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Credit Check: muddles in the mire

The introduction of new policy on section 106 tariffs and affordable housing has generated significant interest and concern. The policy simply states that:

“A financial credit, equivalent to the existing gross floorspace of any vacant buildings brought back into any lawful use or demolished for re-development, should be deducted from the calculation of any affordable housing contributions sought from relevant development schemes.”

specialThe statement is clearly policy, albeit the weight to attach to it is a matter of debate.  Where local plans have been adopted in accordance with the NPPF, taking account of viability and vacant floor space, should the new policy override that?  The additional supporting paragraphs in the NPPG are not policy, but there is a risk that they will be treated as if they are, given the poor and skeletal nature of the policy itself.

This shock and awe approach to policy making has led to mixed reactions.  It is estimated that it will cost Westminster City Council alone £1bn in lost funding.  Westminster, Southwark and the City of London are looking for ways to reshape their policies to cope.  Reading and other boroughs have brought a legal challenge. The Westminster Property Association has said it rejects the windfalls the changes would bring.  There have to be question marks about how long it will last.  However, for as long as the policy survives in its current form, the opportunities are offset by some uncertainties.

Opportunity cost

Although there is an argument that the policy only applies to financial contributions it is likely that the  offset applies to both financial contributions and on-site provision. The policy therefore opens up the scope for greater profits.  It also creates a perverse incentive for further running down the stock of commercial floorspace and replacing it with residential uses in some areas.

The policy is not binding on local planning authorities – who may see good planning reasons for not giving it overriding weight.  The likelihood of it being given overriding weight on appeal means that many authorities will feel unable to continue their previous approach though.

The furore highlights how so much reliance has come to be placed on financial contributions and raises a question of whether local Plans that relied on affordable housing provision from vacant buildings remain sound.  Unless there is alternative provision (or finance) or an increase in greenfield site allocations, it is hard to see how they can be – the local plan will not meet the objectively assessed need for affordable housing.  For plans to be sound, they will need to be amended to identify how they will fund affordable provision in urban areas without developer contributions (or how significantly increased site allocations outside urban areas will enable the slack to be taken up, albeit that it will be in less sustainable locations).

Credit check

The policy itself is limited to the 28 November 2014 Ministerial Statement.  The guidance on how to apply the credit is sparse. Several practical difficulties are already apparent:

  • How much credit? The basis of calculation is open to debate. Correspondence with CLG suggests that obligations should be reduced to the same proportion as the net increase bears to the total residential floorspace.  Developers should not assume that the space will be offset on this ‘straight line’ basis – authorities such as Norwich are considering a more nuanced approach where average unit sizes are factored in, with potentially significant effects. Some authorities will apply a GEA basis, not GIA.
  • Vacancy: The NPPG refers to ‘relevant’ vacant buildings providing a credit.  That will mean different things to different people.  Does it mean all of a building or part?  Does it mean at the date of application, of permission or later?  Developers will need to be careful to avoid a definition or period of vacancy that could cut across existing floorspace offsets for CIL. Will authorities seek to back-date rates claims where vacancy is relied on but was not obvious before?
  • Abandonment: The credit will not apply where buildings have been abandoned. This is a high threshold, but also a strange test to choose, being an area of law ill-suited to planning permissions and requiring a mixed objective and subjective test. Unless buildings have become so dilapidated that they are effectively beyond any resumption of a previously authorised use, it will rarely apply.

Local Plan changes

There is a nudge, perhaps unintended, to review Local Plans.  CLG have suggested that the measure is intended to be impact based. If authorities review the impacts and adopt policies that reflect it, the development plan should trump the credit policy.  Authorities in urban areas – particularly London – are now fast tracking this kind of review.  In some areas, a Neighbourhood Plan might be a quicker and easier vehicle in which to do this, given that such plans only need to be prepared ‘having regard to’ national policy.  According to recent Secretary of State appeal decisions, they can be adopted inconsistently with the NPPF, become immediately out of date (or sit in draft) and still be given determinative weight on appeal.

There is also a nudge to CIL. The new policy can, and should, be reflected in CIL viability modelling for all types of sites.  It may increase the charging rates significantly for strategic sites with material levels of vacant building.  As local authorities look for alternative sources of funding the changes may also lead to more scrutiny of whether the Government’s changes to the CIL regime under the Localism Act 2011 did, really, kill off the ability to spend CIL on affordable housing.

