SECTION 106 AGREEMENTS
If you are or are hoping to become involved in residential property development (or new build property conveyancing), it’s likely that you’ll need to know about Section 106 agreements. Whilst this is a fairly wide topic, hopefully, our summary below will give you a good summary of the important details.
What is a Section 106 Agreement?
“Section 106 Agreements” come from the Town and Country Planning Act 1990 (known as TCPA 1990 for short). They are used by the Local Planning Authority when dealing with applications for planning permission for housing development projects. The aim is to encourage the developer to offer something to the community in return for the granting of planning permission, which will enhance or aid the local area.
For example, the Local Authority may feel that the local residents are going to have to put up with some noise and disruption whilst the building works are going on, so this can be mitigated by getting the developer to agree to provide something to the community in return, such as building a play area or providing some affordable housing.
If there is nothing in particular that the Local Authority wants the developer to do or build, they can ask for a financial contribution, which the Local Authority can then use to provide amenities in other areas. The agreement between the Local Authority and the developer is set out in the Section 106 agreement.
What is a Section 106 Agreement used for:
In most cases the Local Authority will have a list of infrastructures that they intend to develop and where to locate monies received from Section 106 Agreements.
Examples of such infrastructure include the following, but each Local Authority will have their own agenda Highway development, drainage improvement, affordable housing (which is often a very high priority in some areas) and supporting local infrastructure such as transport and education.
Due to local authority budgets being cut in the last couple of years, local authorities can find themselves under greater pressure than they previously had. As a result, S106 Agreements can produce a much needed source of support or funding in order to aid and maintain local communities.
Why are Planning Obligations (Section 106 Agreements) used?
There are a number of reasons why S106 notices are used, but the most common ones are as follows;
1) Prescribe: Where a Developer is building a development of residential properties, it might be that a percentage of the development is to be given by the developer to the Local Authority or a local housing association to be offered as affordable housing.
2) Compensate: Where a development might cause loss or damage such as the loss of open space, noise or disruption, an Agreement will be entered into which will take this into consideration and compensate the local residents and the wider community for that loss or disruption.
3) Mitigate: Where a development could have an adverse impact on the local community, a Section 106 would be used to mitigate that impact. For example, where a development for a large number of residential properties is taking place in a small area, the developer might have to mitigate the pressures placed on local Schooling by, for example, building additional classroom space.
When should Section 106 Agreements be used?
As we have previously discussed, a Section 106 Agreement will often be utilised to make a development proposal more acceptable in terms of planning when otherwise it would fall short. The legal test for such an obligation which is set out in section 122(2) Community Infrastructure Levy Regulations 2010 require the obligation to be:
- a) Necessary to make the development acceptable in planning terms;
- b) Directly related to the development;
- c) Fairly and reasonably related in scale and kind to the development.
The National Planning Policy Framework (NPFF) stipulates that all section 106 obligations can only ever be utilised if the parties are unable to achieve the same aim with a standard planning condition.
The Local Authority can only apply either the Section 106 requirements OR the Community Infrastructure Levy (“CIL”) for one development.
Bi-Lateral and Unilateral Agreements:
These Agreements are often entered into by the developer and local planning authority, more commonly known as a Bilateral Agreement. An example of this will be where the developer and LPA enter into formal negotiations and arriving at a mutual Agreement. There will be times where the developer might feel that such negotiations are becoming protracted or the local planning authority are making unfounded demands, in situations such as these the developer might offer a unilateral undertaking without the co-operation of the local planning authority.
Who can enter into a Section 106 Agreement?
Whilst usually an Agreement will be entered into directly by the developer and the local planning authority, the legislation allows for anyone with an “interest” in the land to enter into such an Agreement. So this could include a mortgage company, or someone who is hoping to buy the land from the developer.
Preparation of the Section 106 Agreement
Before entering into a Section 106 Agreement the local planning authority will produce a draft copy. At this stage the precise terms of the Agreement will be negotiated between the LPA and the developer’s solicitor. Once the terms have been fully agreed and both parties are satisfied, the LPA will require an undertaking from the developer’s legal team to make full payment for any costs associated with the drafting process. It will then be signed by all relevant parties.
What does a Section 106 Agreement look like in reality?
A developer proposes to build a retail park on an empty piece of land in your local community. On first glance this seems like a great idea, the possibility of new jobs, facilities and infrastructure in the area. However, good ideas always come at a cost where members of that community might object to such proposals. Community members might believe that such infrastructure could place additional strain on transport and provide additional competition to smaller independent shops within the vicinity.
At this point it seems that we have reached a deadlock. The proposals might not pass and gain planning which means the developer cannot start their project. If this happens, what can be done?
This is where Section 106 Agreements become pivotal. What could the developer and development do to contribute to the local community in order to develop the area?
At this point the Local Planning Authority might ask the developer to enter into a Section 106 Agreement. This could include the developer making payments to the Local Authority for earmarked improvements such as transport links, highway maintenance or to create an area at the retail park which could impact the local community such as a community centre.
Once the developer and the LPA have negotiated and agreed upon the terms of the Agreement, planning will be provided, and the developer will become legally bound by these terms.
Can planning obligations be lifted:
Yes! Section 106 obligations can be modified or discharged in two distinct way;
1) Within 5 years from the date of completing the obligation via an agreement between the Council and the person/s whom the charge is enforceable against.
2) After 5 years starting with the date the obligation was completed.
In addition, the parties can always agree to vary the terms of the Section 106 by consent.
What happens if a developer doesn’t comply with their Section 106 obligations. Whilst default is always a risk, due to the recent recession and the financial pressure placed upon developers to comply with their section 106 obligations, developers finding themselves in even more difficult situations. If these contributions cannot be reduced through negotiations, local authorities have the power to issue legal proceedings to enforce the terms of the agreement, such as payment of any sums due, or compensation for any losses suffered.
The local planning authority have the ability to enforce against the original parties to the Agreement, their successors in title and any parties that will derive title from those parties. This means that if the site where development has taken place is encumbered by such an Agreement, anyone who later acquires an interest in that development could potentially be found liable for any breach of that Agreement. If you are buying an interest in a property that is subject to a Section 106, make sure that the obligations have been complied with, or that you are willing and able to comply with them to avoid any action against you.
Hopefully this has given you a flavour of what’s involved, but if you need any more specific details, we’d be delighted to help you.
Disclaimer – our articles are designed to give you guidance and information. There is no substitute for proper direct advice, particularly as everyone’s circumstances are different. If anything in this article may affect you, please contact us for advice that is specific to your circumstances.