Section 106 insights: Part 3

Introduction

There are many clauses that commonly appear in s.106 obligations (a term that covers agreements and unilateral undertakings). While the types of obligation may not be unique to a particular local planning authority (LPA), the exact drafting of the provisions will vary. In this article we consider the following common types of obligation: agreed carbon targets and contributions, employment and training obligations and Grampian obligations.  In doing so, we highlight the features of these different types of obligations and any pitfalls to avoid.

Carbon Targets

It is reasonably common for a developer to have to produce an energy statement at the planning application stage that identifies a “carbon budget” for the proposed development (i.e. the total amount of carbon dioxide emissions permitted over a period of time to remain within prescribed thresholds). The energy statement will be based on proposed energy efficiency measures to be included as part of the scheme and will highlight any shortfall against the LPA’s published carbon targets. Even where a development is submitted for detailed planning permission (rather than outline permission), however, the forecasted carbon budget will only be a best estimate of the development’s performance based on the materials and technology existing at the time planning permission is granted. Given that most detailed permissions only have to be implemented within three years from grant and may take a couple of years to build out, it is therefore entirely possible that by the time a development is finished, building materials and technology would have developed further since the grant of planning permission. More so in the case of outline planning permissions. The upshot of the lag between the grant of permission and completion of a scheme is that the final development is often more energy efficient than initially predicted. For this reason financial obligations relating to agreed carbon targets (often a five or six figure sum) need to be carefully drafted, since many LPAs base their calculations on the energy statement produced at the application stage, yet the difference between projected and actual figures can be significant.

Developers may well therefore prefer to produce a new energy statement at practical completion (PC), rather than solely relying on the statement produced at the application stage, particularly on larger and multi-phase developments. Producing an updated statement ensures the carbon shortfall of the completed development is accurately calculated, the resultant contribution identified, and a trigger for payment of the contribution included. If the carbon contribution is calculated at PC, it also means that indexation should only be applied from the date the contribution is agreed or determined and not from the date of the s.106 obligation. Drafting carbon target obligations in this way has the added benefits of (a) delaying the payment of the contribution to the end of the development when it is more likely to be income producing, meaning the developer is less likely to be reliant on development finance to pay the contribution; and (b) ensuring the contribution amount is a more accurate and often lower figure.

An alternative approach is for the developer to pay a percentage of the contribution based on the application stage energy statement earlier in the development cycle and then pay any shortfall once the PC stage carbon budget is calculated.

Assuming the LPA agrees that the developer may submit further energy statements at PC or on completion of each phase, it is wise to ensure the s.106 obligation includes dispute resolution provisions, in case the parties cannot ultimately agree a development’s energy budget.

Employment and training obligations

Employment and training obligations are typically lengthy and included in a separate schedule to the s.106 obligation. Frequently we find that these provisions have been prepared by the LPA’s employment and skills team with little insight from the contractor community, notwithstanding the fact contractors are responsible for implementing employment and skills plans in practice. Careful dissection of the drafting is therefore required to make sure employment and training obligations are practical and deliverable.

Often employment and training obligations will include targets figures for the number of apprentices, local long term unemployed residents, school leavers and possibly those with protected characteristics (e.g. registered disabled persons) to be employed during the development’s construction phase. Usually, these employment and training targets are expressed as a percentage of the overall construction workforce; however, occasionally a fixed number will be included (e.g. 10 apprentices) or a methodology (e.g. 1 apprentice for every £1m of development cost). It is vital that main contractor views are sought on the wording of these obligations. If the obligations are unworkable in practice, then the developer may well limit the pool of main contractors willing to tender for the development. Alternatively, it may make the contactors’ bids more expensive, which is likely to affect development viability. For example, the number of workers on site usually ebbs and flows during the course of construction. If the number of apprentices required by a s.106 obligation is a fixed number (or based on development cost), then there is a risk that during the early or late stages of development more ‘obligation’ labour is required on-site than other labour, thereby placing a disproportionate burden on the contractor in terms of supervision. For this reason, employment and skills targets should never be absolute obligations.  Instead, the drafting should refer to “reasonable endeavours” being used to achieve targets.

It may also be prudent for the developer to include in the s.106 obligation that the value of the employment and skills plan (including the cost of delivery) will be costed. Should the LPA also want the developer to pay a financial contribution in the event the developer cannot achieve a particular target, then the developer should insist that the requirement for, or amount of, the contribution is off-set against the delivered value of the plan. If the developer has done everything the plan required of it in terms of advertisement, open days, work experience, talks to schools, clinics at job centres and so forth, but not enough people apply for an apprenticeship or fail to accept an offer of employment, or commence work but then drop out, the developer should not be penalised financially. The rationale being the developer has performed its side of the bargain and expended financially the value it committed to.

Care is also required in relation to employment and skills obligations concerning the post-construction operational development. Ideally, a limit should be included in terms of the number of years that the obligation(s) will apply following first occupation of the completed development. Other suggestions include excluding head office roles and other roles that will not be advertised (e.g. in cases where employees will transfer from another branch of a business) from job advertisement requirements. To avoid placing unnecessary restrictions on incoming business occupiers, lawyers acting for developers should also strongly resist the inclusion of restrictions against occupation of the development until prescribed employment targets have been achieved. Finally and as detailed above, all operational phase employment obligations should be drafted as requiring the developer to use reasonable endeavours and not absolute performance.

Grampian obligations

Grampian obligations, like Grampian conditions on a planning permission, are obligations that both prevent any development on site unless and until the obligation has been discharged and relate to something outside the developer’s control, for example, securing an access or right of way into the development site across third party land. These obligations should only be accepted if there is no other option and the developer is certain that the obligation is capable of being discharged. Otherwise, the obligation places a complete bar on the development being undertaken. Grampian obligations may also make it more difficult to secure development finance, as well creating a ransom situation, thereby enabling a third party to negotiate from a position of strength to secure more favourable outcome (particularly in relation to a financial settlement).

Where inclusion of a Grampian obligation is unavoidable (e.g. on policy grounds), the developer should try to identify a fall-back position and revise the drafting of the obligation accordingly. Examples of fall-back positions include: (a) time-limiting the requirement to secure a third party right; (b) agreeing with the LPA that it will exercise its powers of compulsory purchase or other statutory powers to achieve an outcome (e.g. its powers under s.203 Housing and Planning Act 2016 to override restrictive covenants) provided certain conditions are met; (c) additional drafting to cover alternative scenarios e.g. waiving the requirement to provide two accesses to the site, provided some alternative step or waiver is agreed with the Highway Authority.

Insights

Also look out for Part 1 and Part 2 of our insights on s.106 obligations. We hope that this three part series provides readers with a better understanding of various obligations often included in s.106 heads of terms and how these can be approached from a drafting perspective to ensure a fair balance between the LPA’s need to secure planning gain and the developer’s delivery of the development. If you have any questions arising from this article, or would like to discuss your s.106 requirements, please contact Sarah Fitzpatrick, Head of Planning at sarah.fitzpatrick@nortonrosefulbright.com or +44 207 444 3678.