The initial wave of appeal decisions under a government regime that allows developers to challenge affordable housing obligations contains some pointers on how the system is shaping up.
Affordable housing is under pressure as grant funding, planning policy and land values pull in different directions. Planning obligations under section 106 of the Town and Country Planning Act 1990 are often wrongly seen as a safer bet than conditions to secure essential affordable provision. To date, obligations have given planning authorities more control; they must no longer serve a "useful planning purpose" and until recently could not be appealed for at least five years.
However, legislative changes introduced via the Growth and Infrastructure Act 2013 are now making their presence felt. The new section 106BA, which gives developers a right to ask councils to review housing obligations, and section 106BC, which gives developers a right to appeal against review outcomes, came into force on 25 April 2013. Where a scheme is judged not to be economically viable, the planning authority must modify affordable housing obligations so that it becomes so. Crucially, the process is a numerical exercise; there is no scope to reopen the planning merits.
Exploitation of this procedure to date has been surprisingly modest. Developers' desire to maintain good relations with planning authorities for later phases and new schemes may explain its low uptake. Also, the regime has limited application to larger schemes because any uncompleted elements will revert to the original obligation after three years or from April 2016.
Eight of the first 11 review appeals made under section 106BC resulted from non-determination, rather than refusal, by local authorities. Six of the first ten appeals decided were successful, while four received straight rejections. Most have been decided within four months of the original application. The number of affordable homes lost as a result is small, at around 100 units.
The direction in the government's statutory guidance that actual land costs should be used in appraisals to see whether applicants overpaid for the land is being followed by inspectors.
In section 106BC appeals involving developments at Holsworthy Showground in Devon (DCS Number 200-001-292) and South Norwood in south London (DCS Number 200-002-000), developers' overbids were discounted by inspectors. However, identifying genuinely comparable values for specific schemes and areas remains a problem in securing agreement on appraisals at appeal.
Care is needed on the viability information submitted and accepted during the initial planning stages.
Planning authorities should be wary of accepting unrealistic cost and value assumptions at the application stage. Small changes to build costs or sales values may result in affordable provision being stripped out later. Once permission has been granted, and financial and other obligations secured, it may be easy for developers to show that the planning requirements do not stack up.
The government guidance is clear that the assumptions used during initial section 106 negotiations will set the agenda for reviews and appeals, apart from those such as build costs that are intended to be updated. Appellants seeking a higher profit margin at a later stage have been given short shrift. In the Holsworthy case, the developer sought a 20 per cent profit margin in its review appraisal, despite having used a lower rate in its original planning appeal. The higher rate was rejected.
In a case from Surrey, a developer's request to waive a commuted sum for off-site affordable provision to improve profitability from eight to ten per cent was rejected in light of the scheme's low risk profile. The fact that the appellant had embarked on the development using an appraisal showing a loss of £84,000 did not help. Crafting appraisals to show very low margins at the planning application stage, starting the development and then seeking a higher margin generally will not work.
Many authorities will find it hard to respond robustly to appeals within the 28 days allowed by the legislation owing to time and resource pressures.
Where councils choose to resist section 106BC appeals, they should seek good valuation and other advice to ensure it is not futile. Setting up a panel of internal or external advisers who can be called on at short notice is important.
In the South Norwood case, the authority did its homework on build costs and the inspector saw no reason to overturn its refusal. But on a scheme in Suffolk, the council appears to have done too little too late on build costs and likely sales values, and the appeal was allowed. In a case from Blackpool, the council was allowed to submit updated benchmarked sales values, build costs and land values on the last day of the inquiry.
Any modifications made to obligations must ensure that schemes "become viable" at the date of the decision. While the guide emphasises that this means at today's costs and values, the approach to uncertainty over future values has caused difficulties.
A proposal that simply makes an unviable scheme less unviable should not succeed. The legal test requires immediate deliverability and the guidance stresses its importance. An appeal involving outline permission for a scheme in Cornwall (DCS Number 200-001-440) was dismissed on the grounds that the appellant's revised appraisal did not reflect a costed, deliverable scheme.
By contrast, an inspector allowed a section 106BC appeal on the 100-unit Mast Pond Wharf scheme in Woolwich (DCS Number 200-001-500) despite the developer's appraisal confirming that the project would remain unviable even if all the agreed affordable provision were removed. The local authority called for a review mechanism as a hedge against future increases in sales values. The inspector did not question its ability to impose one but decided that it was unnecessary, given that relaxation of the obligation's requirements would only last until 2016. He saw this as sufficient to ensure that the scheme would be delivered in the "current market", in line with the guidance.
The inspector's analysis was directed primarily at the guidance's impetus to get construction moving. He did not address the fact that local sales values had increased by almost 30 per cent over the preceding three years, nor the duty to apply "such other modifications" as inspectors consider "necessary or expedient" to ensure the effectiveness of obligations at the end of the three years.
However, those points did not feature in the legal challenge brought by the local authority. Its grounds were that the inspector had misapplied the law on the need for the scheme to become viable at the decision date, misunderstood its reasons for asking for the review mechanism and given inadequate reasons for refusing to impose one. In June, the High Court dismissed these claims as unarguable.
Few authorities have taken the initiative by proposing different modifications put forward by developers. A more adventurous approach is needed from councils.
Under section 106BA(6), obligations can be modified in "some other way" from those sought by the applicant. In an appeal decision this month from east London, the inspector accepted that the scheme was unviable, though not to the extent claimed by the appellant, and imposed a commuted sum towards off-site provision. Also, the regime does not explicitly prohibit councils from modifying obligations to anticipate future increases in profitability. This is worth considering, if it can be done in way that preserves minimum levels of profitability and the ability to fund and deliver the scheme straightaway.
Conditions can still be used to secure affordable housing, and any appeal on requests to vary them is subject to an overall judgement on the planning merits. Wider use of conditions would kill off some of the tortured drafting and negotiation of affordable housing obligations by lawyers. Where obligations are used, authorities should consider how review mechanisms can be built in more consistently. Properly drafted, this could oust section 106BA altogether.
This article appeared in Planning magazine, 29 August 2014.