Section 106 obligations: reducing the affordable housing requirement – renegotiation or appeal


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Over the last couple of years, it has become increasingly common for disputes to arise as to whether or not a proposed development would be viable if it is required to carry an affordable housing obligation that is consistent with local planning policy. A recent Court of Appeal decision provides an interesting insight into how differences between local planning authorities and developers may be resolved and is likely to encourage developers to resist an authority’s demands and take their chances at appeal. A subsequent decision of the High Court demonstrates, however, that it cannot be assumed that an affordable housing obligation can be reduced at a later stage even if planning policy has softened.

In Vannes KFC v Royal Borough of Kensington and Chelsea, the Court of Appeal was asked to consider the legality of a decision made by a planning inspector on an appeal brought by Vannes against a refusal of its application for planning permission. There was no dispute that the proposed change of use from hotel to residential was acceptable but one of the key issues at the Inquiry was whether or not the developer should be required to provide some affordable housing either on site or by way of a financial contribution to the Council.

The relevant planning policies are contained in the London Plan produced by the Mayor of London.Policy 3A.10 advises that:

“Boroughs should seek the maximum reasonable amount of affordable housing when negotiating on individual private, residential and mixed used schemes, having regard to their affordable housing targets …, the need to encourage rather than restrain residential development and the individual circumstances of the site. Targets should be applied flexibly, taking account of individual site costs, availability of public subsidy and other scheme requirements.”

Paragraph 3.52 which accompanies Policy 3A.10 goes on to provide that:

“In estimating provision from private residential or mixed used developments, boroughs should take into account economic viability and the most effective use of private and public investment, including use of financial contributions. The development control toolkit developed by the Three Dragons and Nottingham Trent University is one mechanism that will help.”

The Three Dragons toolkit is one of a number of models used to determine whether the redeveloped residential value of a site will exceed its existing use value. If it does not do so, then the development is not considered to be “viable”. It is often, therefore, used as a means of determining the amount of affordable housing that a development can sustain. Use of the programme requires that values are ascribed to certain matters such as construction costs, anticipated sales values and financing costs.

At the appeal Inquiry, both the Council and the developer called a large number of witnesses to give evidence on the appropriate input values to be used when using the Three Dragons toolkit. There was a considerable difference of opinion between the experts to the extent that the model showed that the development would make a loss of £7m if the developer’s input values were to be used, whereas it would produce a profit of £10m if the Council’s input figures were used. The developer advised the inspector at the Inquiry that if the provision of affordable housing was required, then it was unlikely that the development would go ahead.

The inspector allowed the appeal and granted permission. In his decision letter, the inspector acknowledged that the evidence that both the Council and the developer had given to him on input values was supplied by professionally qualified and experienced surveyors and valuers, and he declined to give a ruling on whose figures he believed to be correct. Instead, he advised that the extent of professional disagreement on the figures affected the weight that he was going to give to the toolkit results.

He pointed out that the toolkit analysis was not a policy requirement in determining whether affordable housing should be provided (or the amount). The inspector also observed that Policy 3A.10 of the London Plan refers to the need to encourage rather than restrain residential development, and that the developer had advised that the proposed scheme would be unlikely to go ahead if an affordable housing obligation was imposed. The inspector concluded that, having regard to all of the circumstances of the case and the lack of reliance that can be placed on the toolkit results, it would be unreasonable to require affordable housing to be provided.

The Council challenged the inspector’s decision in the High Court, essentially on the grounds that he had failed to resolve a key issue, namely, whether or not it was viable to provide affordable housing as part of the development. Interestingly, the Secretary of State decided not to defend the decision of the inspector and gave its consent to an order for the inspector’s decision to be quashed. The developer continued to oppose the challenge as it was entitled to do. Perhaps unsurprisingly in these circumstances, the High Court made an order quashing the inspector’s decision largely on the grounds put forward by the Council. The developer sought to have the High Court’s decision overturned in the Court of Appeal. Its persistence paid off because to the surprise of many the Court of Appeal disagreed with the High Court and reinstated the inspector’s decision.

The Court of Appeal ruled that economic viability is just one factor which has to be taken into account when considering whether or not there should be an affordable housing requirement. The court decided that the inspector was entitled to conclude that it could not reliably be determined whether the development was viable with an affordable housing obligation and that, in these circumstances, it was reasonable for him not to place any significant weight on the economic viability issue in deciding whether or not affordable housing should be provided. It was, on the other hand, however, reasonable for him to place weight on the developer’s assertion that the scheme would not proceed if affordable housing was required.

