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Viability Decisions – Care Needed on ‘Market Value’ Assumptions

The recent Parkhurst Road appeal decision emphasises the importance of understanding how  land value expectation (and so the price for land) should reflect planning policy requirements.

The appeal decision dismissed the 96-home proposals for the disused Territorial Army centre on Parkhurst Road, Holloway on the grounds that it would not provide the “maximum reasonable” level of affordable housing, as required by the council’s core strategy. The appellants offered ten per cent affordable provision, reflecting a purchase price of £13.25 million (which, in light of nearby sales data, was said to be the market value for the site). The Inspector accepted the authority’s approach, starting with the site’s established use value (EUV) and applying a significant premium, to reach an overall benchmark nearly half that put forward (at which 34% provision was feasible).

Caution is needed on whether the decision is really a game-changer or just a reminder of home truths.

Benchmark, not Landmark

The decision is a benchmark, of existing policy, rather than a landmark in terms of a new approach. It shows a willingness to take policy and guidance at its word and treat land value as genuinely residual to policy requirements (even where they are expressed to be ‘subject to viability’).  It does not junk the comparable approach, nor does it undermine the use of either a substantial premium to Existing Use Value  (EUV Plus) or use of Alternative Use Value where appropriate to reflect the need for an incentive to release land.  It is a reminder of the need to critically examine evidence of comparable values to weed out those which failed to comply with policy in the first place (i.e. are not truly comparable).

It also illustrates the role that the Mayor’s Housing Supplementary Planning Guidance (March 2016) will play in London in clarifying that the outcome should rarely be different whether either the EUV Plus or the RICS market value basis is used properly.

Context is everything

The backdrop to this particular decision also matters. In a previous (2015) appeal, the Inspector’s finding that the price paid was broadly reasonable in light of ‘market signals’ (competing bids and comparables) resulted in a letter from the Government responding to the threat of legal proceedings by Islington acknowledging that the PPG’sunambiguous policy position” is “in all cases land or site value … should reflect policy requirements and planning obligations…”.

The 2017 decision adopts a more critical approach to giving effect to that, but is not really that different to other appeal decisions through the years which reflect the same fundamental point already flagged in the PPG (look back, for example, at the 2013 Holsworthy Showground decision) discounting price paid as an overbid against true market value.

Technical Pointers

Both the 2015 and 2017 decisions acknowledge the appropriateness of a viability Review. A 24 month ‘grace period’ was acceptable to avoid a pre-implementation Review but seeking a 22% margin at the Review stage when the effective profit on the 10% AFH offered at appeal was 18% was – sensibly – rejected on the basis that the development risk is already rewarded by the preserved return of 18%.

It is also significant that a requirement not to leave the homes empty for more than 3 months (under its adopted Preventing Wasted Housing Supply SPD, July 2015) was rejected on the basis of doubts about both the justification for, and the enforceability of, the obligation. The latter point should be scrutinised as a proper consideration in judging the reasonableness of the obligation – not least because it would suggest that the kind of obligations required by the St Ives Neighbourhood Plan could never be given effect.

Timely delivery for regeneration projects

man building a brick wallThe Winchester Silver Hill scheme was based on a development agreement between Winchester City Council and a developer for a mixed-use retail and residential scheme in the city centre.  While the principle of regeneration for Silver Hill was widely agreed, this scheme was bitterly opposed by some residents (and local businesses and landowners), primarily on the grounds that the design and mass of the development was inappropriate for the historic setting of Winchester’s city centre.

Here we consider some of the legal issues and challenges that local authorities can face as they attempt to regenerate their localities, taking lessons from this well-documented scheme.

Read the full article

This article was first published in the Solicitor’s Journal Half Year Review (June 2016).

A better alternative?

buttThe latest of our series focussing on the Housing and Planning Bill considers the controversial Government amendment to “test the benefits” of introducing competition to the processing of planning applications. Amidst the furore surrounding many of the Bill’s provisions, such as those on affordable housing and permission in principle, this one caught many by surprise.

