Affordable housing and the quest to capture land value

Background

Could it be that Government may be ready to abandon the pursuit of that elusive Grail, land value capture (aka unearned increment and planning gain)? The quest has been on for more than a hundred years, but there are signs that things may be changing. Visionaries over the years, including John Stuart Mill, David Lloyd-George, assorted Fabians, and a young Winston Churchill (quite bizarrely), have held forth about the unfairness of land owners enriching themselves as towns developed, but doing nothing themselves to earn the gain. Periodically, Parliament made attempts to remedy this perceived unfairness, the short-lived Development Land Tax being the most recent example. These schemes to tax unearned increment were creatures of unbelievable complexity which were exterminated routinely when a succeeding government arrived in power from opposition.

Section 52 Town and Country Planning Act 1971 empowered local authorities to negotiate developer contributions and take some of the planning gain for the benefit of the community. This provision morphed into Section 106 of the Town and Country Planning Act 1990 – enter the so-called planning obligation. All quite voluntary, of course – but for a large development the extent of the voluntariness is relative – unless an agreement is entered into, or a suitable unilateral undertaking given, then no planning permission will be forthcoming. It is the signing of the section 106 agreement or undertaking that converts items from a planner’s shopping list into legal obligations.

So what goes into section 106 planning obligations? On the back of this overworked statute the parties pile both infrastructure-related contributions and requirements to provide affordable dwellings (or off-site contributions therefor). These two categories are completely different. The infrastructure contribution is a material consideration and a not- unreasonable way of making the developer fund the ramifications of its development. The affordable-housing requirement, on the other hand, could be argued to constitute affordable-housing tax which is arbitrary and not certain, but is included as an obligation because of government policies. Whilst the requirement to have affordable housing as part of a development may (or may not be) a material policy consideration, nowhere in the planning legislation does it say that the developer should foot the bill. Somewhat surprisingly the Government did not follow the recommendations of Kate Barker for a planning gain supplement. Instead, the Planning Act 2008 came up with the idea of a Community Infrastructure Levy (CIL) – a lawful, logical and innovative means of capturing gain and taking some of the load off section 106 for development-related infrastructure costs. Slightly ambivalent as to the means of its implementation, which is quasi-optional, nevertheless local planning authorities are generally having a crack at putting charging schedules together. Unlike many of its predecessors, CIL was not killed off when a new government coalesced in 2010; a rare example of cross-party consensus in the treatment of land value capture. Has Government given up the hunt for the Grail, realising that England is after all not Utopia? Not altogether it would seem: some local authorities shun CIL and will hang on to the section 106 comfort blanket for as long as they can. It’s just possible, however, that young CIL will be allowed to mature and flourish in the next ten years – although whether it survives 2015 remains to be seen.

How section 106 agreements work

CIL does not deal with the provision of affordable housing – by far the biggest private-sector payment into Community Chest. So the section 106 tug-of-war will continue unabated, and if the developer and local authority do not agree, then the planning inspectorate must rule in a quasi-judicial capacity on the viability or otherwise of a required contribution in a given development. The trick in section 106 is that once the developer, perhaps under commercial pressure, has signed up to make an agreed contribution, the matter of lawfulness or otherwise of the imposition is set aside. There is a contractually binding positive obligation running with the land. Game over – for a while. Then along came section 106A and, in 2013, section 106 BA, BB and BC. The government realised that over-optimistic affordable-housing provisions agreed to in the good times were stalling developments post-recession. The developer could apply to have his obligations discharged or modified. Good news for the developer, undoubtedly, especially as the statute provides that the contribution cannot be made more onerous. There is, however, a small sting in the tail: if the contribution is not removed or modified by negotiation, then what happens? The matter goes to appeal and the inspector appointed by the Secretary of State will determine afresh what the developer is to pay. There may be an appeal hearing, and the Inspector’s decision will be based on policy, not law.

There was a recent case in respect of a site in Lydney, Gloucestershire, where the developer Robert Hitchins Ltd applied to remove affordable-housing obligations under section 106BC. The Inspector determined that the affordable-housing requirement would not be removed, but would be re-set at rate of 14.1%, substantially lower than the rate under the pre-existing obligation. The Inspector’s decision, based on financial projections which are now material in planning policy terms, wrote off part of planning gain captured in a pre-existing section 106 agreement, though the reduced rate still represented a substantial cost to the developer. The decision-making process involved the Inspector making value judgements on sales values, sales rates and acceptable profit level. The real significance of the decision (and others like it) is that it shows how sections 106 BA, BB and BC allow the State to have a second bite of the cherry. The State gets to determine a revised level of contribution on the basis of its own policy and one individual’s opinions. Did Parliament really intend to give the State this type of power?

Implementation of policy

What of the requirement for the LPA to look to its own development plans, as stipulated by section 38(6) Planning and Compulsory Purchase Act 2004? Sadly, 41% of LPAs do not have a local plan. Despite not having a local policy framework in place, those authorities are still making planning decisions, and exacting planning obligations on the basis of their own emerging policies and the NPPF. Are planning obligations entered into in these circumstances enforceable? When do the core strategies of an emerging local plan take on sufficient maturity to enable an LPA to use it to raise hundreds of thousands of pounds in revenue?

Taking a broader view, it is arguable that neither the NPPF nor local policies are the appropriate means of capturing land value. There was some debate about previous policies such as PPG 3 in the nineties, but in the last 25 years developers have accepted the system and signed on the dotted line in order to obtain planning permissions. In most cases developers have simply assimilated the section 106 framework into their business models. Other stakeholders have not been unduly worried as they perhaps see the developer’s profits as fair game. Government has encouraged this anomalous position to the extent that its affordable housing contributions policy is based wholly on what could be termed ‘policy take’. The introduction of CIL to fund development-related infrastructure is perhaps a sign that Government acknowledges the way in which infrastructure contributions were being raised through the planning process was not wholly satisfactory. In no other sector of the government’s activity is policy take used as a means of raising revenue. The number of challenges and judicial reviews would be abundant if Government made any attempt to replicate what it does on the back of its affordable housing planning policy in any other field.

 

Possible solutions

There are several ways of addressing the various issues raised in this article, including the following:

  • give certain provisions of the NPPF the force of law
  • oblige LPAs without local plans to have their decision making supervised
  • introduce a scheme akin to CIL for local affordable-housing contributions
  • require the use of standard-form discrete section 106 agreements and undertakings for affordable housing provision
  • appoint an affordable-housing mediator where a developer and LPA are at loggerheads.

The list is, of course, non-exhaustive and given only as a basic starting point for a full debate. Future Housing Review will be looking in detail at these questions in the run-up to the election and will present its conclusions to the next Government.

 

[1] Land between Lydney Bypass and Highfield Road, Lydney, Gloucestershire, APP/P11615/Q/14/2215840

[2] See Select Committee Report on the Operationn of the NPPF, 9th December 2014. http://www.parliament.uk/business/committees/committees-a-z/commons-select/communities-and-local-government-committee/news/report-national-planning-policy-framework/

[3] See NPF report on Mediation in Planning – http://www.natplanforum.org.uk/Final%20Report%20-%20Mediation%20in%20Planning%20-%20PDF.pdf There is an HCA scheme is for mediation in the context of renegotiation of planning agreements on stalled sites.

 

Nigel Turner MBA, LLB Hons, Dip Proj Man RICS is a consultant solicitor with Bennett Griffin and director of Future Housing Review

 

The information contained in this article is for general guidance only and is not intended to be legal advice. Professional advice should always be taken on the application of the law in any particular situation.