordable housing segregated from private homeowners and tenants would make schemes unviable.

For example, the One the Elephant development in Elephant & Castle (also a Lend Lease project) has recently come under fire for arguing (according to a reported council report) that it would be ‘unable to support the inclusion of affordable housing within the development’ because the developers would need to provide ‘[a] second core… including lifts and circulation areas…the cost of construction would increase with the introduction of a further lift, as well as separate access and servicing arrangements’.

This, and other practices by developers, have led Stephen Cowan, controversial leader of Hammersmith & Fulham council to take a stand and state for his own borough that ‘the message to property firms who submit ridiculous viability assessments for schemes which damage neighbourhoods and blight our borough is simple - think again or look somewhere else’.

It is understandable that, as with rural developments, the government is keen to increase house-building. However, it is not acceptable that legislative provisions which are clearly intended at addressing local need are not, for whatever reason, being utilised. 

Vacant Building Credit

In recent weeks, it is the impact of the Vacant Building Credit (VBC) on the provision of affordable housing under s106 to which media attention has turned. 

VBC allows any developer that brings an empty building back into use through redevelopment, to be exempt from the s106 requirements as long as it does not involve increasing the floor space of the development. Technically speaking, this seems to mean that if a building has been vacant for any length of time, even a day, the developer could claim the exemption. 

Again, the changes are defended by Mr Lewis, who argues that they:

are good for both the environment and for society. Excessive section 106 tariffs [which include deals on payments for affordable housing] just lead to no housing, no regeneration and no community benefits

However, the policy has been branded ‘insane’ by the director of planning at Westminster Council, which reports it has already lost £29 million on just three recently approved developments.

Given such losses, such a reaction may be expected. However, in an unusual move, Daniel Van Gelder, chairman of the Westminster Property Association, which  counts among its members some of the major development players including Berkley Group, Grosvenor and Qatari Diar, released a statement in which he described the applicability of the policy in areas such as Westminster as short-termist and ‘inequitable’.

A Change in the Tide?

Despite the commitments within s106, it is clear that s106 legislation is, in many cases, not being used to its full potential by local authorities and is being gradually eroded by a progression of amendments and new regulations.

However, all might not be lost.  As a result of a judicial review this month, the High Court ruled that the decision for Winchester Council to allow developer TIAA Henderson to remove 100 affordable homes and a bus station from the original s106 agreement in return for up to £2 million for alternative housing provision without re-procuring the scheme breached both UK and EU procurement rules.   The scheme is now under an Article 25 holding direction whilst a decision to call in the development plans is made.

As argued optimistically by Peter Marsh, former chief executive of the Tenant Services Authority:

This judgment acts as a warning to any council-led development - if you use the NPPF to move the goal posts, and kill off affordable housing, after you have your development partner on board, you now run the risk of having to re-tender the entire scheme. Most developers would rather not take that risk and would rather live with their obligations than lose the entire scheme.

Whether the principles are relevant to contested developments such as those in Greenwich will be something to watch. The judgment has the potential to make a significant impact on local authority practice, and will certainly lend welcome heat to the scrutiny surrounding such developments.

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Tagged: Housing Law, Property Law

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