Viability at stake

All parties involved in housing proposals need to get to grips with market conditions and the mechanisms to take them into account in planning agreements, argues Stuart Andrews.

In coming to terms with the current downturn, we can be confident that the government is committed to maintaining housing supply, that housing delivery targets remain to be realised by every local authority and that the underlying demand for housing is still of significant concern.

In a letter to councils, DCLG chief planner Steve Quartermain has advised that all planning permissions for housing should be reviewed and attendant section 106 agreements re-examined because "now more than ever it is important to help authorities ensure that existing planning permissions are built out". We also know from paragraphs B10 and B38 of Circular 05/2005 that local planning authorities should take viability issues into account when concluding any section 106 agreement.

The proportion of affordable housing is the obvious target for any adjustment needed to make a scheme more viable. But reduced provision does not always have an impact on delivery and scheme sustainability. Also, as PPS3 makes clear, affordable housing requirements should always be regarded as targets.

The secretary of state's approach to viability shows a willingness to take account of market conditions and support for substantial reductions in affordable housing to bring development forward. This has been demonstrated in recent decisions on proposals in Godalming and Maidenhead. Both cases related to small residential schemes on regeneration sites. In Godalming, the secretary of state agreed to a substantial discount on affordable provision. In Maidenhead (DCS Number 100-060-592), no affordable provision was required at all.

There are similar decisions in which the inspector or secretary of state has accepted evidence of scheme viability and an attendant discount in affordable housing provision. While the inspector in the Godalming case acknowledged the potential to employ a review mechanism to boost affordable housing provision in line with better market conditions, this option was not put before the inquiry (DCS Number 100-058-474). The inspector had to resort to recommending approval with a discount to affordable homes provision to reflect the market.

This approach is well and good for modest development schemes, but the position must be different for more substantial development. This is reflected in a recent case from Beverley on Humberside (DCS Number 100-061-857). The proposal related to a mixed-use development including 165 homes to be built six to eight years into the development programme. The developer argued that viability dictated a departure from the 40 per cent affordable target required by policy and made an offer of nine units.

The secretary of state accepted this offer and was minded to determine that the section 106 agreement should allow for the staged review of affordable housing provision based on future viability in expectation of an improved market by the time the residential element would come forward. This approach explicitly rejected the appellant's proposed use of a clawback mechanism relating to future market conditions.

The approach in the Beverley case is consistent with that identified in the Homes and Communities Agency's recent good practice note Investment and Planning Obligations - Responding to the Downturn. This recommends "the use of mechanisms to defer policy-based planning obligations on early phases of a phased development to subsequent phases, subject to viability testing prior to the commencement of each phase".

A point of clarity has been reached. Modest schemes that are struggling in this market should be assessed at the grant of consent to determine any affordable housing discount. Those unviable schemes with a longer lifespan should be permitted subject to arrangements for future review to reflect prevailing economic conditions.

But inherent difficulties arise in securing these arrangements in any section 106 agreement:

- How to determine the break point between a modest and a substantial scheme or between an immediate and a slow-burning development.

- How to set upper and lower limits for any future affordable provision.

- Whether future assessments should be based on the assumptions of the first appraisal or the prevailing position throughout the life of the development.

- How to deal with repeated review exercises in rapidly changing market conditions or where grant funding is hard to pin down.

- How to revisit the discount on earlier phases without frustrating future development and the commercial arrangements between landowners and developers over a potentially substantial timeframe.

These are far from straightforward issues. Even reaching this stage assumes that there is agreement on such things as profit levels, land values, construction costs and contingencies in settlement of the initial assessment. It also assumes agreement on the reliability of affordable housing policies and, more particularly, that they have been subject to proper economic assessment.

This is all fertile ground for confusion, error and ultimately litigation. The answer is not necessarily to produce further advice, because the circumstances of each case will differ considerably. Section 106 agreements have been prepared to deal with this problem and experienced surveyors have established methodologies to overcome valuation issues. These issues need to be properly understood by all concerned and the approach has to remain adaptable and fluid in this ever-changing market.

Stuart Andrews is a partner at Eversheds LLP.

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