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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.

Demolition job

The Government has published a new Demolition Direction, which confirms that permission is only required for demolition of buildings larger than 50m3 GEA.  This reflects the position following the Court of Appeal’s judgment in the R (Save Britain’s Heritage) v CLG [2011].  The court was concerned in Save that by carving out various buildings (including those that were listed, in a conservation area, or non-residential), the previous 1995 Direction avoided proper consideration of the need for Environmental Impact Assessment. EIA is not required for Listed Building or Conservation Area Consents.

The publication of the new Direction is a reminder that when demolishing buildings, owners need to be aware of the current position:

  • Size is key: building demolitions over 50m3 GEA are development requiring planning permission.
  • Permitted Development rights are generally* (but see EIA, conservation areas, PD below) available, but the PD regime requires owners to seek ‘prior approval’ from the local planning authority on the demolition method is now engaged.
  • EIA*: PD rights do not apply to EIA development.  Reliance on PD rights and ‘prior approval’ will often require some form of EIA screening.
  • Conservation Areas*: The requirement for Conservation Area Consent for demolition of buildings in a CA was abolished in England with effect from 1 October 2013.  PD demolition rights no longer apply in these areas, however, demolition will be an offence unless the building is under 115m3 GEA (or must be demolished due to a s106 agreement, enforcement notice or planning condition).  One oddity of the changes is that demolition of buildings of less than 115m3 GEA in these areas still require a planning permission, albeit that the criminal offence does not apply.
  • PD Games: Several authorities have used the post-Save need to rely on PD baringrights to issue Article 4 directions withdrawing demolition rights, to protect buildings that are neither listed nor in a conservation area.  The Baring Hall Hotel in Lewisham was protected from the use of PD rights by an Article 4 direction.  The planning authority’s subsequent refusal of express permission to demolish was upheld by the Planning Inspectorate on appeal.
  • Viability: clearing a site may be desirable to prevent the building becoming listed (either as a heritage asset or an Asset of Community Value).  In most cases, though, doing so will significantly reduce the Existing Use Value and risk creating an artificially low benchmark for development profitability when running toolkit appraisals in connection with affordable housing and other obligations.
  • Community Infrastructure Levy: demolished floorspace can be offset against CIL liability, but only where it was on-site at the relevant ‘first permits’ date (and part of it had been in continuous lawful use for at least six months during the preceding three years).  This will often be the point at which pre-commencement requirements are discharged. Demolishing too early, particularly where it is done in reliance on PD rights, will kill off what might be a substantial CIL saving.  Developers should ensure their phasing conditions and overall strategy are carefully drawn to maximise the ability to offset existing floorspace and proceed with site preparation work, whilst limiting the cashflow burden of CIL.  For many schemes this requires careful thought.

Money Back Guarantee for Planning?

money-back-guaranteeThe Growth and Infrastructure Act 2013 introduced several measures to speed up the planning process.  We have recently reviewed a report by Cambridge Centre for Housing & Planning Research on the impact of the “Planning Guarantee” element. It confirms our experience, that whilst the introduction of a negative incentive has triggered reform in many areas, there is also a real risk that decisions are taken badly as authorities seek to resist losing funds.

The Planning Guarantee requires local planning authorities (LPAs) to refund fees for planning applications not decided within 26 weeks (unless there is an agreed extension). It also allow applicants to apply directly to the Secretary of State where an LPA is designated as poorly performing – because it does not determine 30% of applications within 13 weeks, or more than 20% of its decisions on major applications are overturned on appeal.

The report confirms that the targets have had both positive and negative impacts on LPA processes.  While some LPAs have reviewed their practices and improved their service, in other LPAs the targets have led to perverse results.

  • Some of the more successful authorities have reviewed their processes alongside feedback to focus on good customer service. This approach is often accompanied with detailed pre-application discussions, including the preparation of section 106 agreements before Committee. However, this approach received mixed responses from the parties surveyed, with some complaining of increased costs and timescales, while others found this approach helpful.
  • Other consultees reported a willingness by some authorities to refuse applications and request new applications rather than miss a target or risk the return of the application fee. They noted a greater likelihood of unresolved issues being pushed back into conditions rather than being dealt with pre-decision.
  • Some responses questioned the helpfulness of targets, which do not identify re-submitted applications, or appeals of decisions on non-major applications.
  • Some respondents also reported particularly slow further progress if a target is misssed.
  • Responses also stated that a high number of approvals within the target time did not necessarily correlate with a higher rate of starts and completions.

For more details on our review, please see the full article on LexisPSL website.

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.

Bar still rising for EIA challenges

There has been a steady flow of cases winding back the scope for legal challenges on the grounds of defective Environmental Impact Assessment (EIA).  The recent judgment in R (Bishop’s Stortford Civic Federation) v East Hertfordshire District Council [2014] EWHC 348 Admin is the latest.

The case concerned Henderson’s £105m retail and residential proposals for local authority land at Bishop Stortford.  The Civic Federation challenged the grant of permission on several grounds, including that the development control committee’s August 2011 approval was improperly influenced by the speech of a executive member responsible for the council’s finances, who had been instrumental in negotiating a confidential deal with Henderson.  The Court rejected the claim that his intervention made it impossible for the committee to ignore the council’s vested financial interest in the development and take a decision based on purely planning grounds. The judge notably ‘deplored’ the forensic analysis of the political debate relied on by the claimants, which risked undermining the democratic process.

