s.106 & CIL - an updated Q&A in response to Viability.

It's now almost six weeks since Nicola put her thoughts on what was likely to happen with s.106 & CIL in light of the lockdown together; with the lockdown, fairly fresh upon is.  Since then six weeks of reality has hit us and amongst our team we've responded to client and press enquiries asking us what is going on.  This passle is an attempt to gather those responses together in one place*:@ as a Q&A.

• Is the C-19 crisis likely to see section 106 agreements renegotiated? 

We are expecting to see quite a few section 106 obligations needing to be re-negotiated especially on those developments which are still awaiting permission.  The Heads of Terms for these can be re-negotiated now as they are easier to re-write than a formal Deed of Variation.  (Albeit this may need a trip back to (now) virtual committee).  

Those developers who had just obtained planning permission and entered into a section 106 agreement with contributions based on values starting to return once more following the turmoil in recent years will find themselves in a more problematic place.  Developers were keen to get on site and many had commenced development which in all likelihood had triggered the start of the requirements to make the contributions in the 106 agreement. The obligations could be onerous in those current circumstances.

If house prices are set to fall (as predicted) there will also be questions regarding viability. 

• Is the coronavirus actually already affecting scheme viability? 

Yes!!  Initially sites closed down, now they are opening back up.  The government guidance on doing so is here, but safe distances must be maintained.  For many developers this means one trade at a time in a plot and overall many fewer workers on site.  As such completions will be slower. 

Some mortgages are being held up due to the lack of being able to get to site etc which means there is an impact on legal completions this then has an impact on cash flow and whether the obligations can be met within the specified time period – usually obligations are triggered at set intervals of development and occupation.  Where the triggers for contributions are fixed at points in time not points in the development (6 or 9 months after Commencement; rather than 50th Occupation) this issue is likely to be exacerbated. 

• Is there concern from the development sector about being able to fulfil existing s106 obligations in the current climate? (for eg. Regarding cash flow) 

Cash has always been king, but now even more so. With schemes either being mothballed but with obligations triggered or with sites being delayed due to a period of closure or slower working methods which means less cash being generated in the immediate term. In addition you have developers which are trying to preserve its cash position to ensure it has the necessary cash in the bank to fulfil its banking covenants.

• How might s106 agreements be renegotiated work in practice – ie. can it be done now, or does it require a new s106BA? 

No a section 106 agreement can be amended by agreement of all the parties at any time.  You will simply enter into a Deed of Variation of the original 106 Agreement. 

Until the s.106 is 5 years old this is however a voluntary option and whether the LPA, who may be cash strapped itself due to years of local government austerity and the effect this will have had, will have the desire to re-negotiate is also something to consider.  s.106BA gave an additional right of appeal for those attempting to argue lack of viability of a project.  Without a new s.106BA the only recourse against an LPA acting unreasonably on receipt of such a request would be the High Court and that would be an extremely high bar to pass.

• Are you aware of any examples of developers requesting revisions to section 106 agreements already? 

We have seen a few enquiries being raised by clients and our real estate colleagues when they are dealing with site acquisitions. We have a site which is a client is acquiring and the section 106 obligation is already in place. Questions have been raised as to the level of contributions and what can be done in respect of those going forward should the market not react as quickly to an easing of the lockdown. 

Some in this sector are expecting a speedy bounceback to the housing market (which had seen a rush after the general election in January and February); if jobs are to be protected and there are not large scale redundancies as seen in the last recession in 2008, then people will still have the desire to move.  Some people may even feel this has given them a different perspective in life and will move to a more rural setting.  It will be interesting to see how the lockdown affects the different elements of the housing market.

• How likely is the government to act on these concerns (if they are widespread) and reintroduce a section 106BA/BC-type mechanism? 

The Secretary of State is clearly aware of these issues as can be seen by this public letter to him by the London industry. 

The Planning White Paper was due in Spring and is still expected in due course.  It may be that the government is updating it to take into account some of these issues.  Lockdown has resulted in a number of temporary measures (such as the temporary planning measures already introduced regarding the change of use etc) being brought in quickly via Statutory Instrument.

• What the local planning authority would do to enforce the obligations.

Clearly an LPA can't discharge the obligations (which may give uncertainty in funding and transactions), but there is a discretion as to whether they enforce the specific requirements through the usual mechanisms of injunctions and entry.  If the local authorities are using their discretion then this could be susceptible to challenge if different developments are being treated differently.

• What about CIL?

We have seen a variety of pragmatism from Charging Authorities (but the legal problems highlighted in Nicola's article above remain).  One has deferred the introduction of their CIL charging regime for 6 months.  Others have delayed their debt recovery policies, to allow 6 months delay for payments and delayed issuing further Demand Notices by a further 3 months.  

These payments will clearly have an impact on 106 obligations and payments. There is no mechanism for discretion in the CIL regime if the charging schedule is in place. This creates a headache in these situations.

*:@ - content here is a full team contribution with particular thanks to Claire P-R 

We suggest previous
provisions (known as Section 106BA) are reintroduced to allow for discussions to be reopened with
local authorities to make changes, where necessary, to support continued construction.
London Property Alliance letter to Robert Jenrick MP (7 April 2020)”