The pros and cons of relaxing section 106 obligations in the wake of the lockdown

The government is facing calls to make it easier for developers to renegotiate section 106 agreements during the coronavirus crisis, in order to prevent development projects being rendered unviable by the economic fallout. However, some commentators say it is too early for such measures to be introduced because the impact of the pandemic on viability is not yet clear.

Construction: downturn has led to calls for planning obligation requirements to be relaxed (pic: Getty)
Construction: downturn has led to calls for planning obligation requirements to be relaxed (pic: Getty)

In the wake of growing fears about the impact of the Covid-19 lockdown on scheme delivery, developers and their advisors have been busy lobbying Whitehall for measures to mitigate the challenges they face. Last month, both the London Property Alliance, a body representing central London property owners, developers and advisors, and the Law Society's Planning and Environmental Law Committee wrote to the housing secretary Robert Jenrick asking for the government to consider bringing back rules, last seen in the financial crisis, that force authorities to renegotiate section 106 planning gain agreements when requested.

So, should planners be bracing themselves for another wave of section 106 renegotiations? "Absolutely," according to Anita Rivera, head of planning at law firm Mishcon de Reya. She said the economic reality was already now "fundamentally different to what it was when section 106 agreements would have been entered into", meaning schemes could be halted as developers have no chance of making their expected return.

The question of planning obligations under the coronavirus lockdown has two distinct elements. First is the question of when exactly section 106 obligations are due, and second is the question of the quantum of the obligation itself, and whether it makes the scheme unprofitable.

Gary Day, land and planning director at retirement housebuilder McCarthy & Stone, said its sales had almost entirely stopped, making it vital to preserve cash. Hence, McCarthy & Stone has written to every planning authority with which a section 106 has either been agreed and not paid, or is still in negotiation, and asked to defer payments to later in the development process, thereby enabling it to hold on to precious cash. "We're asking if we can push payments back to the completion rather than commencement of schemes, or at least 50:50," he said.

Nevertheless, he said he has not yet asked authorities to renegotiate the quantum of contribution. While "most authorities have been very flexible" about deferring payments, he said he expected they would be less flexible over the contributions themselves. Milton Keynes council, for example, has said the idea of any renegotiations of section 106 agreements were at this stage "premature". Likewise, Andrew Whitaker, planning director at the Home Builders' Federation (HBF) said he knew of "lots of developers" going to local authorities and asking for delays, but only "one or two" so far asking for the volume of contributions to be changed.

Under the 1990 Town and Country Planning Act, while local planning authorities and developers can at any point agree to amend a section 106 agreement, authorities have no obligation to enter a renegotiation until five years after the original agreement is signed. After the last recession, the government temporarily introduced a new clause – section 106BA of the Town and Country Planning Act. This effectively forced authorities to renegotiate affordable housing requirements in existing agreements when asked to by applicants, who had the option to appeal to the Planning Inspectorate if they were not satisfied or the renegotiation request was not determined within 28 days.

Both the Royal Institution of Chartered Surveyors (RICS) and the HBF's Whitaker back the calls from the London Property Alliance and the Law Society to bring equivalent legislation back on the statute book. Whitaker said the legislation should be enacted but not yet made 'live' with regulation, ready to be implemented immediately if necessary. "We think it's prudent for the government to have this ready in its back pocket," he said.

So far, while sales rates have collapsed, there is no evidence that house prices have fallen – making it hard to prove that development viability has been adversely affected (see panel below). McCarthy & Stone's Day said: "If I went to a local authority now and said a scheme wasn't viable, they would with some justification say: 'How do we know that's the case?'" Jennie Baker, an associate director at consultancy Lichfields, added: "Developers don't want to be seen as opportunistic."

Anthony Lee, head of UK development consultancy at BNP Paribas Real Estate, said it wasn't yet clear that residential prices will fall. "The government should clearly wait for evidence to become available before introducing any measures to renegotiate existing agreements," he said, particularly as the section 106BA process was used after the last recession even when values had actually recovered. "We need to avoid a repeat of that," he said.

Graham Jones, section 106 specialist at local authority body the Planning Officers' Society, also said it was "too early" for authorities to approve requests to change the quantum of obligations. "We need to wait until things settle down," he said. Jones warned against any changes in viability resulting in less affordable housing, saying that government funding should make up any shortfall. However, he said councils were already receiving requests to delay section 106 payments and should be as flexible on that as possible.

Richard Crawley, programme manager at the Local Government Association's Planning Advisory Service, said those in local government are "expecting some revisiting of section 106 agreements but this isn't happening much yet". He added: "I think it will only start to take off when the recovery is properly underway. There is lots of pragmatism around and everyone I've spoken to is keen to reduce the risk of scheme or business failure."

Many observers are expecting that significant falls in house prices will ultimately materialise, at which point, according to Day "all" developers will be seeking to vary section 106 agreements. Tony Mulhall, associate director of the land professional group at the RICS, said: "Many local authorities will be slow to catch up to the market realities of delivery or politically will not want to at this stage. A national government intervention through the introduction of section 106BA is the only realistic prospect of reacting quickly."

Indeed, Matt Spilsbury, head of development viability at consultancy Turley, said even the lockdown delay alone will "materially affect viability, given the way land and finance costs run-up exponentially when schemes are on hold". These pressures will be more acute on apartment schemes, he added.

However, while the government is aware of the requests from developers, it is not yet clear if it will act. Tim Smith, partner at law firm Bryan Cave Leighton Paisner and the current chair of the Law Society's Planning and Environmental Law Committee, said the government was understandably distracted fighting the virus itself. "A number of professional bodies have already made sensible suggestions to government," he said, "but these suggestions appear not to have the attention of government at this stage."

But there are signs that some individual councils are prepared to be more flexible during the pandemic when it comes to developer contribution payment timescales. This week, Manchester City Council considered a proposal for planning obligations to be collected when schemes are completed rather than captured up front, to help ease development challenges. And Wakefield Council has said it will allow more time for developers to pay Community Infrastructure Levy (CIL) charges.

How the Covid-19 crisis is projected to impact on house prices

Forecasts of house price falls:

  • Knight Frank: Last month, it forecast a collapse in the volume of sales but a house price reduction of just three per cent this year.
  • Savills: Last month, it said prices would fall between five to ten per cent this year.
  • Lloyds Banking Group: It said it expects prices to fall five per cent this year, but could collapse by as much as 30 per cent in three years if a severe downturn triggered.
  • Centre for Economic and Business Research: It forecast a 13 per cent fall in prices by the start of next year.

Estimates of recent house price levels:

  • Office for National Statistics: House prices fell in February – the latest available month for data – by 0.6 per cent, but were still 1.1 per cent up year on year, and close to record highs.
  • Nationwide: House prices were up by 0.7 per cent in April, and 3.7 per cent over the year, the strongest growth in over three years.
  • Halifax: House prices were flat in March, but up three per cent year on year and maintaining the record highs achieved in February.
  • Zoopla: City house prices grew by 0.1 per cent in March, the lowest growth for a year, but were still 1.8 per cent above March 2019.

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