The claim also related to updated EIA material submitted by Henderson but not publicised by the Council. The Environmental Statement (ES) included a substantial planning policy section and the applicant felt that it was necessary to submit a policy addendum to address the changes arising from final publication of the NPPF.  The EIA Regulations require substantive updates to an ES to be publicised (either as ‘further information’ – requested by the planning authority – or ‘other information’ – submitted voluntarily). This did not happen and the objectors sought a quashing order on the basis of a technical breach.

The court held that the submission of an ES Addendum because of the adoption of the redevelopmentNPPF did not trigger the requirement because it was not substantive information.

Importantly, the judge also held that, even if there had been a breach of the EIA Regulations, he would have exercised the discretion not to quash the permission given the technical nature of the breach and the lack of significant prejudice to the claimant. Although not part of the formal judgment, this confirms the willingness of the High Court to move away from the more restricted position adopted since Berkeley v Secretary of State for the Environment (No.1) [2001] on the availability of the discretion where there are breaches of EIA requirements, towards the more flexible position put forward by Lord Carnwarth in the Supreme Court judgment in Walton v The Scottish Ministers [2012] UKSC 44.

As well as highlighting the need to limit legalistic nit-picking over what is said during planning committee debates (in contrast to the specific resolutions resulting), the case also highlights the level of unnecessary policy information now routinely included in ES work and the potential dangers of doing so where updates then become necessary, which themselves become an issue requiring further publicity. It also underlines a judicial reluctance to grant a remedy for technical ES defects where in the real world they cause no harm.

New Towns Act 2015?

Dentons sponsored the TCPA to produce a new version of the New Towns Act, updated to make it fit to deliver the cities that we need today.  Why is it relevant?  Because we have all talked about increasing the delivery of housing and found it difficult to achieve in the present planning system.  And because the legislation is already available to deliver several new towns like Milton Keynes if there is the courage to do so.  This could be done quickly, and we would all benefit.

One benefit of a new Act would be to force the present cross-party rhetorical commitment to new homes into legislative form.  It would allow the law to be modernised.  It can bring in duties in relation to good design, sustainable development and dealing with climate change.  Importantly, it could also start to bring back to life the real vision that lay behind the original 1946 Act – of creating better places for people to live and work.  We should seize the opportunity to do so.

The Planning Chamber

Yesterday the Government published its response to its Autumn consultation on the reform of Judicial Review.  Following last year’s reforms, the  response affirms the Government’s intention to continue to reduce the role judicial review can play in delaying and/or frustrating development.

The response confirms:

  1. a new specialist Planning Chamber is to be set up, but within the High Court rather than the Upper Tribunal (as previously proposed);
  2. a new permission filter will be introduced to S.288 appeals in order to weed out weak claims early on;
  3. a new threshold will be set which allows the court to refuse to grant leave or relief where the outcome for the claimant is unlikely to have been substantially different from that complained of;
  4. no proposals will be introduced to restrict “standing”;
  5. cost capping and tighter rules are being introduced for the use of Protective Cost Measures, but this will not extend to proceedings relating to environmental cases;
  6. measures be put in places to allow costs to be awarded more regularly against claimants following  refusal of permission at oral hearings; and
  7. the ability to “leapfrog” cases straight to the Supreme Court will be less restricted.

Some of these measures have already found their way into the Criminal Justice and Courts Bill.  It is expected that changes to the Civil Procedure Rules will be introduced to deal with the operation of the Planning Chamber.  It will be interesting to see if the reforms have a genuine impact both in deterring third parties from lodging judicial proceedings.  The key issue is to ensure that the Planning Chamber is properly resourced so that any delays are kept to a minimum.  That will always be far more important than the other measures.

Market restrictions

housing-bubbleForeign investment is being blamed for contributing towards a “housing bubble” in London.  I was asked, while speaking at a conference last week, whether the planning system could be used to dampen the ardour of foreign buyers inflating the value of London’s property market by restricting the sale of new market units to UK residents.

Aside from the fact that we have laws which seek to police and prevent discrimination  (of which such a restriction would normally fall foul), this is not an inherent UK “problem” but rather a London-centric one.  How well does this sit with the active promotion of the UK by the Government for foreign investment?

If local authorities are intent on introducing a restriction, there will need to be justifiable and evidenced planning reasons for doing so, ideally enshrined in a local policy.  The policy will have to be justified, for example, on the basis that the local housing market is not meeting the needs of local residents.  Possible means of addressing this may be to require new development to be marketed locally for a prescribed period, or, more restrictively, require a certain percentage of units to only be made available (both of first sale and re-sale) to local residents but with cascade provisions allowing others with local connections to buy units if there is not enough local interest.  However, I question how easy such a restriction would be to monitor and control.

The fact is that foreign investment in residential property, even if largely within London for the time being, provides wider regenerative benefits for the UK as a whole in contributing to economic growth via the creation of new jobs, new homes and infrastructure. Is this not what good planning should achieve?  Whilst the UK is still coping with the effects of austerity, any investment, whether national or international, should be welcomed unless there is a very clear harm which can be “planned away”.

As Lord Rogers recently noted there is a separate issue about houses being bought but not occupied.  Care is needed not to confuse the two points.