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Time to fix CIL

The November 2017 Budget announcement on developer contributions, promised in the Housing White Paper, decided not to ditch the Community Infrastructure Levy but to tweak it instead.

Last January we suggested 6 reforms to make CIL more transparent and ensure it complements, rather than confuses, the development process. Here are the top 5 for 2018.

Reform #1 – deal with the small stuff, quickly

The recent amendment Regulations are welcome.  The Government should look to implement another set of amendment regulations by the summer, to deal with identified problems on indexation and give effect to the simplification on pooling restrictions promised in the Budget. It should reconsider the current proposal to use house price indices to inflate CIL.  Although transparent, there is no relationship between the change in values and the cost of delivering infrastructure.

There are better alternatives and consideration should be given to capping indexation rises where they exceed modelling assumptions at the CIL setting stage, giving a discount to the rate equivalent to any excess. That would encourage regular charging schedule reviews and ensure the charge remains within bounds of the original viability work.

Reform #2 – Free up strategic sites

The Budget committed to allowing a partial review of charging schedules. Among other things, that will allow charging authorities to look again at genuinely strategic sites and fix some of the problems that CIL-setting has created where errors were made or assumptions were not held to account in the examination process. The reform will allow zones to be set for these sites, with rates that reflect an agreed viability position including factoring in affordable housing delivery.

This can and should be implemented by the summer.

Reform #3– Free up strategic sites, again

For all the benefits of CIL recognised by both the CIL Review and the Budget, it is horribly complex for large, phased development.  The Review will need to grapple with how much flexibility can be created for genuinely ‘Strategic Sites’. CIL agreements should be allowed for these sites, which preserve the overall value of the infrastructure contribution (so that CIL is still a tool of value capture rather than mitigation management) but escape the complexity of the Regulations in terms of triggers, offsets and reliefs.  That will require careful thought on procurement issues, in terms of the point at which liability arises, and a more sensible approach to works in kind than the Regulations currently allow.

This can and should be implemented this year.

Reform #4 – Exemptions, distractions and diversions

There should be a proper debate about the sense in the reliefs, exemptions and offsets that plague CIL. If we want the system to be simpler, simplify it by removing these. As long as the charging regime ensures the charges adjust to reflect that, it will be neutral in many cases but far less complex.

Reform #5 – Spend It

One of the main gripes on CIL is the lack of certainty about its use (and the delay this is said to cause). In truth, many S106 contributions are subject to long clawback periods. In truth, too, CIL is only a drop in the ocean for infrastructure funding – it is unreal to expect it to be spent before match funding has been assembled or for it to deliver big bang projects on its own.

That said, two things need to be fixed:

  • CIL is meant to support the Local Plan. That is not always clear and the Government needs to consider tilting the balance from discretionary use of CIL, where it can be drained away from investment in new infrastructure to support Local Plans, to a slightly more prescriptive framework for some of the really big ticket items used to justify CIL setting in the first place.
  • Allowing CIL to be spent on maintenance of existing infrastructure is a mistake and undermines the benefit and legitimacy of the value capture it was designed to achieve. The changes made by the Localism Act 2011 to allow this were regressive and going back to the 2010 position – that CIL should fund new or upgraded infrastructure – would help concentrate spending and minds.

CIL fix is good news, more please …

After an absence, the tradition of new year Community Infrastructure Levy Amendment Regulations is back in the form of the draft Community Infrastructure Levy (Amendment) Regulations 2018, published on 14 December 2017.

The amendments are another sticking plaster ahead of a full overhaul of the CIL Regulations, this time to deal with difficulties that some authorities had got into on the application of indexation to CIL charges for S73 permissions.

Section 73 so simple

If a S73 permission is granted where no CIL charging schedule was in place at the time of the original permission, the CIL Regulations are intended to only charge the ‘top up’ change in CIL. That is entirely clear from Ministerial statements in the run up to the implementation of the Community Infrastructure Levy (Amendment) Regulations 2012 which introduced the regulation 128A regime (and various other changes) for such transitional cases.

A quirk of the drafting meant that – taken in an inappropriately literal way – the difference between indexation values for the original and the S73 consents would result a charge based on the application of the indexation change across the whole of the consented floorspace. So, for example, a S73 permission that in floorspace terms should have either zero, negative or minimal change in CIL chargeable value was being treated as having a charge relating solely to indexation change.

The Valuation Office rejected that approach on an appeal against the resulting chargeable amount in March 2017, which remains subject to stayed judicial review claim by the collecting authority.

