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Capital Gains

Dentons, together with URBED and Gerald Eve, were instructed by the Greater London Authority to look at international land assembly practices, to feed into recommendations on those conditions that would best support land assembly for house-building in London.  On 14 May the Deputy Mayor, James Murray, published ‘Capital Gains: A Better Land Assembly Model for London’ which brings together the research evidence and sets out 10 recommendations to support a shift in land assembly practice.

In London, the assembly of land is often seen as one of the main challenges to increasing build-out rates. The report identifies several barriers to land assembly in London, ranging from factors inherent in the sites, such as contamination, to factors associated with ownership, such as the extent of fragmentation and compensation expectations. The research evidence focussed on three European case studies – ZAC Claude Bernard in Paris, Freiburg in Germany and Amersfoort in The Netherlands – and a North American case study focussing on Toronto, Canada and Oregon, USA. The research identified policies, strategies and procedures that have been applied positively to facilitate land assembly and accelerate the pace of delivery. Those measures that we consider are the ‘best fit’ for London form the basis of the 10 recommendations.

A core recommendation is the introduction of a new planning designation termed ‘Land Assembly Zones’ (recommendation 1). These are strategic sites or areas where land assembly will be supported, through interventionist measures if required. The aim is to provide a focus and to encourage land owners to self-assemble, with a designation as a LAZ being accompanied by an ‘in principle’ resolution to exercise compulsory acquisition powers (recommendation 2). This would be a clear signal to landowners, and also an invitation to developers to bring forward proposals in the area.  The measures recognise that limited resources are available for public intervention and we expect the zones will be focused on those areas where housing density can be significantly increased if land is assembled into larger development parcels, where fragmented ownership is a real development constraint and, initially at least, in areas with good transport connections.  We recommend that land values are frozen for CPO compensation purposes on the date of designation, to crystallise the ‘hope element’ of the CPO compensation (recommendation 8).

The second core recommendation is the introduction of statutory land pooling. We recommend that the GLA prepare template documents to support the voluntary bringing together of land, drawing on the Dutch Building Rights model of sharing value uplift. In the longer term we recommend that this voluntary approach be underpinned by a new statutory mechanism (recommendation 7). We see that mechanism covering two scenarios: a private sector model, driven by landowners and a public-sector model led by the GLA or local authority.  In both scenarios the compensation paid to landowners would include part of the marriage value of the assembled site. Although not a formal recommendation in the body of the report we explore the possibility of “density bonuses” where land is masterplanned and assembled, potentially also delivering additional value and an incentive to self assemble.  We see this type of land pooling having application on all scales of site. We suggest the creation of a multi-disciplinary team to support boroughs and developers in tackling strategic and difficult sites, with the devolution of additional finance to support this (recommendation 10).

The report makes further recommendations regarding the acquisition of land, including allowing the confirmation of CPOs in the interests of ‘good planning’ ahead of planning consent being granted. Developers of large strategic sites need certainty at the start of a project that the entirety of the land will be available, even though it may not be built out for several years. Against that backdrop it is unrealistic to expect there to be a fully worked up scheme. We suggest that weight be given to the LAZ designation (which itself will be the subject of scrutiny) when considering whether the confirmation of the CPO is in the public interest (recommendation 4). In order to facilitate this we believe the power to confirm borough CPOs should be delegated to the GLA (recommendation 5).  This would assist in embedding ‘innovative’ approaches to the exercise of CPO powers. For example the introduction of a ‘use it or lose it’ approach to CPO land. If development on land which has been acquired compulsorily does not proceed the GLA or local authority should step in to hold that land, and any other land owned by the proposed developer, to ensure it is brought forward for development.

Value Capture: Holding Fortunes to Hostage?

There is a confetti of paper being produced on value capture. Think tanks are embracing it as a panacea to the housing crisis, infrastructure delivery and reducing inequality. Two parliamentary committees are considering the issue. Ministers are making regular reference to the subject.

The abundance of comment suggests we need to be careful. Part of the reason so many are embracing it is that it means very different things to different people. At one end of the scale there are the flat-earthers – those who believe that any increase in the value of land belongs to the community unless it is a direct consequence of personal blood, sweat and tears. At the other end of the spectrum are the apostles of the night watchman state – who deny the right of anyone even to regulate the use of land in a way which diminishes value.