What is proposed?

Applicants in designated areas will be able to choose whether to have their planning application processed by a “designated person” rather than by a specified local planning authority.

As with many aspects of the Bill, Regulations and Development Orders will contain the all-important detail about how this will work in practice. There are a multitude of  issues of principle though.

What does it mean for planning?

Denounced in the Lords as being tantamount to the privatisation of planning, this has the potential to change the face of development control as we know it, if adopted across the board.

However, before the death knell sounds in council planning departments across the country, some key points to bear in mind:

  • the clause makes it clear that determination of the application will remain the responsibility of the specified local planning authority;
  • it is a pilot to test the waters – it will run in specified areas for a specified time period;
  • it will be optional – applicants can choose whom they want to process their application;
  • it will apply only to developments of a “specified description” – we await clarity as to what that means.

While much of the focus (and concern) centres on private sector processing, the government has made clear its intention is to foster innovation amongst councils through competition. Indeed, there will be opportunities for those able to seize them.

Some food for thought

  • Process vs determination – an artificial distinction? To what extent can they be separated, given that qualitative judgments are often required throughout the life of a planning application? Is it really possible to hive off elements which are genuinely process-driven and isolate them from the inherent politicism of planning?
  • A viable alternative? There continues to be much nervousness around the public disclosure of viability information in planning applications. Might private sector processors be favoured on the basis that they may not be subject to the requirements of the FOIA and EIR regimes?
  • It may shift the traditional focus within local authorities away from development control and towards strategic plan-making. Not necessarily a bad thing, particularly with other measures in the Bill designed to incentivise plan-making.
  • Has the government side-stepped the issue of resourcing planning departments? It is committed to encouraging innovation and driving down costs, so will this address long-standing resourcing issues? It also has to be seen alongside the recent Ministerial announcement that the Government will consult on allowing “well-performing planning departments” to increase their fees in line with inflation.

Housing and Planning Bill – consents with benefits?

This third part of our Q&A on the Housing and Planning Bill 2015 considers how the Government’s proposed duty to list financial benefits associated with planning may create trip wires for development.

calcWhat is the new duty?

Clause 115 introduces a new requirement for local planning authorities to provide information about the “financial benefits” of any planning application when reporting it, including:

  • list of any material and non-material financial benefits of the application, whether to the local planning authority or otherwise;
  • a statement of the planning officer as to whether each benefit is material to the application.

The benefits are the ‘local finance considerations’ introduced by the Localism Act 2011 (the Community Infrastructure Levy (CIL) and the New Homes Bonus) and others specified in regulations (which may also define the amount or value of various benefits).

Why?

The Government is keen to ensure that the benefits of development are known, including the role of CIL and other funding in delivering community infrastructure and other investment.  Communicating the value of plans for growth remains a critical aspect of promoting contentious development. There is a risk that the changes will make it inadvertently harder.

What might the practical effects be?

Requiring councils to report on benefits has the potential to increase the risk of judicial review. When a duty to give reasons for approval was introduced in December 2003 by an amendment to the Town and Country Planning (General Development Procedure) Order 1995, it gave rise to legal nit-picking and numerous challenges on the grounds of the adequacy and coherence of reasons. The duty was put out of its misery by a subsequent amendment to the Order in September 2010.

As currently drafted, the Bill requires councils to not only decide whether something constitutes a financial benefit, but also whether the benefits are material or not to the application. Given the current struggle to resource the core planning work needed to process applications, this is unlikely to be a welcome burden. Equally, the question of materiality is one that is rarely dealt with cleanly in practice –  in relation to CIL, where the need for a genuine planning relationship between CIL and the scheme itself to qualify as a material financial consideration is often ignored.

Strange Tides – Courts And Tribunal Pull In Different Directions

Viability debates continue to shape planning. The frontline is shifting, from debates about key principles, towards the wider issue of transparency and participation.