No change

The amendment regulations now address this point by clarifying that the same indexation base value should be used for working out the chargeable value of each consent.

Although they will only come into effect later this winter, the Explanatory Memorandum states that they are clarificatory.

What lies beneath

That is important, because the ‘fix’ is partial and does not address all the mischief in the Regulations for S73 applications. By making it clear that the changes are ‘clarificatory’ we now know the Government agrees with the common sense interpretation of the Regulations the Valuation Office Agency has taken on appeal.

The Government should be commended for having listened and acted wisely. They should now make a habit of that on CIL – our next blog will include our New Year’s wish list for simplifying CIL.

In the meantime real care is still needed when dealing with S73 applications, indexation and abatement applications.

CIL – false starts can be punishing

Community Infrastructure Levy liability is determined by the point at which development is notified or deemed to have commenced. The point at which that actually occurs is not crystal clear and a recent Planning Inspectorate decision suggests that care is needed by collecting authorities and developers.  At the moment there is a risk that a planning permission that has not been implemented for planning purposes (and which could, indeed, lapse for a failure to start in time) has been implemented for CIL purposes creating a CIL liability.

CIL Triggers

CIL liability is not triggered by a material start: it is triggered by the date given in a commencement notice (unless the notice is withdrawn in advance) or, in the absence of advance notice, the deeming of a commencement date by the collecting authority.

A material start without serving a commencement notice means that CIL liability is accelerated (losing instalment and other deferral benefits) and inflated (losing some reliefs).

What constitutes a material start for CIL purposes can therefore be a million dollar question.

False Starts

The CIL Regulations require the chargeable development to have been commenced:

  • that means (under reg.7(2)) the date “any material operation begins to be carried out
  • material operation has the same meaning as under Section 56(4) TCPA 1990. Care is needed, because the Courts have confirmed that the list in Section 56(4) is not exclusive – other operations could therefore trigger CIL where material
  • reg.7 does not refer to Section 56(2), which is clear that for the purposes of meeting time limit conditions, material operations have to be “comprised in the development”. Nonetheless, the Regulations are clear elsewhere that it is the chargeable development that must be commenced.

For time-limit purposes, the law is clear that operations done without discharging genuine pre-commencement conditions are not referable to the relevant planning permission (FG Whitley & Sons v SoS Wales(1992) 64 P & CR 296: “if the operations […] contravene the conditions, that cannot be properly described as commencing the development authorised by the permission“). The operations are unlawful and at risk of enforcement, unless recognised exceptions apply.

Logic suggests that the same legal authority – and outcome – should apply to early starts for CIL purposes. CIL should not be triggered but there may be enforcement consequences and CIL consequences associated with any use of retrospective permission under Section 73A TCPA 1990.

Inspectorate disagree

CIL practice and logic have been bad bedfellows. In a recent CIL appeal decision, the Planning Inspectorate was asked to determine the correct deemed commencement date where development began without complying with a pre-commencement (noise protection) condition.  The appellant claimed that the development was not referable to the planning permission and so not chargeable. The authority contended – probably rightly – that the condition was not a genuine pre-commencement condition for Whitley purposes. The Inspector took a more purposive approach, finding that:

  • The CIL regime is not concerned with whether or not a development is lawful, it is only concerned with whether it has commenced.
  • The date of commencement of development is a separate matter from the date upon which development could be said to be authorised.

It is not the first decision to adopt this approach (also applied on appeal in 2014). Then again, two wrongs do not make a right.

Common Sense?

Care is needed by developers and reliance on the Whitley principle is risky, not least because at one level the relevant law is about the extent to which enforcement would be perverse.  The other side of the coin is that some of the findings noted above are arguably perverse: the CIL regime is (explicitly) concerned with the question of whether the chargeable development has been commenced. If the Courts would not recognise commencement for planning purposes in reliance on the chargeable permission – and would instead uphold enforcement – it follows that the ‘date for commencement of development’ is not a separate matter from the point at which that commencement could properly be said to be lawful.

The two appeal decisions do not, in that sense, recognise that:

  • the Regulations require a different approach: although reg.7(2) does not require the commencement to be referable to the chargeable permission, every other part of the Regulations that relies on reg.7(2) does so clearly.
  • this avoids otherwise perverse outcomes: for example:
    (1) service of CIL stop notice (for development taking place under the chargeable permission) where an enforcement notice could be served against development being treated as unauthorised by that permission;
    (2) CIL payment being required despite the Courts determining that the permission itself has not been implemented and so has lapsed.