Affordable housing contribution reduced on appeal

We have previously reported on successful appeals by developers to reduce affordable housing contributions under the Section 106BC appeal mechanism.  Shortly before Christmas a further developer, Bloor Homes Limited (“Bloor”), succeeded in its appeal to reduce its affordable housing contribution on a scheme in Shepshed on viability grounds.

Bloor entered into a planning obligation in November 2012 which required the provision of 30% affordable housing with 70% in the form of rented units and 30% being intermediate housing.  Charnwood Borough Council subsequently refused Bloor’s application to modify the affordable housing contribution.

With the appeal documentation Bloor submitted appraisals for the provision of 30% and 14% affordable housing on the appeal site.  Bloor  also carried out a Market Research Report which identified values achieved on a residential site under construction on Anson Road in another area of Shepshed. 

In reaching his decision the Inspector, Stephen Roscoe, drew heavily on the values achieved from sales at Anson Road. Based on these figures the Inspector concluded that there was an additional £211,000 to add to the 14% appraisal value.  He accepted that the affordable housing obligation of 30% made the scheme unviable in current market conditions.  However, when looking at the 14% appraisal scheme he concluded that, based on an affordable unit price of £110,000, the value increase justified two additional affordable units.  The Inspector decided that the required number of affordable units should be increased to 12, equivalent to 17.1% with 66.6% being rented units and 33.3% being affordable units.

hsgThis appeal highlights three issues.  First, the significance of meaningful benchmarks.  Good local evidence will be persuasive.  Second,  the Section 106BC appeal process offers some real flexibility.  Whilst Bloor did not succeed in securing the 14% affordable housing provision they wanted, they did secure a 13% reduction on the original contribution requirement.  Bloor did not carry out any viability appraisal prior to entering into section 106 agreement.  The process from submission of the Section 106BC application to the Inspector’s decision took only 6 months.  That is less than it may have taken had such work been carried out at the application stage.  The relative speed of the process is likely to pose a risk for local planning authorities where section 106 agreements do not have any in-built viability review.  Thirdly and finally, the Council suggested a market review mechanism so that, if sales values increased, further affordable housing would be provided.  The Inspector noted that since a Section 106BC modification only lasts three years, this was not practicable for a large scheme likely to take longer than that to deliver.  This is a more contentious point since it potentially limits the options open to both developers and to local planning authorities.  It is more a reflection of a lack of imagination about the potential modifications than an issue of principle.  A sensible review clause could be developed and should have been considered.

Faith based planning?

In November the Government announced changes to planning policy in relation to the size of schemes that should provide affordable housing and make tariff style contributions, and the “credit” to be given for  vacant buildings when calculating obligations.  The policy was announced in Parliament and reflected in changes to the NPPG, see our previous blog.  The stated aim was to make development easier for small developers.  The policy changes have been challenged by West Berkshire and Reading Councils, with the support of a growing band of local authorities and public interest organisations.

prices housesOne of the issues that the Courts will have to consider is the effect that the exemption of small sites from affordable housing/contributions will have in terms of the number of affordable homes that are secured and the level of public planning contributions that are achieved.  Unfortunately, DCLG did not carry out any analysis of the numbers of affordable homes or cash likely to be lost before promoting the policy.  Surprisingly, there was no regulatory impact assessment or any environmental analysis that might have explored this issue.  Whilst there may well be good public policy justifications for the changes, promoting new policy without at least some public understanding of the consequences is just daft.  It is tantamount to faith based planning.

A similar issue arises in relation to vacant building credit.  Again, there is no evidence of the levels of affordable housing/ planning contributions that will be lost as a consequence of the change.  Perhaps more importantly, at least in terms of the operation of the planning system, there is no clarity about how the vacant building credit will actually work.  We have already seen different interpretations from different planning authorities.

