Building blocks

There are several issues to look out for during a property transaction, and planning restrictions are one of them.

In this article, I look at one of the most common restrictions: section 106 obligations (section 106s).

Section 106s are made pursuant to section 106 of the Town and Country Planning Act 1990 (TCPA 1990). I use the word “obligations” rather than “agreements”, because section 106s can be made by way of an agreement (between two or more parties) or a unilateral undertaking (made only by one party). Section 106s are a method by which local planning authorities (LPAs) are able to restrict development, making it acceptable in planning terms. When a planning permission is granted, it can be subject to a section 106 obligation; that is, a section 106 would need to be entered into prior to the planning permission being granted. However, section 106s do not need to be related to a planning permission – they can be standalone. That being said, most section 106s are tied to a permission.

LPAs make certain demands of a developer through the use of section 106s. In a section 106, a developer makes certain promises to the borough / district council (which deals with most planning matters) and/or to the county council (which deals with waste, minerals and other planning matters). Some authorities are unitary authorities, which carry out the functions of both the borough / district council and the county council.

Section 106s can require of a developer either monetary or non-monetary obligations (unlike planning conditions, which can only restrict a development in non-monetary ways).

Completed section 106s will flag up as a local land charge (LLC). It is very important to carefully check any extant section 106s to establish whether they remain valid and enforceable, and to check that all outstanding obligations have been fulfilled.

As well as section 106s, it is advisable to check that all Community Infrastructure Levy (CIL) payments have been made prior to the completion of a property transaction – otherwise, successors in title can be liable. There is insufficient space to discuss CIL in this article.

Law and policy

The use of section 106s is governed by the TCPA 1990, the National Planning Policy Framework 2019 (NPPF) and the Community Infrastructure Levy Regulations 2010 (as amended) (CILR 2010).

Before insisting on section 106s to be entered into before granting planning permission, LPA officers must consider whether such obligations would genuinely make the development more acceptable in planning terms. Paragraph 54 of the NPPF states: “Local planning authorities should consider whether otherwise unacceptable development could be made acceptable through the use of conditions or planning obligations. Planning obligations should only be used where it is not possible to address unacceptable impacts through a planning condition.”

The same applies to other planning agreements such as highways agreements made pursuant to section 278 of the Highways Act 1980: they should only be used where planning conditions can’t be.

The legal tests for when a section 106 can be used are set out in regulations 122 and 123 of the CILR 2010 (and repeated in paragraph 56 of the NPPF). A section 106 can be used if it is:

• necessary to make the development acceptable in planning terms
• directly related to the development
• fairly and reasonably related in scale and kind to the development.

In summary, section 106s must only be used when they are necessary to mitigate the impact of a new development, and where planning conditions can’t be used.

Planning Practice Guidance (PPG), which accompanies the NPPF, advises that “discussions about planning obligations should take place as early as possible in the planning process”, on the basis that “pre-application discussions can prevent delays in finalising those planning applications which are granted subject to the completion of planning obligation agreements”.

Parties

Whether a section 106 is an agreement or a unilateral undertaking, it must be made by way of a deed rather than a simple contract, and must be executed as such, including the LPA’s official seal.

Every party with a legal interest in the land must be a party to the section 106. That includes owner(s), mortgagees, and lessees with a lease of more than seven years. The developer may or may not be the owner of the land. If they are the owner, they must sign up to the section 106. If not, they may or may not choose to sign up (since if they’re not the owner, they may not have any legal interest in the land). A provider of affordable housing (a registered provider) may also need to be a party.

Unilateral undertakings are usually quicker to process, because there are no other parties to negotiate with, so as long as the LPA approves the draft wording before it’s executed, the section 106 can be completed relatively quickly.

Procedure

Before a section 106 is entered into, the planning officer to whom the matter has been allocated will typically send draft heads of terms to the developer, or their solicitors, to review. These will summarise the demands being made of the developer, to which they must agree before the matter goes any further. There may be some negotiation at this early stage, before a draft of the section 106 is drawn up. In fact, if the heads of terms can’t be agreed, the section 106 may not be drawn up at all.

Some developers might find themselves in difficulty, financially and practically, if obligations have already become due (before, during or since lockdown) and finances are tight

If and when the heads of terms are agreed, a draft section 106 agreement / unilateral undertaking will be drawn up. However, before a draft section 106 can be drawn up, the LPA (or its solicitors) will require from the developer an undertaking to pay its reasonable legal fees associated with the section 106, whether or not it ultimately completes. This is a standard requirement. An LPA’s fees for settling a section 106 vary greatly, and it’s safe to assume that if the LPA instructs external solicitors to carry out the work, fees will be much higher (sometimes double that of in-house legal fees). A developer has little choice but to accept the fees, particularly if the grant of planning permission is dependent on the completion of a section 106. However, it might be worth trying to negotiate the fees down; I have succeeded on a handful of occasions, though ultimately, the client will need a pragmatic approach to such matters, if they want the planning permission.