Three separate value components need to be treated differently:

  • If a development is asked to pay for the infrastructure needed to support it some people call that value capture. Land value increases and part of it is then “taken”.   This is not really value capture. It is simply development paying the full cost of development. In the same way that landowners pay for bricks when they build, payment should be made to cover the cost of any necessary infrastructure. Any proper residual calculation of the value of land should reflect these costs. The exercise is more “right pricing” land, rather than value capture.
  • Land increases in value as a function of many factors. If there is specific public investment that increases the value of land then that value can, potentially, be captured to pay for the cost of the infrastructure. This might be called a “repayment value capture“. Where land values increase, in total, by more than the cost of infrastructure there is a more interesting question about whether all of that value increase should be captured, a “pure value capture“.
  • Finally, there are increases in the value of land that are not attributable to any particular cause or investment. The value might rise because of third party investment in the area – an investment as simple as a coffee shop or restaurant opening up. It might reflect changes in working patterns or simply changing demography, with greater demand for the land or property in that location. This is the most difficult tranche of value increase to address. Some of the historic discussions have called this the “unearned increment“. It underpins a large part of the house price increases.  To date, that residential value increase has been left in the pockets of the lucky owners.  In any honest debate about value capture, the value captured by these owners would be under consideration using fairer and less disruptive tools than SDLT and moving on from the sole focus of capture on developers and the point of development.

In broad terms it seems unarguable that land should be “right priced” to reflect the cost of the infrastructure needed to support it. Similarly, it is difficult to argue against cost recovery (repayment) value capture. Indeed, equitably, it is hard to argue against a pure value capture if the land value increase can genuinely be attributed to public infrastructure investment. There is a bigger question about what should happen to the unearned increment.

The next blog will cover some of the ways in which land could better be right priced, and value captured, using the planning system without abusing it. It being a relatively pragmatic world, we will leave the “unearned increment” to the tax system.

The Planning Act: ten years on

We consider how the scope of the NSIP regime has evolved and examines the role that it could play in delivering large-scale developments.  In November 2018 the Planning Act 2008 will celebrate its tenth birthday. Through the Planning Act a new regime for the consenting of nationally significant transport, energy, water, waste water and waste infrastructure projects was born.

Read the full article

This article was first published in Property Law Journal (April 2018) and is also available at http://www.lawjournals.co.uk/

A reasoned approach

We look at a local planning authority’s duty to give reasons, in light of recent case.  In September 2016, the Court of Appeal ruled that Dover District Council had failed to give legally adequate reasons for its decision, against the advice of its planning officers, to grant planning permission for a controversial development partly in an area of outstanding natural beauty (AONB) (R (on the application of Campaign to Protect Rural England) v Dover District Council [2016]). This was one of several recent cases which have dealt with, and have generated some uncertainty about, the duty to give reasons.

Read the full article

This article was first published in Property Law Journal (March 2018) and is also available at http://www.lawjournals.co.uk/

Mind the Gap – Letwin Review should take care to avoid policy overload

The Letwin Review is considering why there is a significant gap between the number of planning permissions being granted and the number of homes built.

Initial findings are due to be published with the Chancellor’s Spring Statement 2018 in March (with the final report in the Autumn Budget).  There are a few things to think about before engaging in another orgy of Plan-Shaming and policy overload.

Apples and Pears

There is a need to be careful about how sites are looked at in the first phase of the Review:

  • Treating outline consents as if they are, or should be, immediately implementable is wrong. Outline consents can require significant work to reach detailed approval, let alone readiness for mobilisation and delivery.
  • Care is needed too, on what is treated as ‘delivery’.  Site mobilisation (for example enabling infrastructure) takes time and pre-dates construction of homes.

Defining what delivery and success look like is therefore important to avoid categorising sites that are being invested in – but have not yet yielded homes – as dormant. This will be significant in the context of the emerging Housing Delivery Test, which should be a fundamental part of the Local Plan system.

90% of percentages are wrong…

Various figures are bandied around on how many consents are ‘unimplemented’. Even adopting the higher level figure of 423,000 unimplemented homes with consent:

  • that is a tiny proportion of total supply – roughly 12-14 months of planning approvals
  • it illustrates the need for a deeper stock of permissions to achieve the heroic build out rates the Government is now committed to.

A Local Plan system which made more (and more detailed) site allocations, with clarity about infrastructure requirements, would make a big contribution to closing the gap between in principle approval for development and the detail needed for delivery. Likewise, a Local Plan system that sniffed and snuffed out unrealistic assumptions on delivery rates when trajectories are being examined would help ensure the right number of consents are granted in the first place to create the stock needed.

Diversification

Businesses will generally develop at the rate they are best able to achieve and which reflects the overarching price/demand relationship.  Rather than blaming the private sector for the speed it can – prudently –  build at, it would be more productive to look at how to achieve an increase in direct delivery (or directed delivery) by public bodies which have historically made up at least 100,000 of the gap to the Government’s 300,000 homes per year commitment.

In some cases that will involve more assertive use of land assembly and policy tools in a way that creates greater certainty about land values up front so that builders can build and sell more quickly.

Planning blame-fest?