The principle behind the credit is simple.  Affordable housing contributions and planning contributions should now be based on the net increase infloorspace.  This is meant to mirror CIL.  However, unlike the CIL process, CIL rates are set taking account of viability and make assumptions about the likely level of net increase in floorspace.  Critically, the vacant building credit does not address some important detail.  At what point is a building judged to be “vacant”?  Is it at the date of the planning application or determination?  What if the building is deliberately made vacant?  Is the credit meant to pro rate the floorspace or the number of units?  What if the planning policies in the development plan already factored in net increases in development?  The lack of definition about these issues will provide developers with some opportunities and local planning authorities with headaches.  We will follow up this blog on the potential different outcomes depending on what interpretation is taken.

Faith based planning may just about be acceptable.  After all we elect governments to reflect our prejudices.  However, even if planning policy is being promoted without evidence to support it, there must be clarity about how the policy is meant to work in practice.

First road test for special measures

Less than a year after the introduction of the government’s ‘special measures’ regime for poorly performing local planning authorities, the secretary of state has determined the first planning application submitted directly to him.  Section 62A of the Town and Country Planning Act 1990 (amended by the Growth and Infrastructure Act 2013), which came into force on 1 October 2013, enables applicants to apply directly to the secretary of state to determine applications for major development where the local planning authority for the area has been designated as being in ‘special measures’.

In the first case, Gladman Developments applied to the Secretary of State to determine its outline application for 220 new homes, a school drop-off and pick-up zone and associated infrastructure in Blaby in Leicestershire. This application had been refused on five separate grounds, including conflict with the local authority’s planning policies seeking to promote sustainable development within or adjacent to Leicestershire’s principal urban area. The inspector took the view that the proposal would result in unsustainable out-commuting patterns and so conflict with the principle of promoting a reduction in travel.  He considered that the development would fail to preserve or enhance the character or appearance of local heritage assets and not reflect the distinctive character of the area, and result in the loss of high-quality agricultural land.

The new procedure demonstrates that an application for major development can be determined on a quicker timescale – within three months in the Blaby case – than a scheme of this size might usually be considered locally.  So far, this is the only application to go through the section 62A procedure. But does this route provide developers with a genuine alternative to working with local authorities in ensuring that development is acceptable at the local level, whilst waiving their right to appeal?

This is a shortened version of the article that appeared in Planning magazine, 29 August 2014 – click here for the full version, and here for a copy of the decision.

Back to basics: a reminder on viability appeals

We have previously noted the outcome of the viability appeals beginning to trickle through under the new Section 106BA/BC provisions as part of the Growth & Infrastructure Act 2013 regime for speeding up planning decisions and delivery.  In a recent Inspectorate decision, at Manor Road South Norwood, the Inspector dealing with the Section 106BC appeal refused to accept that a commuted sum for affordable housing should be reduced.  It is a reminder to get the basics right in an appeal on viability grounds and where the burden of proof lies.

The scheme was intended to be 100% affordable and it was agreed with the LPA that 50% had become the viable level of on-site provision and, furthermore, that it would be not be feasible (for non-financial reasons) to deliver the scheme as a 50/50 affordable/private sale development. The commuted sum in the Section 106 agreement therefore kicked in and the appeal was made in relation to the Council’s refusal to accept that the amount could not be afforded.

noIn addition to disputed construction costs, a key issue was the benchmark land value to be used as a development cost.  Like the Holsworthy Showground appeal, the Manor Road decision confirms that price paid will not be accepted as a development cost where it represents an excessive bid against existing use value (EUV) (i.e. where it includes hope value associated with future redevelopment).  The developer sought a 25% uplift in land value above EUV but this threshold was not accepted and the Council’s 20% value was adopted.  As a result, the appraisals confirmed that a commuted sum was still achievable.

The decision confirms how the Inspectorate will deal with Section 106BC appeals until the ‘sunset clause’ bites in April 2016 and the opportunity disappears.

  • Inspectors will be willing to use EUV, plus a reasonable uplift, rather than price paid – overbids and hope value will be stripped out where they exceed this.

In a hot London residential market, those bidding for land where there will be a significant element of affordable housing will need to bear this in mind.

  • The onus is squarely on the developer to show that the scheme would not be viable in the current market when relying on Section 106BC.  The Inspector in this case decided that it was ‘impossible to be definitive’ on the issue of uplift above EUV but as a matter of judgment accepted the Council’s lower starting point (20%). This is the reverse of the coin compared to Vannes KFC v Royal Borough of Kensington and Chelsea [2011] – there, the Court of Appeal accepted that an Inspector could decide not to reach a view on the viability numbers because he considered them too unreliable, but could set the numbers to one side and give weight to the developer’s more qualitative contention that the scheme would not proceed.

