Viability has become an ever more important planning consideration in recent years. Developers often argue that high costs and low returns restrict their ability to provide affordable housing and other community benefits as part of their schemes. Some local authorities have attempted to counter this through the use of viability review mechanisms.
Also known as "clawback clauses", these usually involve re-evaluating how much affordable housing or other community benefit it is viable for the scheme to provide. They are often applied when construction begins or, for multi-phased projects, can be applied at various points in the planning and development process, such as when reserved matters applications are determined.
Commentators say that such tools are being used more frequently by councils, as they allow changes in market conditions to be taken into account. Claire Dutch, partner at law firm Hogan Lovells, says that almost all councils are aware that if a developer proposes a scheme that does not meet their policies for developer contributions, they can require it to agree a clause saying that viability needs to be reviewed in future. "Developers have no choice. Otherwise they don't get planning permission," she says.
Clawback clauses "can be simple or complex, but we have been seeing them grow in complexity," says Dutch. Such reviews "are only as good as the appraisal", adds Roy Pinnock, partner at law firm Dentons. "While some work, others are not easy to understand and apply," he says. Practitioners also warn that the necessary monitoring of a scheme's progress can add to councils' costs. And reviews can lead to contributions going down as well as up.
Though most common in London due to high residential values, viability review clauses have also been used by other English city councils. Birmingham City Council is preparing for the first viability review of developer Urban Splash's Icknield Port Loop scheme, which proposes 1,150 homes on brownfield land near the city centre. It was granted outline consent in 2013 with an initial affordable housing contribution of ten per cent. "A fresh viability appraisal is required at each reserved matters application, with any extra sums earmarked to be spent on education and affordable housing," says Ian McLeod, the council's assistant director of regeneration.
Another imminent review is for the 750-home Saffron Square scheme in Croydon town centre. This was granted permission in 2008 with a 35 per cent affordable housing requirement. In 2010, developer Berkeley Homes renegotiated a revised 23 per cent target with the London Borough of Croydon following the recession, but agreed to reassess the scheme's viability when 95 per cent of the private homes were occupied - a milestone that is now approaching, according to the council.
Some councils have started embedding reviews in policy documents. In January, the London Borough of Islington adopted a development viability supplementary planning document that requires reviews mechanisms "on all major residential applications that do not meet the strategic affordable housing target". John Wacher, Islington's section 106 and development viability manager, says: "We have seen significant increases in values, in some cases even in a 12-month period, and wanted assurance that we are getting accurate information." Below we look at three clawback deals that have netted extra millions for affordable housing.
WANDSWORTH, LONDON £10 MILLION CLAWBACK
In 2012, the London Borough of Wandsworth granted outline permission to developer Ballymore Group for the 1,750-home Embassy Gardens mixed-use scheme in Vauxhall. The permission included a section 106 agreement committing the developer to providing 15 per cent of the housing as affordable. But the agreement contained a three-part review clause to evaluate at different stages of the scheme whether additional affordable housing could be sustained.
The agreement established that if the private residential units achieved an average sales value of £850 per square feet, the developer would be required to make higher payments to the council. The trigger points for these values to be assessed were when the developer applied for detailed permission for each new phase of the scheme. By the time it made its application for the second phase, sales values had recovered to such an extent that the developer agreed to pay the council £40 million towards affordable housing in addition to the 15 per cent provided on the site.
So far, the council has received £10 million. Council leader Ravi Govindia says that the additional funds will be used to support off-site affordable housing. "Although we would always prefer low cost homes to be built on-site, it is by successfully enabling development in the first place that councils can provide more homes for local people," he says.
BRISTOL £783,000 CLAWBACK
As an authority facing severe development constraints, the bulk of Bristol City Council's development comes in the form of relatively small-scale single-phase sites. Jim Cliffe, its planning obligations manager, says that this means that the council doesn't use viability reviews very often. But in 2014 it received almost £800,000 following a review of a 147-home Linden Homes development on the edge of the Bristol County Ground, home to Gloucestershire County Cricket Club.
The original planning permission included no affordable housing, but a viability review clause was included in the section 106 agreement. "When the homes came through, the market had jumped and they sold for more than anticipated," says Cliffe. The review, undertaken at the completion of the development in autumn 2014, yielded £783,000 for the council to support off-site affordable housing. "It shows that the clauses can work, but it depends on the timing," Cliffe says. "We had a very good working relationship with Linden Homes. They were aware that the review was required and were happy to make the provision."
Cliffe says that review clauses are not always straightforward for councils to draft. "I think developers and their financiers are very concerned about them as they want absolute certainty in terms of scheme cost and funding," he adds.
HOUNSLOW, LONDON £6.9 MILLION CLAWBACK
The London Borough of Hounslow granted permission for developer St George's 308-home Kew Bridge scheme in October 2011. Now complete, the scheme includes 3,750 square metres of commercial space. The application proposed providing 61 affordable homes, equivalent to a 20 per cent affordable housing level, against the 50 per cent target set in the London Plan at the time.
According to a 2011 planning committee report, the applicant agreed to a clawback mechanism in the section 106 agreement stating that the housing contribution would rise to a maximum of 50 per cent if the viability of the development subsequently rose above an agreed base level. The council's affordable housing supply manager, Sean Doran, says that over the last decade it has been Hounslow's policy to negotiate reviews if applications propose affordable housing levels that fall below its policy requirements on viability grounds.
Doran says that the Kew Bridge scheme has resulted in three payments totalling £6.9 million in affordable housing contributions over and above the 20 per cent originally agreed across the two phases of development. These were triggered when each phase neared completion, with a third review following the final apartment sales. The first review prompted a £1.3 million payment in February 2014 and five additional off-site affordable homes in September 2014, Doran reports. The second yielded contributions of £3.7 million in January 2016 and the third £1.9 million in June 2016. Doran says: "The process took a long time to negotiate, but the actual reviews have been relatively straightforward and resulted in a very positive outcome for all parties."