The Information Commissioner’s Office (ICO) and, ultimately, the First Tier Tribunal (FTT) hear appeals under the Environmental Information regime, intended to give effect international commitments to participatory decision-making. In RB Greenwich v IC and Brownie (EA/2014/0122), the FTT required disclosure of pricing and profit assumptions, sales and costs forecasts.  Given the finding of limited commercial harm, the decision is unremarkable.  It is one example of disclosure being increasingly required either because there is little real harm or that real harm is outweighed by the public interest in understanding the reasons for particularly controversial decisions.

shellThe Courts’ approach is different. George Turner v SoS CLG and others [2015] EWHC 375), concerned a challenge to the Secretary of State’s decision to approve the Shell Centre redevelopment.  A financial appraisal was submitted with the application to explain the level of affordable housing provision (and reviewed by the local authority’s expert). It was not forwarded to the SoS. The expert’s summary report was reluctantly disclosed two days before the inquiry began. The claimant argued that it was impossible to properly determine the viability justification for the departure from plan policies without scrutiny of the full appraisal.

In rejecting the claim, the judge followed the Arsenal case (Bedford v LB Islington and Arsenal Football Club Plc [2002]) where a confidential consideration of viability, with a report giving only the “gist of” the findings, was allowed. He stressed that the law only requires the disclosure of the materials placed before the decision maker.

Two questions stand out.  Firstly, the judgment is silent on an authority’s duty to pass application materials to the Secretary of State (under s.77 TCPA 1990). The Call-In Direction required all application documents to be sent to the decision maker. That did not happen. The facts were therefore different to Bedford.  Secondly, inquiry evidence must be heard in public, unless the SoS makes a – rare – direction for a shielded procedure for scrutiny of sensitive information.  It may have made more sense to use that process, rather than limit the material provided.

The Court of Appeal will now consider these issues in deciding whether to hear the claimant’s appeal, in the context of real concerns recognised by the judge at first instance about the conduct of the Inquiry.

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.

Viability still under the spotlight

The Growth and Infrastructure Act 2013 amended the Section 106 regime to allow developers to challenge affordable housing obligations on viability grounds. The first wave of decisions contains some pointers on how the system is shaping up.

Planning For Growth

Affordable housing is under pressure as grant funding, planning policy and land values pull in different directions. Planning obligations under section 106 of the Town and Country Planning Act 1990 are often wrongly seen as a safer bet than conditions to secure essential affordable provision. To date, obligations have given planning authorities more control; they must no longer serve a “useful planning purpose” and until recently could not be appealed for at least five years.

The new Section 106BA, which gives developers a right to ask councils to review housing obligations, and Section 106BC, which gives developers a right to appeal against review outcomes, came into force on 25 April 2013. Where a scheme is judged not to be economically viable, the planning authority must modify affordable housing obligations so that it becomes so. Crucially, the process is a numerical exercise; there is no scope to reopen the planning merits.

Five Things We’ve Learned

1.  Inspectors are following The direction in the government’s statutory guidance that actual land costs should be used in appraisals – discounting overbids against market value.

2.  Care is needed on the viability information submitted and accepted during the initial planning stages.  It will set a benchmark for reviews and appeals.  For some schemes, no viability information at the planning stage will be the best approach.

3. Authorities are finding it hard to respond robustly to appeals within the 28 days allowed by the legislation. Many of the appeal decisions are soft targets.

4. Any modifications made to obligations must ensure that schemes “become viable” at the date of the decision. The Statutory Guidance emphasises that this means at today’s costs and values. The approach to uncertainty over future values is causing difficulties.

5. Few authorities have taken the initiative by proposing different modifications put forward by developers. A more adventurous approach is needed from councils, using the powers available.

This is a shortened version of the article that appeared in Planning magazine, 29 August 2014 – click here for the full version with reference to recent appeal decisions.

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.