In this case, the Inspector did not accept that the developer had made its case out thoroughly enough to overturn the starting point on both costs and profit margin put forward by the local planning authority.

  • Small changes to cost assumptions can have significant impacts on outturn – assumptions must be robustly underpinned by evidence and good practice to ensure success. If cost assumptions are contested, the local planning authority’s assumptions will have to be shown to be flawed (rather than just conservative) to ensure success.

Appellants should therefore cast a critical eye over their case before they embark on the Section 106BC process.

Reducing contributions

Another developer has successfully appealed under Section 106BC of the Town and Country Planning Act 1990 to reduce its affordable housing contribution on viability grounds.

The appeal by Tamewater Developments Limited followed the refusal of Oldham Borough Council to discharge three outstanding affordable housing contributions totalling £283,525 for a development consisting of 19 flats and 25 dwelling houses (£383,525 being the total sum secured as an off-site affordable housing contribution under the original S106 Agreement).

o-HOUSE-PRICES-POUNDS-facebookThe Inspector accepted the viability evidence presented by the Developer and allowed the appeal, reducing the overall affordable housing contribution to £100,000 for a period of 3 years from the date of the decision.

Interrogating viability information supplied by developers does appear to present a challenge for Councils in an appeal situation.  In a market where housing values are rising (albeit perhaps not as quickly in Oldham), Councils determining applications under S106BA should be pressing for a greater use of viability review mechanisms as a form of modification to the original affordable housing provisions, rather than simply refuting the viability evidence presented by the developers, particularly where there is not the expertise to robustly defend this position on appeal.  At the very least, the provision of some affordable housing may be secured by a more solution based approach.

Residential conversions: merger risk

Creation of substantial high end residential properties in Central London by the reconversion of previously subdivided houses, the amalgamation of purpose built flats or adjoining houses and sideways amalgamation of units is a strong trend.  Buyers should consider whether supersized homes need planning permission (and the Community Infrastructure Levy (CIL) liability arising) amidst changing approaches by planning authorities.

Change of use

The Town and Country Planning Act 1990 makes clear that the conversion of a single pcihome into several is a material change of use (requiring permission).  The amalgamation of units into one may also be a material change. The effects in planning/ amenity terms will almost always be non-material though – fewer people, car movements and less noise.  However, Richmond upon Thames v SSETR & Richmond upon Thames Churches Housing Trust [2000] confirms that it is a question of fact and degree to be considered in each case.  The Richmond case also suggested that planning policies and evidence of needs are relevant.  Where these change, there is a risk that permission may be required.

This is important since as well as facing a risk of refusal and planning obligations it can have a significant CIL consequence.  Where permission is required, CIL liability will apply (because change of use to residential is chargeable development, notwithstanding the absence of any new floor area).

Change of plan

Westminster City Council adopted a plan policy in January 2011 resisting the loss of residential units, to preserve housing supply. There have been three appeal decisions since late 2012 in which Inspectors have applied the Richmond approach and, having regard to the new policy objective, refused to issue a Certificate of Proposed Lawful Use for amalgamations without permission.  This casts a shadow over Certificates secured before the change in the policy, because the certainty they provide can fall away if there is a “material change… in any of the matters relevant to determining such lawfulness” before the use begins.  Westminster’s previous policy (UDP Policy H1) was less strict than C14 and it was common for the kind of Certificates that were sought in the three appeals to be issued by the Council.  The new Policy CS14 has effectively (although not explicitly) been treated as a change in circumstances in the appeal decisions. A Certificate granted before the 2011 policy came into force, but never ‘banked’ by bringing an amalgamated unit into use would therefore arguably have little benefit now unless the use began before 2011.

Change of mind?