In the application of Planning law, common sense tends to rise to the top, eventually. There is no reason why the CIL regime should be interpreted in any less sensible way but until there is clarity through further reform or guidance on this point, care is needed.

Community Infrastructure Levy (CIL): is the self-build exemption achievable?

The CIL regime ushered in by the Community Infrastructure Levy Regulations 2010 has brought more development within the scope of developer contributions. ‘Self-builders’ – who directly organise the design and construction of their new home – now generate around 10% of new private sector housebuilding (Self Build Housing Market Report – UK 2016-2020 Analysis). Their experience of CIL was meant to be straightforward, but regulatory complexity and attitudes to charging have meant that it is anything but.  We discuss the CIL regulations’ exemption and highlights its deficiencies.

Read the full article

This article was first published in Property Law Journal (September 2017) and is also available at www.lawjournals.co.uk

Developer contributions – which way next?

We look at the government’s CIL review, and put forward alternative ideas for fixing a broken system.

The Housing White Paper promises a new approach to developer contributions, to be announced in the Autumn Budget. But the government’s parallel review of the community infrastructure levy (CIL), published in February 2017, is illustrative of a confused regime. The future for developer contributions deserves a clearer path, so planning can focus on place-making, not value capture.

Read full article

This article was first published in Estates Gazette (February 2017) and is also available at https://www.egi.co.uk/legal/developer-contributions-which-way-next/

Autumn Statement: mood music?

In the absence of the Housing White Paper, the industry is still left needing to mind the gap.  We have simplified budgets – abolishing the Autumn Statement – but no hint of simplified planning for growth.

The overall commitment to housing is welcome mood music, but the lack of detail on powers and fiscal incentives to support locally-led Garden Towns to deliver at the scale needed leaves a hole.  Expanding grant funding for affordable tenures is great news but at £25,000 per unit is not going to be life changing.

hamThe £2.3bn Housing Infrastructure Fund could be a game changer if it is used to reward areas for proactively planning for growth. Making an up to date housing land supply a condition for at least some of the funding would dangle the right carrot for authorities that currently only have the stick. The lack of fiscal measures for new settlements – incentivising forward funding of major infrastructure that can unlock delivery at real scale – is disappointing though.

Affordable Housing is heading towards life support – delivery in 2015-16 was 52% lower than last year.  The announcement in the Autumn Statement of a funding injection to deliver 40,000 affordable homes is welcome. It is a clear recognition that addressing the housing shortage is not simply about building more homes.  Yes, we need more but they must meet a variety of needs. There are further signals of a softening of the Government’s stance on Starter Homes – tenure flexibility replacing David Cameron’s commitment to a single tenure.

Without the Housing White Paper, there is also still a wait to see how the NPPF is going to be reshaped and in particular how housing land supply and Local Plan duties will be re-set following expert advice on accelerating delivery. If the Community Infrastructure Levy is to be replaced by a simplified flat national charge, the effect on infrastructure funding and the transitional arrangements need to be understood now, so that schemes in the pipeline do not get put into suspended animation.

The statement gives some clues about the Government’s direction of travel but, funding commitments aside, offers little substance.  We still await the detail in the Housing White Paper which we are told will be published “soon”.  Reasons for the delay are unclear. Have responses to leaks on more radical measures, such as penalising developers for slow delivery, prompted a re-think?

Brexit: A week later

flagWhat are the likely effects of the Referendum decision on planning? The real answer is that nobody knows but here is a guess:

  • There will be more devolution to city regions. There is clearly a distrust of Westminster and “experts”. Expect to see devolution being set in more of a sub-regional framework.
  • Although there will be delays, the further drop in interest rates and the need for investment will mean more emphasis on new infrastructure. Now is the time for city regions to refine their infrastructure plans, making sure that they fit comfortably within the National Infrastructure Commission ambitions.
  • More of the investment will be outside London. London has succeeded in part because of the staggering levels of infrastructure investment that have been made. Other regions deserve their turn.
  • The planning system will not change.  There is no “European” element that can be stripped out. Much that is blamed on Europe is, in fact, common sense and best practice around the world. For example, does anyone seriously anticipate that we will not environmentally assess plans for large scale development proposals?  Similarly, we already have international and national commitments on climate change. Expect no change.
  • There will be some siren calls to put the brakes on housing delivery. It will be argued that, with lower levels of immigration, objectively assessed needs will fall. In reality, immigration is unlikely to fall significantly or soon. In fact DCLG figures already assume a material reduction. And, if successful in reducing immigration, the likelihood is that there will be a need to accommodate some of the Brits presently living in Europe.  Expect no change.