Evidence from the sector on the non-Planning constraints to delivery is important.  Is there a skills gap, what will Brexit do to it and if Government is sponsoring Brexit how will it sponsor the solution?

From the frontline, a few of the  Planning matters that do slow things down are:

  • Length of time taken to deal with highways works agreements. The absence of a standard template agreement is a real blight on the development process.
    Constant reinvention of the wheel and imposition of poorly drafted and unreasonable requirements does have a real impact on the site mobilisation process. Government could sponsor a standard form and issue guidance recommending its use.
  • The bloat and general time-soak associated with unnecessary use of planning obligations. Our ‘speeding tickets’ blog flagged ways to speed things up without scarce Parliamentary time being needed.

Neighbourhood plans v housing

As the need for housing gains increasing traction, to what extent are neighbourhood plans having to take a back seat? Six years after they were introduced by the Localism Act 2011, neighbourhood plans have surprised many commentators with both their level of take-up by communities, and the importance afforded to them by the government. We look at some recent decisions.

Read the full article

This article was first published in Property Law Journal (February 2018) and is also available at http://www.lawjournals.co.uk/.

Regulation change to allow LPAs to sell land with benefit of planning permission granted to themselves

From 23 February 2018, an LPA will be able to grant itself planning permission and sell the relevant land with the benefit of that planning permission. This small statutory change has the potential to significantly bolster LPAs’ role in facilitating development and ensuring that it is comprehensively planned.

The Town and Country Planning General (Amendment) (England) 2018 (the Amending Regulations) will remove Regulation 9  from Town and Country Planning General Regulations 1992 (the 1992 Regulations), with the effect that planning permissions granted by LPAs to themselves  will now run with the land.

Currently, Regulation 9 provides that a planning permission (where applied for by an LPA on its own land) will be personal to the LPA and where applied for jointly, only for the benefit of LPA and the named applicant. This has severely impeded the ability of an LPA, having secured planning permission to then sell the land on with the benefit of that planning permission. This has had cost implications requiring more complex land structures to be put in place before applications for development proposals could be made.

Oddly, the Regulations do not apply to any planning permissions granted before 23 February 2018. Given that future consents will run with the land it is strange that past consents have not been similarly “liberated”.

The removal of Regulation 9 was proposed in last year’s Housing White Paper on the basis that it will save time that developers would otherwise spend securing planning permission in relation to land which they purchase from LPAs.

It should achieve this. Now the Government needs to make sure that the best consideration requirements are changed so that land can be sold on for the best use for the area rather than just for the best price.

Who GOVErns Planning?

Michael Gove has published a 25 year plan to improve the environment. It is wide-ranging, comprehensive and aspirational. If delivered, and the lack of a real delivery programme is problematic, the plan aims for us to leave the environment a better place than we found it.

The plan contains three themes that might lead to a profound change in planning. The first is a principle that development should have a net environmental gain. On a project by project basis this could mean a development having a natural capital account setting off the environmental costs against a compensating balance for either on-site or off-site benefits. If so there will need to be a proliferation of environmental land banks and habitat improvement schemes that development can use to ensure a net gain.

The second theme involves looking at how to improve the environment. Much of the plan focuses on managing, maintaining and enhancing the natural environment.  It is clear that we should be seeking opportunities to remedy past mistakes.  It might be worth thinking about how this could change attitudes to, for example, brownfield sites. It might lead to a move away from the lazy assumption that brownfield sites in the countryside can simply be replaced by less ugly development.  It might, instead, just mean saying “no” to the replacement of development that would never be permitted nowadays and a focus on sites that, although green, can make a better contribution to sustainable growth if carefully planned, designed and developed.

The final theme relates to the Green Belt. The language of the plan talks about making these areas more accessible, almost envisioning them as country parks. That has never been a Green Belt purpose.  With changes due to the NPPF it might, however, become a future factor when changing Green Belt boundaries or when designating new Green Belts.  Tying back to the first theme it might lead on to a scheme where, in exchange for planning permission, new development has to secure rights of access to Green Belt land as part of the environmental benefit offer.  And where that increase in accessibility is itself part of the balance to be struck in release of other Green Belt land.

If the plan follows through on these themes it could reshape the foundations of the planning system.

Time to fix CIL

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

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

Reform #1 – deal with the small stuff, quickly

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

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

Reform #2 – Free up strategic sites

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

This can and should be implemented by the summer.

Reform #3– Free up strategic sites, again

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

This can and should be implemented this year.

Reform #4 – Exemptions, distractions and diversions

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

Reform #5 – Spend It

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

That said, two things need to be fixed:

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

CIL fix is good news, more please …

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

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

Section 73 so simple

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

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

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

No change

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

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

What lies beneath

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

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

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