The short point arising from this decision would appear to be that if a developer has credible evidence supported by respected witnesses that a scheme would not be viable with an affordable housing requirement, it may well be able to avoid having to provide affordable housing even if its figures are disputed by the local planning authority. This is likely to strengthen developers’ hands considerably when it comes to negotiations with local planning authorities on whether a scheme should provide affordable housing (and, if so, as to the amount).

The second court decision will, however, be welcomed by local authorities. In R (application of Renaissance Habitat Limited) v West Berkshire District Council the developer had already obtained planning permission for development of land for residential purposes. It had entered into a section 106 agreement which required the developer to pay various contributions to the Council towards infrastructure costs which the Council would incur in dealing with the effects of the development. The agreement specified the sums that were due and the time at which they were required to be paid. The developer subsequently paid some, but not all, of the required contributions and the Council issued proceedings in the High Court seeking recovery of the amount outstanding.

Before that claim was heard, the developer brought its own proceedings in the High Court seeking an order that it was unlawful for the Council to take recovery proceedings. The developer referred to the fact that the Council had adopted a new planning policy since the section 106 agreement had been completed. The developer argued that if contributions were recalculated by reference to the now current Council policy no more would be due from it than it had already paid to the Council. The developer also argued that some of the contribution amounts stated in the agreement had been arrived at by calculations that were inaccurate. The developer’s application was, however, unsuccessful. The court said that the Council was simply seeking to enforce an agreement which was incontestably lawful when it was entered into. It stated that the sums demanded by the Council were lawfully demanded because the developer had agreed to pay them even if (which was not accepted) there had been a miscalculation in arriving at some of the figures. The court expanded on its decision. It explained that, although it may be unlikely that the Council would enter into an agreement requiring such contributions to be paid now it would not be unlawful for it to do so even though it would be inconsistent with current planning policy.

In reaching its decision, the court referred to the fact that there were a number of other options available to the developer if it was not happy with the obligation in the agreement. It could have sought to try to amend the wording of the agreement so that it contained a mechanism for adjusting the level of contributions in the event that planning policy changed. Alternatively, it could make a formal application for a variation of the terms of the section 106 agreement and then appeal a refusal of that application if necessary. A third option would have been to refuse to enter into the agreement in the first place and argue its case at appeal.

While the Renaissance Habitat decision did not concern affordable housing, the same principles are clearly capable of application to a demand for affordable housing, whether on site or by way of financial contribution. So far as dealing with the issue specifically in the drafting of the agreement is concerned, developers are likely to be anxious that such wording would be used by the Council to argue for an increase in the level of contributions in due course if planning policy were to move in that direction. Historically, the trend has been for emerging planning policy to impose increasingly onerous section 106 requirements, and on balance, therefore, developers are probably going to be reluctant to suggest that such wording should be added to an agreement.

The option of making a formal application to vary the section 106 agreement is only available for agreements that have been in place for more than five years. The test that would be applied here is whether or not the obligation in question continues to serve a useful purpose. It is important to note here that this does not have to be the purpose for which it was originally imposed.

There was a suggestion in the Renaissance Habitat case that this should be read as meaning a useful “planning” purpose. However, even if the test is read in this way, where, as in the Renaissance Habitat case, the obligations are to make financial payments, it is going to be very difficult to persuade an inspector that such contributions no longer serve a useful planning purpose when the Council will no doubt be able to point to some planning purpose for which they intend to use the money.

This leaves the option of refusing to sign the agreement and going to appeal. In many cases, particularly where the obligations involve paying relatively modest sums to the local planning authority, an appeal is unlikely to be an attractive option, having regard to the costs and delays that would inevitably be incurred. However, where the Council is seeking a significant affordable housing obligation a developer may now be encouraged to appeal.

In London, planning policy already allows viability concerns to be taken into account. Many local authorities outside London have also introduced a greater degree of flexibility in their policies to be taken into account. Where such flexibility exists, the Vannes decision suggests inspectors are likely to lend a sympathetic ear to developers’ arguments. If such a strategy is to be adopted, however, it is essential that the developer has an experienced and suitably qualified team of professional advisers whose opinions on the valuation issues relevant to viability are likely to be afforded respect, even if they conflict with opinions being put forward by the local authority.

Susanna Weatherstone, Solicitor, Fladgate LLP (sweatherstone@fladgate.com)

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