Perhaps the greatest effect will be that Parliamentary time will focus on managing the crisis and broader constitutional issues. Hopefully, that means that there will be less time for planning reform and we can all move calmly to a proper plan-led system of the type envisaged by the Local Plan Expert Group.  This should be supported by a slightly simplified CIL regime after the Review with a less febrile property market and one better balanced around the country.

Mind the gap – if Starter Homes survive, there will be blood

cake

The Starter Homes initiative now faces an uphill struggle onto the statute books following setbacks in the House of Lords. Critics should be careful not to write them off, though, because the Government is adopting a twin track approach that is likely to deliver changes this year either way which will disrupt and reshape planning debates.

Even if the radical Starter Homes Duty is unravelled successfully by the House of Lords, it seems very likely that the Government will modify the NPPF  to make Starter Homes a qualifying affordable housing tenure and, potentially, attempt to give it the primacy that the Housing and Planning Bill 2015/16 was aimed at until the Lords rebelled.

Either way, the changes will undoubtedly have a radical effect on Local Plan and application processes:

  • Local Plan snakes and ladders. Again.  More complication, more fuss and evidence base changes. Government is likely to change guidance on Housing Needs assessment, to identify first time buyers as in housing need. This will overturn the apple cart on existing SHMAs and Local Plans, which will immediately become out of date.
  • Starter Homes will be exempt from CIL. There is no detail in the Technical Consultation on how or when this will come into effect or how the clawback will work where homes are sold in breach of the protected period restrictions. Care is needed in swapping tenures ahead of the changes coming into effect.
  • Transitional measures. The current Starter Homes Technical Consultation is not clear how any Starter Homes requirement would be phased in.  The industry must have some headroom so that the changes do not delay schemes submitted before a sensible transitional date.
  • There will be winners – the new price caps should deliver better returns where there is a straight swap for Shared Ownership.  Authorities will seek an increase in overall affordable provision.  The changes may end up bolstering the case for a fixed percentage of affordable housing in London.  At Lower Graylingwell, the 30% affordable provision has increased to 50% Starter Homes, for example. Developers will need to plan for the demise of ‘golden brick’ payments by Registered Providers, though, and assess the cashflow implications of another 20% of product as sale tenure. Marginal sites, including previously developed green belt will be sold heavily on the back of Starter Home delivery and should expect kinder words on appeal as a result.
  • The allowance for commuted sums in ‘high value areas’ will perpetuate the existing difficulty of policies that surrender to landowner expectations and muddy the waters for developers bidding for land.
  • There will be blood. The changes will bypass conventional housing need. Reluctant and resistant authorities with backlogs of vulnerable and excluded people on the housing register who cannot access a £450k home will point to the fundamental jurisdiction in the Town and Country Planning Act 1990 to take local, democratic decisions in the interest of good planning.

They may weigh the breach of the Starter Homes duty against the duty to meet needs. The extent to which the Regulations can oust that, or any breach creates a ground for legal challenge, will come to the fore. Great care will also be needed on reporting the effects of the affordability sacrifice.

Non-starter? New homes proposals are going to shake things up, if they survive

The Government’s Starter Homes proposals have been around for a while – consultation in 2014 led to new policies in March 2015, backing the commitment to deliver 200,000 by 2020, freeing Starter Homes ‘exceptions sites’ from affordable housing requirements and encouraging authorities to search for sites. The Housing and Planning Bill 2015-16 measures intended to realise that commitment will go well beyond the existing policy, if they survive the House of Lords Report stage.

Big picture

cakeStarter Homes will be new homes [1] for purchase only (and only by first time buyers under 40) to be sold at the lesser of 80% of market value or £450,000 in London (and £250,000 elsewhere).

  • Authorities will be under a statutory ‘general duty’ to promote Starter Homes when considering planning applications
  • A power for the Government to specify the proportion of Starter Homes on specific types of sites, nationally
  • A power for the Secretary of State to issue ‘compliance directions’ requiring Local Plan policies to be disregarded. This is a hitherto unknown command power by central Government and is possible casualty of the House of Lords’ scrutiny.

The Government has already made clear that tenure changes should be accepted without changes to the overall amounts of provision in S106 renegotiations.  The HCA is already putting this into practice, tenure swapping a policy compliant affordable split to Starter Homes on its Lower Graylingwell scheme in West Sussex.

