Monday, 1 April 2013

Community Infrastructure Levy – the approaching nightmare


We had an in-house seminar last month between our planning law team and our colleagues in the property law team on CIL and other issues that are of current concern (including assets of community value) and it is clear that people are only now beginning to wake up to the implications of CIL. My colleague David Brock presented an extremely enlightening paper on this topic, but rather than stealing his thunder I will leave it to him to comment on these issues on his own blog.

However, quite incidentally, I received only a few days later some thoughts on this same subject from a good friend of mine in the planning profession, with the suggestion that I might like to publish them here. So, with due acknowledgement, I am happy to do so.

First, there are just a couple of preliminary points I ought to explain. It is reckoned that only about 70% of local planning authorities in England will actually adopt CIL. Some have already done so, but the ‘deadline’ that the majority have chosen to work to is April 2014. In Wales (where my correspondent mainly practises), I understand that 6 April 2014 is the standard date set for CIL to come into effect.

My correspondent writes:

As we move closer to the CIL regs taking effect (6 April 2014 – only just over a year away now as I write), their implications on the overall planning contributions payable on a particular scheme come more sharply into focus, particularly as I happen to be working on a proposal, the contributions in respect of which, will be dramatically altered post-CIL. In order to simplify the explanation, it is probably best if I provide an example. In doing so, I will focus entirely on housing contributions in order to simplify matters.

Current Situation

Take a local planning authority with an up-to-date development plan (in the context of legislative requirements, rather than economic realities) and SPG covering s.106 contributions. The administrative area spans affluent commuter suburbs through to deprived towns. SPG seeks contributions to a variety of infrastructure projects, with the most financially significant being transport and education. It recognises the economic disparity across the borough and discounts the contribution in the identified deprived areas by up to 50%.

Post-CIL Requirement

The local planning authority has published its Preliminary Draft Charging Schedule, in which, with the support of a report by the District Valuer, it reduces the CIL contribution to “Zero” in the economically deprived areas. This is an outcome that I would not criticise, as it recognises an economic reality.

The Proposal

The scheme, which will incorporate approximately 300 new residential units, will, if determined prior to the effective date, attract a combined highways and education contribution that is likely to be in excess of £500,000, whereas, post that date, the contribution will be zero, providing the CIL Charging Schedule remains as currently proposed.

Discussion

On the face of it, uncertainty over the final version of the CIL Charging Schedule means that it could be a risky strategy to delay submission of the planning application until its determination would take place post the adoption of the CIL. However, I can think of a number of ‘ploys’ that would negate the risk. For example, negotiate the s.106 later this year and then just don’t sign it until a clear picture emerges regarding CIL charging. If you’re going to be worse off by delaying, then sign. If you’re going to better off under CIL, then delay and renegotiate the s.106.

Reg 123(3) is quite specific, in that determinations made on or after the effective date cannot take account of pooled planning obligation contributions where 5 or more contributing obligations have already been entered into which provide for the funding or provision of that project, or type of infrastructure [Reg 123(3)(b)(ii)]. When counting the number of such obligations, it is from the date that the Regs came into force: 6th April 2010. In my estimation, it is highly unlikely that any local planning authority will not have entered into at least 5 obligations in respect of highways and education during that period.

Some may argue that such a strategy is not required, for if the economic situation in the deprived area is so bad that it is reasonable to set the CIL contribution at zero, then make a viability case and have the contribution reduced accordingly. However, Boy George in his budget announced a “Help to Buy” scheme, the first element of which commences on the 1st April 2013 and, it is estimated, will support 74,000 new home buyers. While the second element, starting in January 2014, is estimated to support £130 billion of high loan-to-value mortgages. The outcome of this is that most of the house price pundits, including the RICS, are predicting at least the possibility of another housing price bubble. In that context, what weight can you really expect to be afforded to your valuers’ carefully constructed historic comparables?

In addition, and we’ve all been here (or why introduce CIL in the first place?), even if you try negotiating with the local planning authority in respect of a reduced contribution, what guarantee do you have that they will respond meaningfully prior to the submission of a planning application? And even if they do respond, it doesn’t mean that they, or one of the funding recipients, won’t change their minds later.

From a landowner’s or developer’s perspective, the decision is easy; delay submitting the planning application for 6 to 9 months and avoid the consultants’ fees while, in the instance outlined above, saving approaching £100,000 a month. Even planning lawyers have months when they don’t earn that much!

