Section 106 Agreements - Get carved out-not carved up

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Section 106 Agreements - Get carved out-not carved up

'Section 106 Agreements' as they are commonly known are mechanisms in the form of planning obligations entered into as agreements or unilateral undertakings under Section 106 of the Town and Country Planning Act 1990 that are designed to mitigate the impact of development and make otherwise unacceptable development proposals acceptable in planning terms.

Section 106 Agreements are frequently used to procure the payment of financial contributions, the provision of affordable housing, the phasing of development, the implementation of specified works on land very often beyond the application site, the maintenance of open space and a whole of host of other obligations.

In the last few years the arrival of Community Infrastructure Levy (CIL) in those areas where it has been adopted has had an impact on the extent of the role of S106 Agreements but it has by no means replaced them - a forthcoming note will explore the relationship between the two mechanisms

Section 106 Agreements are usually entered into by the developer promoting the planning application and if the developer does not have the requisite interest in the relevant land the parties that have an interest in the land affected by the agreement

If a Section 106 Agreement is not complied with it can normally be enforced against the original parties to the agreement, their successors in title and the parties deriving title from those parties.

If therefore the site is encumbered by a Section 106 Agreement anyone acquiring an interest in that site can find themselves potentially liable under that Section 106 Agreement.

This can apply irrespective of the nature of the site whether commercial, residential, industrial or any other use.

If there is non-compliance with a Section 106 Agreement the local planning authority may seek recovery from successors in title in lieu of the original parties. Especially, as most S106 Agreements have a provision in them releasing original parties from liability after they have disposed of their interest in the relevant land.

This potentially opens the door for Section 106 Agreement to be enforceable against, for example, purchasers of individual residential/commercial units, service companies taking a long lease of the land to provide services for the site, the providers of affordable housing and/or open space management companies who acquire an interest in the site.

Whilst most local authorities will confirm that it is not their normal policy to pursue recovery against such parties, without a specific carving out provision exempting such parties from liability in the S106 Agreement itself, then this sort of unanticipated liability can potentially be pursued.

This can lead to all sorts of difficulties in term of disposals and/or the securing of funding for any particular site. So it is in the interests of owners/developers as well as potential purchasers/lessees to ensure that this issue is properly addressed.

It's our experience that at the time a S106 Agreement is negotiated most Local Planning Authorities will readily accommodate a request for a specific carve out in the agreement exempting these categories of purchasers/lessees from liability.

In the absence of such an express carve out then there are a number of alternatives that can explored.

Firstly, an indemnity against liability under the Section 106 Agreement from the selling developer. In this context it needs to borne in mind that an indemnity is only as good as the covenant strength of the party that offers it and liability under a Section 106 Agreement can subsist for a lengthy period.

Secondly a retrospective approach may be made direct to the Local Planning Authority for confirmation that the S106 Agreement in question will not be enforced against a specific category of purchaser/lessee.

Thirdly confirmation and evidence of compliance for the discharge of all obligations under the Section 106 Agreement may be available before the purchase/lease commitment is made.

Potential purchasers/lessees of any site affected by a Section 106 Agreement need to take great care to ensure that this issue of potential liability is addressed before they commit. In the absence of an express carve out in the agreement itself, particular attention needs to be paid to the alternatives available to ensure that liability under the Section 106 Agreement is not visited upon them as an unwelcome guest.

Site owners/developers need to ensure that this issue is properly dealt with at the time the S106 Agreement is entered into so that it does not present problems in the funding, development and/or disposal of the site.

To discuss this or any other real estate commercial issue, please do not hesitate to contact the team.

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