All is (nearly) revealed

The NPPF Review has not been clear about the extent to which Starter Homes will actually be treated as affordable housing (albeit that they will be exempt from providing it).  We understand that the significance of the Starter Homes Technical Consultation on the Regulations which will shape the regime is that:

  • There will be a fixed 20% requirement for most schemes of 10 units or above.  Viability testing will be permitted, but the threshold for exceptions is likely to be a higher bar than hitherto accepted in viability appeals.
  • Starter Homes will be affordable housing in policy terms. In re-opening the NPPF consultation on changes to the definition of affordable housing, the Government is signalling its intention to modify the NPPF to allow Starter Homes to qualify. We understand that they are meant to be a ‘top slice’ of viability, which is intended to ensure that Starter Homes always float to the top of the affordable tenure pile in appraisals.
  • The 8 year ‘restricted period’ during which first time buyers will have restricted selling rights will allow the percentage of market value to taper up (like staircasing Shared Ownership equity).  This responds to concerns by lenders about the effect of sudden pulses of de-restricted units hitting the market at the same time.  These periods are controversial and likely to be significantly amended following the cross-party rebellion in the House of Lords.
  • Units will not be able to be let. The attractiveness of this, alongside a period where the market for re-sales is narrowed to first time buyers under 40 remains to be seen.
  • PRS is likely to benefit from a blanket exemption but will be expected to yield a commuted sum. The Government is likely to require such sums to be calculated based on the gain in value to the developer (and to require authorities to deliver Starter Homes with it). How it will factor in the costs of assembling land to do so is moot.
  • Standard S106 wording is being prepared.

Rebel Alliance

The defeats suffered by the Government at the Third Reading stage in the House of Lords on 11 April 2016 now cast a shadow over how radical this new tenure is likely to be. Amendments backed by a cross-party alliance of peers would:

  • Extend the protected period to 20 years and force starter homes owners to repay any discount (tapering by 1/20 each year) where selling earlier
  • Return control to local authorities on how many starter homes should be delivered locally, and was backed by a majority of 86 peers.

Both amendments were back by majorities of at least 85 peers and the likelihood of the radical changes envisaged by the flagship policy announcements last year coming into effect in 2016 look limited.

[1] including those constructed but not yet occupied

Transparency of financial benefits in planning

The Housing and Planning Bill (Clause 140) proposes to make public, through committee reports, the financial benefits of certain development proposals – as we have commented on before.  The report will need to list the benefits whether it is material to the LPA decision or not, and note the LPA’s position on the benefit, these include local finance considerations (as defined by the TCPA 1990 section 70 (inserted by the Localism Act 2011)).  CIL payments are included within this description whoever may be the beneficiary, i.e. the LPA as collecting authority for its own levy, or for the Mayor of London.

Piles-of-pounds1The Government’s technical consultation on implementation of the planning changes (issued on 18 February 2016, and invites representations by 15 April 2016) sets out that council tax and business rate revenue could also be included within the description ‘other financial benefits’, to be prescribed through regulations.  This will require the LPA to liaise with those relevant departments of its Council to ascertain estimates of the likely tax/ rates that will be generated by a development, and whether that is a material consideration to the decision to be made on the application.  This could prove difficult where the scheme is in outline and the full details of a development are not yet known, in particular where flexible uses are proposed.  New Homes Bonus benefits will also be required to be reported, again further liaison will be required to obtain the appropriate information, the level of funding and determine whether that funding is material.

Most committee reports already include a section on the benefits of a scheme, this would usually include an estimate of any levy charge payable (whether mayoral or its own), as well as section 106 agreement benefits – where a recommendation to grant permission will be subject to the planning agreement being entered into on the basis of the recommendation/ resolution of the committee.  The Planning Practice Guidance already encourages authorities to report financial benefits such as New Homes Bonus and CIL, regardless of whether there is no legal basis for treating them as material to planning decisions. Care is needed to do so without creating a ground for legal challenge that would otherwise have not existed.

The solar industry for example has, for a long time, offered community benefits, either in the form of works in kind (i.e. providing panels on a public building) or financial payments (usually for the benefit of projects promoted either in relation to reduction of energy consumption, or more commonly any projects promoted for the benefit of the community).  These offers are usually made to parish/ town councils.  However, there are a number of instances where payments have been offered, and made, to local schools or other unelected community groups.  The proposals in the technical consultation are likely to require these types of benefits to be included in committee reports and judged on whether they are material.  These arrangements are usually finalised outside of the planning system, by private deed.  This transparency could have opposing impacts – with the relationship between contributions and proposals being tested for materiality, opening routes for criticism and challenge.