Kensington and Chelsea are considering a similar move.  Its current Housing Diversity policy (CH2) seeks to prevent the loss of HMOs or more than 5 residential units.  It also requires any amalgamation scheme to be subject to a Section 106 obligation preventing further amalgamations in future.  Leaving aside the practicalities of how that is intended to work, applying the approach in the Westminster appeals, the policy and supporting text makes clear that any amalgamation of HMOs or more than 6 units is considered material (and therefore requires a planning application).  The status of house reconversions and sideways mergers are less clear.  The Council’s emerging policy is potentially more restrictive – prohibiting any residential amalgamation unless it is either within a property originally built as a single dwelling or the unit created is not “very large”. It also requires all “new residential developments, including conversions, amalgamations and changes of use” to be designed to achieve minimum space and other standards.  Whether this means that any amalgamation is development requiring permission, or just that developments which do not comply with these requirements require permission, is unclear.  It is significant in that sense that the draft planning policies relating to housing were not submitted for examination to the Planning Inspectorate at the end of September 2013 as originally intended.  The Council is continuing to review the evidence base and draft policies.

Bear in mind

There are three key things for buyers and developers to watch out for where amalgamation is planned:

  • Be aware of changing policies — Richmond suggests they will have a real effect on how some changes of use are approached.
  • Be careful about relying on dated certificates of lawfulness– use it or potentially lose it.
  • The Richmond decision would benefit from scrutiny in the higher courts in terms of whether a change in policy can, properly, make something a change of use which was not a change of use before.

Build to let case still needs to be made

prsAttending the launch of the Urban Land Institute’s Best Practice Design Guide for Build To Rent, it is clear there is now the level of engagement between the operator, investor and construction/ design professions needed to drive institutional Private Rented Sector development forward.

A more persuasive approach to development viability and planning is still needed, though.  Build to Let (B2L) developers need to provide a more persuasive model than cheap public land and affordable housing waivers.

Scaling Up

We have previously highlighted the role that planning needs to take to help use the PRS as envisaged by the Montague Review.  Taking a real chunk out of the million homes UK plc needs over the next decade is the goal. As Nick Jopling – UK ULI Residential Council Chair – made clear, B2L it is a real proposition for institutions where it can be delivered at the right scale.

Institutional PRS can, and should, have a key role to play in reinventing and densifying Garden Suburbs around London.  Without it, the 49,000 homes needed are unlikely to arrive. In the longer term, it should also have a real role in the institutional structure of new towns.  To achieve that, equity participation in long-term residential investment in new settlements should be rewarded. We should learn from aspects of the US multi-family tax regime and explore how the planning system can create investor certainty.

Powers and persuasion

The PRS sector has much to do to persuade planning authorities that the viability constraints of B2L are worth paying attention to, both in terms of more flexible application of policies which impose cost burdens and the use of planning powers to assemble land at the right values.

As we have noted before, the PRS viability debate is currently one-dimensional. The onus is squarely on the emerging B2L sector to explain:

  • the demographic need for rental accommodation (and its relationship to housing need and affordability);
  • the benefits of certain types of PRS in different Housing Market Areas;
  • how those benefits can be secured and over what timeframe they should be locked in.

Time is on

Timing is crucial – the opportunity for embedding PRS in this way is linked to the evidence base for Local Plans, in particular the Strategic Housing Market Assessments which often fail to fully recognise the demand for new rented stock.

The sector is doing what is can to drive down build and operational costs.  Persuading authorities that PRS goes beyond super prime apartment blocks and that meeting the needs of Generation Rent is a worthwhile cause is the next step in the viability process for B2L.

Family Hold Back

Dentons and London First hold an annual lunch at MIPIM for leading politicians, developers, investors, public officials and property professionals. The Mayor’s right hand man, Sir Edward Lister, was the guest of honour this year.  The lunch gives an opportunity to explore issues important to London.

The success of London is critical to the future of the country. With this power comes responsibility. At the lunch we noted three particular challenges.

Firstly, rebalancing infrastructure investment – London has gobbled up the vast majority of recent public infrastructure investment in the UK. Any standard cost/benefit analysis suggests that future infrastructure investment should also be concentrated in London and the South East – that is where it will deliver most immediate economic benefit. And London needs more capital investment to continue to compete globally. However, it also needs other cities in the UK to succeed. The UK economy is too imbalanced, and would be more successful, sustainable, and less cyclical, if the cities outside London were stronger. The strength of those cities is dependant, in part at least, on capital investment, and now is perhaps the time for London to hold back and allow more national infrastructure monies to be spent elsewhere.

