Two recent court judgments remind local authorities, developers and landowners of key principles when drafting and entering s106 agreements

Enforcing s106 agreements – what can you do if things don’t work out as planned?

Often courts have to review situations where, despite the best efforts of the draftsmen at the time a section 106 agreement is entered into, unforeseen events arise making the agreement difficult to interpret. This summer the courts have provided some helpful guidance on how they should be interpreted when parties are faced with the unexpected.

Discharging s106 agreements

Section 106A of the Town and Country Planning Act 1990 allows for a person bound by a section 106 agreement to apply to the local planning authority to have the obligation discharged. The local planning authority should discharge the obligation if it no longer serves a useful purpose. The courts have previously given differing opinions on the interpretation of ‘useful purpose’.

In 2003, the High Court indicated it simply meant ‘useful purpose’ whereas in 2011, the court indicated it had a narrower meaning of 'useful planning purpose'. In July, the High Court issued a judgment in R (Mansfield District Council) v Secretary of State of Housing, Communities and Local Government [2018] EWHC 1794 finding the wider meaning ‘useful purpose’ was correct. Mr Justice Garnham decided that the ‘the critical question is whether the objection serves some useful function, the absence of which makes the maintenance of the obligation pointless.’

The case involved a section 106 obligation to pay 75 per cent of the cost of the highway works needed to facilitate a mixed employment and residential development. Following the initial planning permission, two subsequent planning permissions were granted, attracting the same obligation each time. At the time of the judgment, there had been no development on site, though the council had constructed the road and the landowner had paid about a third of the money due under the obligation.

The landowner applied, under s106A, to the council to have the obligation modified so as to release him from the outstanding balance. As the council failed to determine the application the developer appealed to the secretary of state. The planning inspector found that as the road had already been in place for many years, the highway costs would not be directly related to the development permitted under the latest planning permission and that building the road was not necessary to make the development acceptable. Accordingly, she found that the planning obligation no longer served a useful purpose and that it should be discharged. It was the inspector’s decision which the council challenged.

The court quashed the decision, stating ‘Here, there is an obvious purpose in enforcing the obligation, namely to recover expenses incurred by the local planning authority in building the road which made the site a candidate for development in the first place. That is a useful purpose because public money expended to facilitate the development should be recovered where possible.’

Giving meaning to the intention of the parties

In August, the Court of Appeal provided a judgment in York City Council v Trinity One (Leeds) Ltd [2018] EWCA 1883 which considered how to interpret the wording of a section 106 obligation at the time the council was seeking to enforce it. On the face of it, the agreement did not make sense because circumstances had changed so substantially since it was made.

The case was about a section 106 agreement made in connection with a residential development. The agreement contained an obligation to provide onsite affordable housing or, if that could not be achieved, a commuted sum of money instead. The problems of interpretation arose because the agreement set out that the commuted sum was to be calculated was by reference to the social housing grant, as it was in 2003, when the agreement was made. The draftsmen had contemplated that the social housing grant might change to some extent but did not anticipate a complete change to the grant system.

By the time the parties needed to engage the obligation to calculate the sum required in 2006, the social housing grant was calculated differently to that envisaged by the section 106 obligation. The parties could not agree on the amount of money owed by the developer. Subsequently, in 2011, the grant system changed again but that was no help to the parties. Ultimately, the developer claimed the commuted sum was incalculable so not due. The council claimed that would be perverse and did not reflect the bargain struck.

The court summed up the issue as a tension between the language of the contract and giving effect to the intention of the parties. The court referred to two principles set out in the 2015 Supreme Court case, Arnold v Britton and others [2015] UKSC 36:

  1. Usually the court will use the language of the contract, through the eyes of a reasonable reader, to understand what the parties meant.
  2. In a case where something happens which, judging from the language of the contract, was not intended or contemplated by the parties, the court will give effect to the intention of the parties. This can be done where it is clear what the parties intended; i.e. the conclusion is based on what the parties had in mind when they entered into the contract.

The Court of Appeal found that whilst the contract contemplated the change to the grant system it did not anticipate a complete change. The intention of the parties was that a commuted sum should be paid. The council would not have granted planning permission if the developer’s predecessor had not committed to paying a commuted sum.

As to the amount, the court decided that the developer should pay enough money so the council could provide equivalent affordable housing to that due to be delivered by the section 106 obligation. The court acknowledged that it was departure from the literal words of the contract, but found ‘it is the only sensible solution’.

What do these cases tell us?

Both Mansfield and York cases are useful barometers of the courts’ current attitudes to matters arising on the enforcement of section 106 agreements where circumstances have changed since the date of the agreement. Whilst courts have (understandably) in the past favoured conclusions which enable monies dedicated towards public infrastructure provision to be recovered by local authorities, that predisposition is strengthened by these cases. In particular, if the logic behind the decision in York is followed in future cases; that in the case of ambiguity a purposive approach should be followed, local authorities will be in a strong position to enforce the purpose of contributions to fund public infrastructure provision (of the sort envisaged by the section 106 agreement) regardless in any changes in circumstances.

In this judicial climate, the drafting of section 106 agreements will be subjected to increasing scrutiny by landowners / developers and local authorities alike.