Section 106 Obligations Affordable Housing and the Small Developer Update

15th June 2016 Commercial

Section 106 agreements are described by the Planning Advisory Service as 'a mechanism which makes a development proposal acceptable in planning terms that would not otherwise be acceptable'. They are legal agreements through which the developer makes a contribution towards such matters as infrastructure and local services and facilities to offset the impact of development.

Affordable housing is now a policy requirement on most residential developments in this country. For all planning applications that involve affordable housing, applicants are required to complete a Section 106 agreement, the general purpose being to ensure that the required affordable housing actually materialises as part of the development and is of a requisite high quality and that the homes go to local people most in need of affordable housing at rents or prices that are affordable and will remain so in the future.

A Commuted Sum may also be paid as an alternative to the provision of affordable housing on site and the council will usually consider this where this would assist the viability of a development and deliver more affordable homes than on site provision. The council could, for example, use the Commuted Sum to help to re-use empty houses elsewhere for affordable housing.

There are three types of Section 106 affordable housing although contributions vary between planning authorities and requirement levels increase or decrease with the unit number on any proposed development. Generally, the three types of Section 106 affordable housing are:

  1. Social Rent this is usually based on a percentage of average earnings;
  2. Intermediate Housing for example, a shared ownership lease, provided at a cost above social rent but below market levels; and
  3. Affordable Rent rent equal to 80% of the open market rent (including, where applicable, service charges).

An economic viability report/assessment is usually submitted by the developer to the planning authority during the planning process, based upon properly documented building costs, sales values etc., enabling the developer to approach the planning authority with a view to negotiating an appropriate affordable housing provision. Section 106 obligations in relation to affordable housing contributions can place a lot of financial stress upon a development scheme to the extent that a small developer with tight profit margins would be faced with a situation where the costs involved would prevent them from developing at all. Effectively the demands made by the local planning authority in respect of affordable housing may have jeopardised the viability of the underlying planning permission before it even gets off the ground.

In November 2014 government planning policy changed on affordable housing requirements for small sites in England when it announced a number of Section 106 planning obligation changes in order to relieve or remove the pressure on small scale developers and self-build developments. Policy was changed so that for residential property development sites of 10 units or less (and with a maximum combined gross floor space of 1000 square metres) affordable housing contributions should not be sought (except in designated rural areas where authorities may choose to implement a lower threshold of 5 units or less). In addition, a financial credit was announced, equivalent to the existing gross floor space of any vacant buildings brought back into lawful use or demolished for re-development, which should be deducted from the calculation of any affordable housing contributions sought from relevant development schemes.

These changes were challenged in the High Court in July 2015 by West Berkshire District Council and Reading Borough Council on four main points:

  1. Inconsistency with the statutory planning regime;
  2. Failure by the Secretary of State to take into account material considerations;
  3. The Secretary of State's consultation upon the proposal being legally inadequate; and
  4. The Secretary of State's failure to properly assess the impact of the proposal upon persons with protected characteristics (Equality Act 2010; s. 149)

and were found to be unlawful. However, in May 2016 an appeal to the Court of Appeal by the Communities and Local Government was upheld. The policy change is therefore, for the time being, not unlawful although West Berkshire and Reading Councils are currently reviewing their position and considering their next course of action, if any.

This means that, for the time being at least, developers of sites with fewer than 10 houses will no longer have to make affordable housing contributions and thus they will not face costs that could prevent them from developing at all. There could clearly be other reasons why a development does not go ahead but this is certainly a step in the right direction for small developers where the removal of planning obligations should assist their cause.

For any real estate commercial question or for further insight please do not hesitate to contact the team.

 

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Thomas Pearson is a Partner located in Manchesterin our Real Estate Commercial department

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