Financial Viability in Planning Mediation

Posted on March 14, 2017

Introduction

The 1947 Town and Country Planning Act effectively nationalised land and development. Since then the impact of planning policy on viability has been a key battleground between landowners / developers and planners / policy makers. Successive governments have tried and failed to capture the development value or betterment.

Furthermore, viability has been embedded in the planning system to inform both policy and delivery including: demonstrating a scheme is viable before confirming a CPO; the value of enabling development for the restoration of listed buildings; and the viability testing of Local Plans.  Increasingly developers and landowners are using viability to challenge the quantum of S106 obligations including affordable housing on schemes.

This paper reviews the potential for mediation in order to settle disputes over S106 obligations and facilitate the delivery of new housing.

Background and Context

The current emphasis on S106 viability stems from the last recession.  In 2009, the Homes and Communities Agency (HCA) published a good practice guidance manual ‘Investment and Planning Obligations: Responding to the Downturn’. This defines viability as follows:

a viable development will support a residual land value at a level sufficiently above the site’s existing use value (EUV) or alternative use value (AUV) to support a land acquisition price acceptable to the landowner. 

It is important to note that at that time in 2009, developments with planning conditions or obligations agreed before the market downturn were no longer viable, and were undeliverable in their consented form.  This was in addition to the changed lending environment and attitude to risk as a result of the credit crunch.  The HCA guidance was targeted at development management where developers were seeking to appeal or renegotiate S106 planning obligations.  It recommended that planning policies and practice for securing planning obligations needed to accommodate both the current realities and the future dynamic of the land and property markets.

In March 2012, the National Planning Policy Framework (NPPF) confirmed this emphasis on viability.  In the section on plan-making, paragraph 173 states:

to ensure viability, the costs of any requirements likely to be applied to development, such as requirements for affordable housing, standards, infrastructure contributions or other requirements should, when taking account of the normal cost of development and mitigation, provide competitive returns to a willing land owner and willing developer to enable the development to be deliverable.

Subsequently the Planning Practice Guidance website (Paragraph: 019 Reference ID: 10-019-20140306) states that:

In making decisions, the local planning authority will need to understand the impact of planning obligations on the proposal. Where an applicant is able to demonstrate to the satisfaction of the local planning authority that the planning obligation would cause the development to be unviable, the local planning authority should be flexible in seeking planning obligations. This is particularly relevant for affordable housing contributions which are often the largest single item sought on housing developments. These contributions should not be sought without regard to individual scheme viability. The financial viability of the individual scheme should be carefully considered in line with the principles in this guidance. Assessing viability should lead to an understanding of the scale of planning obligations which are appropriate. However, the National Planning Policy Framework is clear that where safeguards are necessary to make a particular development acceptable in planning terms, and these safeguards cannot be secured, planning permission should not be granted for unacceptable development… (our emphasis).

Hence the emphasis is on the Applicant to demonstrate to the satisfaction of the Local Planning Authority (LPA) that the scheme is not viable and planning permission should not be granted for unacceptable development. 

In February 2016, the Department for Communities and Local Government (DCLG) consulted on Section 106 Planning Obligations – speeding up negotiations – with draft proposals for mediation.

It is important to note that S106 negotiations can be a source of delay in the planning application process, but are not the only source.  Development is a complex process and it depends on the particular circumstances of the development proposal and the position, interests and needs of the developer and LPA.

One possibility to improve the process is to bring the agreement of the planning obligation within the statutory time periods of determining a planning application.  This is because planning obligations are often fundamental to the scheme.  The statutory time limits could be amended such that there is a pre-determined timescale for all applications involving S106 planning obligations. This would ensure that LPAs and developers put focused time and resources into agreeing the S106 as they would do to any other fundamental aspect of the application.

Where the S106 is not agreed within the statutory timescales, the developer or the LPA could elect that the scheme enters an alternative dispute resolution (ADR) mechanism.  This could be similar to, and possibly in parallel, to an appeal.  However, the actual mediation should be carried out by suitably qualified and experienced mediators.