Either the LPA’s solicitors will prepare the first draft, or the LPA will ask the developer’s solicitors to, based on a council template. Check the council’s template to make sure it’s up to date and accurate; as we know, it’s all too easy to reach for an old template that has since been amended or superseded.

After the heads of terms have been agreed but before the deed is completed, the wording of specific clauses in a draft section 106 are negotiable.

Monetary obligations

As mentioned, section 106s can be used to require monies from a developer, where planning conditions cannot be. Extracting monies from a developer is one of the primary uses for section 106s: a developer promises to pay monies to the borough / district council, or to the county council, depending on what the monies are for (or to a unitary authority).

Monies paid under a section 106 are to be used by the council to provide items of infrastructure in the locality. Monies could be made as lump sum payments on completion of the section 106, or paid in instalments, at various stages / phases of a development – known as trigger points. Examples could be: 50% paid on commencement of development and 50% on completion of development; or certain sums payable after a certain number of dwellings are occupied. For larger developments, there can be several key phases throughout the development, which might each be subject to a different planning permission and therefore a different section 106, so each phase is treated as a new development in its own right.

Non-monetary obligations

There are several non-monetary obligations that a council can require a developer to provide, to mitigate the impact of a new development. Typically, they will be items contributing to the local infrastructure. A few examples are:

• environmental improvements in the vicinity of the site
• tree-planting / provision of green space
• children’s play facilities
• estate enhancements / landscaping
• car-parking facilities
• refuse / recycling bins
• infrastructure
• affordable housing.

Affordable housing is very commonly required in a section 106, especially for medium-sized to large-scale developments. There are various types of affordable housing, on a sliding scale in comparison to the market rate, including:

• social rented – low-rent, secure housing, prioritised by need
• affordable rent – higher-rent, less secure housing, prioritised by need
• shared ownership – an owner buys part and rents part
• intermediate rent – 80% market rate.

Planning conditions can, in theory, require the developer to provide affordable housing, but section 106s are more typically used for this purpose. LPAs prefer to use section 106s rather than conditions if possible, because a breach of a section 106 cannot become lawful over a period of time, whereas a breach of condition can (if the condition has been breached continuously for 10 years). Further, planning conditions can be appealed by a developer immediately, whereas a section 106 cannot be appealed until at least five years have passed (see below).

In May 2019, the government reinstated an exemption on section 106s being used to secure affordable housing for developments of 10 units or fewer and developments with fewer than 1,000 square metres of floor space; affordable housing cannot be required in association with those smaller developments. The aim was to assist small-scale developers, making smaller developments more viable.

Enforceability

Section 106s are registered as LLCs; they run with the land and are enforceable by or against all parties to the deed. As section 106s can be enforced against all successors in title, it is crucial to carefully consider the wording of extant section 106s to ensure that all obligations have been fulfilled, to protect future owners from becoming liable. Successors in title will, if there are more than one, be jointly and severally liable to fulfil any outstanding obligations. There can be no enforceability of a section 106 by or against third parties (that is, parties who are neither an original party to the deed nor a successor in title).

As well as checking the wording of a section 106, also check the plan, to see which land the obligations relate to (affected land is normally outlined in red).

Section 106s can be enforced by the LPA by injunction or in the county court or High Court for breach of contract, or – for non-monetary obligations – by direct action followed by recovery of monies by the council from the party in breach. If the LPA cannot recover the monies immediately after carrying out the direct action, then a charge will be put on the property, to be recovered on a future sale or transfer.

Local authorities should take a pragmatic and proportionate approach to the enforcement of section 106 planning obligations during [the coronavirus outbreak]

Ministry of Housing, Communities and Local Government

The limitation period for breach of a deed is 12 years from the date of breach (it is six years for breach of contract). A breach could occur at any point, not necessarily at the time the deed was entered into or at the time of development – although most would be, since most obligations are due around the time of construction or shortly thereafter. I flag this up as there is sometimes a misunderstanding as to whether section 106s ‘expire’ after a certain period of time. They do not: they remain valid and enforceable until such time as they are modified or discharged. The only limitation on their enforceability is a 12-year period from the date of breach – which could occur at any time after completion of the deed.

