‘Future-proofing’ section 106 agreements
Back in 2020 there was talk of section 106 agreements being scaled back (and, in some quarters, scrapped entirely) following the publication of the ‘Planning for the Future’ White Paper and plans to introduce a new Infrastructure Levy. The Levelling-up and Regeneration Act 2023 even made provision for the introduction of the Infrastructure Levy, which could have been the beginning of the end for section 106 agreements.
However, with plans for the Infrastructure Levy having been dropped by the Labour government last year in favour of improvements to the existing system of developer contributions, it looks as if section 106 agreements are here to stay for the foreseeable future.
In this article, I consider the ways in which, with the right drafting, section 106 agreements can be ‘future proofed’ and set out some practical ways in which issues can be avoided down the line. Even a straightforward deed of variation can take a significant amount of time to negotiate (particularly where local planning authorities (“LPAs”) are overstretched, and on more complex sites where there are multiple landowners and mortgagees) and the costs can mount up.
The following steps are useful tips and clauses to include in planning agreements to avoid the need for deeds of variation down the line. However, there is no ‘one size fits all’ approach to drafting planning agreements, so not all of what follows will be appropriate in all circumstances:
1. Getting early legal input
It is worth stressing the importance of getting early legal input. By ‘early’ I mean, where possible, before an application goes to committee (or in the case of delegated decisions, before the first draft is issued by the Council) – not least because seeking to amend the heads of terms post-resolution to grant permission could mean going back to committee or a risk of judicial review if material amendments are agreed without returning to committee.
2. Automatically binding s73 permissions
The need for a deed of variation can often be avoided by including a clause providing for future permissions granted under section 73 Town and Country Planning Act 1990 (as amended) to automatically be bound by the obligations in the section 106 Agreement. Clearly, if the extent of scheme changes proposed by the section 73 application are such that additional and/or varied planning obligations are necessary to make the development acceptable in planning terms, there is no avoiding a deed of variation. There can, however, be disadvantages to the inclusion of such a clause depending on the circumstances which our planning team would be happy to advise further on.
3. Affordable housing cascade mechanisms
In recent years, there has been a sustained reduction in the number of registered providers (“RPs”) actively participating in the market to acquire section 106 affordable homes. Indeed, research conducted by Savills last year (‘The challenges of unlocking Section 106 delivery’) found that 53% of the Housing Associations surveyed reported that they no longer intend to acquire section 106 homes or are reducing their requirements. House builders are consequently finding it increasing difficult to fulfil their section 106 affordable housing obligations. All too often section 106 agreements are rigid and provide no flexibility in the event that the policy compliant mix of affordable housing is not deliverable due to reduced demand from RPs. The tide is, however, starting to turn and we are gradually seeing more councils agreeing to the inclusion of ‘cascade mechanisms’. Such mechanisms provide that if a suitable registered provider cannot be found within a prescribed time frame, the developer may for example:
- provide an alternative tenure of affordable housing, which might be more acceptable to an RP or which does not involve an RP at all (such as discounted market sales or discounted market rent);
- offer the affordable units to the Council; or
- as a last resort pay a commuted sum in lieu of on-site provision, which the Council can in turn use to secure the provision of affordable housing within its administrative borough.
Including a cascade mechanism at the outset can help developers secure funding (as lenders can be more confident that the scheme is deliverable) and stop sites stalling in the event that an RP cannot be found. Sadly, we are some way off cascade mechanisms for affordable housing becoming the ‘norm’ though.
4. Mechanism for repayment of unspent contributions
It is increasingly common for section 106 agreements to include a mechanism for repayment of contributions where they are unspent and/or uncommitted after a period of time (usually between 5 and 10 years). In the absence of a clawback provision, caselaw has established that a refund may be secured in limited circumstances where a term can be implied into the agreement. However, it is best practice to expressly include a clause to avoid having to rely on such arguments – not least because research conducted by the Home Builders Federation last year estimated that local authorities in England and Wales are sitting on over £6 billion in developer contributions from section 106 agreements, 25% of which it is estimated have been held for more than 5 years (with some councils holding funds for over 20 years). The full report ‘Unspent Developer Contributions – Section 106 and Community Infrastructure Levy funds held be local authorities 2024‘, makes for an interesting, if not somewhat disappointing, read.
A ‘use it or lose it’ clause also acts as a further incentive for the council to apply the money for the purposes specified in the agreement (which, after all, were deemed ‘necessary to make the development acceptable in planning terms’).
To avoid future (potentially costly) disputes as to who is entitled to any repayment, the section 106 agreement should clearly set out who contributions should be repaid to (for example, to the owner at the date repayment becomes due or the owner that originally made the payment).
5. Broad carve outs for statutory undertakers
Most section 106 agreements include a carve out so that the obligations are not enforceable against specified statutory undertakers. Often this is limited to those supplying electricity, gas, water and drainage services. However, consideration should be given to whether this should extend to other statutory undertakers, such as, telecommunication providers and public transport providers.
6. Mortgagee in possession clause (even where there is no current mortgagee)
Although there may not be a mortgagee in place when the section 106 agreement is entered into, there may well be a mortgagee at some point in the future. It is therefore sensible to include a standard mortgagee in possession clause from the outset to avoid requests from future mortgagees who made insist on one being included, resulting in the need for a deed of variation.
7. Force majeure clauses
The inclusion of ‘force majeure’ clauses (which excuses a party from fulfilling its obligations when unforeseen circumstances outside of its control make performance impossible, illegal or commercially impractical) in section 106 agreements became increasingly common during the Covid-19 pandemic. Post-covid there seems to be a return to the status quo and force majeure clauses are back to being something of a rarity in section 106 agreements, but you may wish to try and include one.
8. Automatic cancellation of local land charges entry
Providing for the automatic cancellation of any local land charges by the Council once all of the obligations have been satisfied in full, can avoid issues/delays when you come to dispose of a site. I have lost track of the number of times when carrying out due diligence on the acquisition or sale of a Property that the local land charges search reveals a section 106 agreement and it is not clear whether the obligations have been satisfied in full. If the local land charge entry has automatically been removed, it avoids the seller having to dig out evidence to demonstrate that all the obligations have been complied with.
For more information on the issues raised in the post (or on any other Planning matters) you can get in touch with our team here.