One of the reasons often cited for disputes is that the planning policy is unclear.  It is important that all Local Plan policies are properly tested in terms of whole plan viability prior to being adopted.  The up-to-date policies should be published and easily accessible on the Council’s website such that developers can have regard to the policies in formulating their land bid.  Furthermore, all LPA’s should have draft Planning Agreements which can be provided to the developer at the pre-application stage.

In this way, through the residual land value (RLV) mechanism, developers can formulate their land bid.  The value of the site is determined by the gross development value of the scheme, less the costs of development, planning obligations, finance, overheads and profit.  If the RLV is positive such that the developer can secure the land, the scheme will come forward.  If the RLV is too low to entice the landowner to sell, then the development is premature.  The developer should wait until the existing use value has depreciated further and/or the alternative use value has increased such that the lines cross and development is viable. 

Guidance on the thorny issue of land value is set out in the Harman report (June 2012) and the RICS guidance Financial Viability in Planning (August 2012).

The Harman report introduces the concept of “Threshold Land Value.  It states that the:

‘Threshold Land Value [TLV] should represent the value at which a typical willing landowner is likely to release land for development.

This is a useful definition as it is a concise description of the landowner’s thought process. However, it is important to note that the Harman report, like the NPPF, is focused on plan making – not decision taking. 

The RICS guidance on ‘Financial Viability in Planning’ was published after the Harman report and it is much more market facing in its approach.  It defines financial viability for the purposes of town planning decisions as:

An objective financial viability test of the ability of development to meet its costs including the cost of planning obligations, whilst ensuring an appropriate site value for the landowner and a market risk adjusted return to the developer” (our emphasis).

The Harman report and the RICS guidance are both useful reports.  The Harman report advocates an existing use value (EUV) plus premium approach whereas the RICS advocates a Market Value (MV) approach. Both approaches have their challenges and limitations and the challenge for the mediator is to understand the wider context for the site to come forward. For example, the developer may have a ‘subject to planning’, promotion or option agreement which enables the site to be delivered; or the Local Planning Authority may have substantial housing targets but face objections from community groups and Members.  Developers also have to consider their reputations and maintain future relationships with the planners.  By understanding the wider context, mediators are in a strong position to be able to facilitate S106 agreements.

What could a S106 mediation process look like?

Where, due to specific unforeseen circumstances, a scheme cannot support the full policy requirements and a compromise cannot be agreed with the LPA, developers or LPA’s could require the scheme go to mediation.

The parties could submit to the mediator their Viability Assessment (including plans, unit mix, cost plans, market research, development appraisal etc).  The mediator would be able to establish the reasonableness of what is being proposed by both the developer and the Planning Authority and facilitate a settlement.

The appropriate body to oversee this S106 dispute resolution service is the Royal Institution of Chartered Surveyors (RICS).  It is important that mediators have the particular skills and experience in order to generate options and ‘reality check’ the parties positions.

Mediators should either be RICS Registered Valuers with detailed knowledge of residual appraisal techniques and/or specialist planning and development surveyors and ideally both.

A panel of specialist mediators could be set up by DCLG (managed by the RICS working closely with the Planning Inspectorate) to ensure that there is the appropriate network throughout the UK to cover all regions and share best practice.

Schemes of any size and use should have access to the dispute resolution service.  It is absurd to exclude any types of development from the service.  However, there should be a minimum fee to cover the work / process involved which would act as an incentive for smaller schemes to settle.

Evaluative Mediation

Mediation is an established method of dispute resolution in construction related claims.  Experienced mediators would be able to understand the wider issues and context for the dispute and facilitate S106 agreements.

Additional ADR techniques such as evaluative mediation or expert determination could be implemented where the parties require a determination to be imposed.  For example, the parties might require a determination on the percentage of affordable housing a scheme could support where no agreement could be reached.  This takes the control for the agreement away from the parties and would need to be binding if it is to speed up the planning application process.  It is much more sustainable if a settlement can be reached by consensus through mediation.