Secondly, funding London and local government generally – London can and should bear more of the cost of investment it needs. The Olympic supplements, the Crossrail rates supplement and Community Infrastructure Levy show what London can do. The London Finance Commission has proposed changes to ways in which SDLT and business rates should be retained for London. As a long term goal the retention of part of those funds may well be sensible. But changes cannot be introduced while there is such a disparity between the property tax revenues of London and the other cities. At the moment Camden and Westminster raise more in business rates than all the other core cities combined. Any change that uses the present property tax base will limit the possibility of future change.  It will ossify an already outdated system. Instead, London should be aiming for greater and broader fiscal devolution, with local authorities, including London, looking at non-property taxes – local sales taxes, local income taxes, local hotel/bed taxes, etc. London should lead the argument for change, using any new freedoms to fund necessary infrastructure.  This would then provide a fairer nationwide basis for funding local government. Critically, however, London should hold back on asking for changes that would just embed the present arrangements for funding local government.

Thirdly, addressing housing demand – London needs new homes. The Further Alterations to the London Plan propose 49,000 new homes a year, roughly double the number of homes that are presently being provided, and probably 20,000 homes less each year than is needed. The scale of change provides an opportunity for experimentation. It should be like a fast breeder reactor. We should all be working to identify and encourage new investors and developers, to promote different landownership/tenure arrangements, playing with new planning tools, and thinking about different ways of providing infrastructure. That may cause discomfort for existing house builders. It should be a concern for landowners where they are not, without good reason, developing. (The last great monopoly of land ownership needs to be weakened.) It may mean changes to the green belt, new towns built and suburbs being rebuilt. We should embrace these challenges, working both within London and with the boroughs outside. In one sense London might hold back.  In a changing economy, maybe more effort should be made to build on the success of Oxford, Cambridge, Brighton, Reading and look to replicate that elsewhere in a way which reduces housing demand in London.  In the absence of a regional plan for the south east, leadership and co-operation are critical.

London is the leading city. It should show leadership. A required leadership quality is adventurous self restraint and encouraging others to grow.

MIPIM 2014: London Calling for more homes

IMG-20140312-00029This year’s MIPIM is upbeat and dominated by an industry intent on making the most of intense demand for homes and increasing demand for commercial space in London.

Sir Edward Lister, the Mayor’s Chief of Staff and Deputy Mayor (Policy and Planning), emphasised that the Mayor will leave no sites out in order to deliver the 49,000 new homes confirmed as needed in the recent London Plan Further Alterations.

Speaking at the annual Dentons – London First Lunch, Sir Lister called for the development sector to ‘double up’ its current housing production. He also stressed that the Mayor is willing to explore all options to bring forward stagnant sites and new communities, including through the use of compulsory purchase powers.

Sir Lister highlighted the role of transport investment, infrastructure tariffs and TIF-style forward funding to bring forward new opportunity areas such as Old Oak Common.

The Nine Elms Battersea Vauxhall Opportunity Area would be the model, he said. He agreed with our suggestion that flexible plan policies and a board of owners and key investors would be key to making other areas as successful as the VNEB. Dentons has been recognised as a “stand out winner” among the law firms advising in the VNEB Opportunity Area. We have helped secure consents for the 4 of the largest 25 VNEB schemes approved since 2007 – Vauxhall Sky Gardens (Frasers), Vauxhall Square (CLS/ Vauxhall Square Limited), Sainsbury’s Wandsworth Road (Northern Line Extension Works Act Order) and Hampton House.  We are also working on the £2bn New Covent Garden Market regeneration scheme.  Together, these account for around 30% of the 16,000 homes envisaged within the VNEB area.

With institutional investors now seriously interested in residential and infrastructure there is a real prospect of achieving these goals.

A long hard look will be needed to ensure that the CIL regime is up to the job, since it will largely replace the S106 tariffs that have worked well at Nine Elms.  Even after recent reforms, it is a dysfunctional system not fit for purpose in relation to large scale and complex development.

Stephen Ashworth also stressed the need to look wider than London at new settlement opportunities that can both provide for London’s needs and begin to balance growth. Realism is needed on the green belt, he said.

We continue to be involved in the most complex new settlements – at Harlow North, Alconbury Weald and New Covent Garden Market – and are working with the TCPA on their New Towns Act proposals.