Viability in planning – the environmental information regime

The recent First Tier Tribunal (FTT) (Information Rights) decision on disclosure of key parts of Lend Lease’s Heygate Estate viability appraisal illustrates the important differences between the Environmental Information and Freedom of Information Act 2000 (FOI) regimes. The differences are significant for applicants and public-private joint ventures, where thought is needed on preventing unecessary information leakage.

FOI and EIR

Both the FOI Act 2000 and Environmental Information Regulations 2004 (EIR) give rights of public access to information held by public authorities. The differences are worth noting:

  • The EIR implement European Directive 2003/4/EC on public access to environmental information, which follows and expands on the 1998 Aarhus Convention. The Convention’s primary goal is to increase the quality and extent of public involvement in and scrutiny of decisions on the environment. The EIR regime must be approached in that light.
  • All of the exceptions to disclosure under the EIR are ‘qualified’ – if any exception is engaged it is still necessary to consider the balance of the public interest in maintaining the exception or disclosing the information. This includes areas that are absolute exemptions under the FOI regime (such as confidentiality).
  • The FOI exemption on commercial prejudice is stronger: the EIR require the authority to prove there ‘would be’ harm, in the sense of being more probable than not (as opposed to merely a significant chance under FOI). Assembling and presenting that kind of evidence is often challenging.  As above, the public interest test will still apply (and the ICO’s decisions confirm that the threshold for non-disclosure is high).
  • EIR exceptions must be interpreted and applied narrowly. Redaction, not refusal to disclose, should be the starting point. Unlike FOI, there is an explicit presumption of disclosure in the EIR.
  • EIR only covers ‘environmental information‘.  Whilst the First Tier Tribunal expressed concern in the Heygate decision about the burgeoning use of EIR for planning matters, the practice of the ICO (see below) suggests that it will continue to be used broadly.

The ICO and FTT are there to strike the balance between giving the public the ‘full picture’ and giving it enough information – perhaps in summary form – to participate without undermining the quality of the commercial information provided.

As noted in the previous blog, the FTT decided in Heygate that despite the significant Picture1controversy concerning the disposal of public land and delivery of affordable housing, only parts of the appraisal materials should in fact be disclosed.  We understand that the Royal Borough of Kensington & Chelsea is now withdrawing its appeal against the ICO’s decision to require disclosure of the viability assessments in relation to Capco’s proposed scheme at Earls Court. The FTT hearing was scheduled for mid-June but the campaigners now expect the authority to disclose unredacted documents. The ICO had criticised the RBKC’s reasoning for withholding Capco’s financial model and costs assumptions as ‘lacking substance or detail’.  It also noted that two viability reports had been prepared – one for public use and the other withheld, showing different levels of viable affordable housing outturn.

Dodging the bullet

The FOI regime allows authorities to refuse to deal with requests that would take too long – more than 18 hours – to process. This is usually because the request has been poorly targeted, but it is increasingly used by authorities to dodge disclosure.  The position under EIR is harder – whilst the exception for ‘manifestly unreasonable’ requests can apply, the ICO has acknowledged that the EIR are intended to have a much higher bar for resisting disclosure under this heading than FOI. Monmouthshire County Council was unable to resist disclosure of material relating to the allocation and development of Deri Farm in August 2013 on this basis, despite estimating that it would take 25 person hours to do so.  The public interest in understanding the site allocation process was key.  Strategic land owners should be therefore careful what they include in pre-allocation correspondence.

In the Heygate case, LB Southwark accepted the disclosure request from a local pressure group as an EIR request, but then sought to characterise it on appeal as an FOI matter. Had it been successful, the absolute FOI exemption relating to confidential information would have applied. Whilst the FTT did not accept this, it did express reservations about the increasingly widespread application of the EIR to planning matters.