Councils often have a section 106 monitoring and/or compliance officer, whose job it is to ensure that all obligations are fulfilled. Monitoring fees are associated with this role, which the LPA is entitled to charge “to cover the cost of monitoring and reporting on delivery of that section 106 obligation” (PPG). Monitoring fees can be difficult to challenge. Pursuant to regulation 121A of the CILR 2010, any borough / district or county council receiving any contribution(s) through section 106s must prepare an annual infrastructure funding statement, for transparency, which can be accessed under a freedom of information request, if it’s not readily sent in response to an informal request.

Modification / discharge

A section 106 can be modified by way of a deed of variation, pursuant to section 106A of the TCPA 1990, as long as all parties to the original deed (and/or their successors in title) agree to be a party to the deed of variation. If not all parties agree to sign a deed of variation, whichever party wishes to modify the original deed must make an application to the LPA – but can only do so once the section 106 has been in existence for five years or more.

Where an application is made to modify or discharge a section 106, the LPA may decide to:

1. continue the planning contribution without modification
2. discharge it, if it no longer serves a useful purpose, or
3. if it continues to serve a useful purpose, but would serve that purpose equally well if it had effect subject to the modifications applied for, allow the modifications, provided they do not place any burden on a third party.

Applications are considered by officers under delegated powers or by a planning committee, depending on the nature and importance of the application, in much the same way as any planning application is determined. (If the matter is complex, large-scale or political, it’s likely to go to committee rather than be determined by a single officer.)

Where the LPA refuses an application to modify or discharge a section 106, the applicant may appeal the determination to the secretary of state, pursuant to section 106B of the TCPA 1990. There is no longer a special procedure for varying affordable housing requirements, under section 106BA.

Section 84 of the Law of Property Act 1925 (power to discharge or modify restrictive covenants affecting land) does not apply to section 106s. I mention this for completeness, as it’s a query I’ve received a number of times in the past.

Planning contributions and the coronavirus outbreak

Most section 106 payments / obligations fall due at specific trigger points. Therefore, if construction has been halted due to the coronavirus and/or the development put on hold for other indirectly related reasons, future obligations won’t fall due until the next trigger point is reached (for example, once 50% of the market-rate dwellings are constructed), which will likely be when development re-commences. However, some developers might find themselves in difficulty, financially and practically, if obligations have already become due (before, during or since lockdown) and finances are tight.

It may be that section 106s will need to be varied (or even discharged) if obligations cannot be met by developers in these difficult times. I anticipate that LPAs will receive significantly more requests and formal applications to vary section 106s this year. If there is a genuine need to revisit a section 106 to ensure that a development can proceed (in the short or long term, once the outbreak is under control), the developer’s request / application to modify is likely, in my view, to be considered more sympathetically than usual by the LPA.

On the subject of enforcing section 106 obligations during the coronavirus outbreak, on 13 May the Ministry of Housing, Communities and Local Government issued helpful guidance: “Where the delivery of a planning obligation, such as a financial contribution, is triggered during this period, local authorities are encouraged to consider whether it would be appropriate to allow the developer to defer delivery. Deferral periods could be time-limited, or linked to the government’s wider legislative approach and the lifting of CIL easements (although in this case we would encourage the use of a back-stop date). Deeds of variation can be used to agree these changes. Local authorities should take a pragmatic and proportionate approach to the enforcement of section 106 planning obligations during this period. This should help remove barriers for developers and minimise the stalling of sites.”

For section 106s that aren’t yet in existence but are required in relation to an as-yet-undetermined application for planning permission, there may be difficulties / delays in getting them completed / executed on time in the current circumstances (there are likely to be practical issues to overcome given that parties need to get their signatures witnessed and the LPA / county council will need to seal the deed). A way of overcoming these difficulties, and of avoiding delays in the granting of planning permission, may be – if the developer agrees – that planning permission could be granted subject to a negatively-worded condition limiting the development that can take place until a section 106 has been entered into. (In such circumstances, it would be wise to get at least a draft section 106 agreed.) Such conditions would go against trite law and policy governing section 106s – ordinarily, the use of such conditions is only permitted where the delivery of a development would otherwise be put at serious risk, and only in exceptional circumstances. As to whether a development would be put at serious risk as a result of delays, this will be matter of viability / deliverability, for the developer to put forward and to be assessed on a case-by-case basis. As to whether the coronavirus outbreak would fall into the ‘exceptional circumstances’ category, I am certain that it would; in fact, it seems to be the very definition of exceptional circumstances!