Scope of EIR

Whilst authorities will increasingly seek to deal with information requests under FOI rather than EIR, they will, and should, struggle in many cases. The Tribunal’s October 2013 judgment concerning the Independent School Playing Fields Advisory Panel minutes relating to Wandsworth Borough Council’s application for consent to dispose of school playing fields at Elliott School in Putney is a case in point. The FTT accepted that the Panel and the Secretary of State were only concerned with the educational impact of disposal of the playing field land (rather than land-use issues), but upheld the ICO’s April 2013 decision that FOIA did not apply and the request had to be dealt with under the EIR regime. It did so on the basis that Wandsworth Council’s disposal application included “information indicating an intention for the playing fields of the school to be redeveloped for housing” and that if consent was given, it is more likely than not that the Council would pursue its plans to redevelop and the measure would be likely to affect the land or landscape. As such, it was a measure ‘affecting or likely to affect’ the environment.  The starting point was of disclosure in the public interest.

Applicants, authorities and objectors therefore need to consider the EIR – and the related decisions of the ICO and the FTT – to ensure that when applications are dealt with  the right balance is struck between disclosure and confidence.

Viability in planning – transparency where it matters?

We highlighted the significance of the Information Commissioner’s Office (ICO) decision to require disclosure of financial information relating to the Heygate Estate renewal scheme in July last year. Local interest groups had challenged London Borough of Southwark to show the workings out behind an affordable deal that will result in less than 4% of the new homes being social rented. The First Tier Tribunal’s recent decision on the appeal against the ICO’s decision highlights the need for care in dealing with confidential information in the planning process.

Balancing considerations

LB Southwark’s decision to accept 25% affordable housing (rather than the target 35%) in relation to Lend Lease’s Heygate scheme has been under intense local scrutiny. The viability appraisal was submitted on a confidential basis, but local groups sought full disclosure under the Environmental Information Regulations 2004 regime (EIR). The ICO is the first port of call once the authority’s complaints procedure has been exhausted

The ICO heard the challenge to LB Southwark’s decision to refuse disclosure last year. It accepted that disclosure of redacted elements of the reports would be commercially harmful. Nonetheless, applying the public interest test under the EIR regime, it decided that the interest in disclosure outweighed the harm. LB Southwark appealed the decision to the First Tier Tribunal, which has now held that:

  • The viability assessment is “environmental information” under the Environmental Information Regulations 2004. The EIR regime operates with a presumption of disclosure, unlike the Freedom of Information Act 2000 regime.
  • Publication of viability forecast data relating to deals to be done with other businesses should not be disclosed, because the commercial harm was not in the public interest, but private sales and registered provider deals should be.
  • The ICO was wrong to refuse to treat Lend Lease’s development model as a “trade secret” and there was no need to show monetary loss arising from disclosure.
  • The Council’s suggestion of absolute confidentiality in relation to the activities of its staff was wrong. Likewise, there is not always a public interest in maintaining secrecy around public private partnership negotiations – the law on information disclosure is drawn to ensure transparency where it matters.
  • Disclosure of the starting point in negotiations (i.e. the initial viability reports) is not the same as the disclosure of the full continuum of those negotiations – the likelihood of a chilling effect on other deals should be viewed in that light.
  • The public interest warranted disclosure of much of the information – given “the importance, in this particular project, of local people having access to information to allow them to participate in the planning process”.  That factor was held to outweigh the public interest in maintaining the remaining rights of Lend Lease and those subcontractors who contributed to the document.

Information hygiene

Any information with public authorities for partnership and development projects should be viewed in light of the potentially broad scope, purposive intent and presumption of disclosure under the EIR. That includes the usually prolific email communications,  meeting notes and telephone notes. Handling such information should be done with care to minimise the chances of unnecessary disclosure. Importantly, where a departure from policy requirements is being justified on viability grounds then the significance of the competing public interests in facilitating development (in particular partnership approaches to public sector land) and interrogating the viability analysis needs to be borne in mind.

How the viability analysis is put together and disseminated is crucial in striking an appropriate and workable balance. Doing so is far cheaper than making the case for exemptions after the event.

A blog highlighting the significance of the Environmental Information regime in this context, will follow.