The real irony of this situation is that the circumstances in which such a delay is going to prove financially beneficial are only likely to apply in deprived areas where an up-to-date CIL Charging Schedule is expected significantly to reduce planning contributions. Yes, the very localities that would undoubtedly benefit most from the economic uplift that the construction industry provides!

Solution?

Is an emerging CIL Charging Schedule a material planning consideration? It is most certainly an ‘elephant in the room’, but can it be used as a simple expedient to reduce or remove the planning contribution towards infrastructure costs? To my mind it is, and should be. For, in reality, only the foolish or poorly advised will, in the circumstances outlined above, seek to obtain a planning permission prior to the effective date. The outcome of which will be that those areas that would benefit most from the economic stimulus occasioned by the construction industry, will have that stimulus delayed - possibly for far longer than 6 to 9 months due to the focus of the major house builders being on ready-to-go sites in affluent areas where turnover is greater and any increase in house prices is likely to be more readily apparent. Such implications are undeniably material to town planning and therefore, I would argue, a material planning consideration.

The difficulty is, will the local planning authority concur? Possibly not, and by the time you’ve argued your case before an Inspector, the opportunity has been lost and your client has run up a further bill in the process.

So, we have a dilemma with no obvious solution. That is unless government recognises the situation and publishes guidance to the effect that emerging CIL Charging Schedules are a material planning consideration that are to be taken into account when agreeing s.106 infrastructure contributions. It should also be made clear that failure by the local planning authority to do so would constitute unreasonable behaviour, thereby raising the spectre of costs being awarded on appeal. However, if it is going to have any beneficial impact, such guidance needs to be published in the very near future.

Unfortunately, for practitioners in Wales, while CIL is not a devolved matter, appeal costs are. As a result they are stuck in the last century with what was, in England, Circular 8/93. Therefore, ‘the spectre of costs being awarded on appeal’ is more reminiscent of a toothless grin when directed at a Welsh local planning authority!
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This is only one of the nightmare scenarios that are going to face developers and their professional advisers with the advent of CIL. The particular situation postulated by my correspondent is more likely to arise in Wales than elsewhere, as my impression is that most English authorities are seeking to maximise CIL so far as practicable, and Nil rates are likely to be a rarity. The danger in England is that if planning applications are delayed, the resulting developments may be caught by CIL, whereas the early grant of planning permission could enable it to be avoided (except in those areas where it has already been or is about to be adopted).

As regards financial contributions under existing policies, secured by section 106 agreements, where local policies call for financial contributions from developers, these policies appear in most cases to be predicated on the existence of an identified need to provide for community, education and/or health facilities in association with new development proposals. It is only where replacement, additional or enhanced facilities are genuinely required that the developer can be expected to make provision for such facilities related in scale and kind to the need generated by the development.

In considering this issue, the statutory tests for the use of planning obligations laid down by Regulation 122(2) of the Community Infrastructure Levy Regulations 2010 must be applied. This provides that a planning obligation may only constitute a reason for granting planning permission for the development if the obligation is -

(a) necessary to make the development acceptable in planning terms;
(b) directly related to the development; and
(c) fairly and reasonably related in scale and kind to the development.

If a planning obligation does not meet all three of these tests, it cannot in law be taken into account in granting planning permission. There is therefore a legal requirement to demonstrate that the terms of the obligation are lawful.

There is clear evidence that the Planning Inspectorate and the Secretary of State are interpreting this requirement strictly, so as to ensure that the statutory tests are met. For the LPA to take account of a proposed section 106 agreement in granting a permission, it needs to be convinced that without the obligation permission should be refused. It is not sufficient to rely on a generic policy or on adopted supplementary planning guidance. This is particularly relevant where there is an authority-wide tariff scheme. The LPA must be able to provide evidence of the specific impact of the particular development, the proposals in place to mitigate that impact and the mechanisms for implementation. This has been the position since the CIL regulations came into force in April 2010 and applies irrespective of whether an authority has adopted or intends to adopt CIL.

In order to illustrate this point, if an authority has a section 106-based tariff system in place to require payments for school places from residential development, then to receive monies under the tariff for a specific planning application, it should be able to demonstrate that there is a deficit of school places within the local catchment area which make the application unacceptable in planning terms and that the Education Authority has measures in place to remedy that deficit, to be funded in whole or in part from section 106 contributions.

If this is not the case and the reality is that contributions are being sought as a fund to support school places generally across the LPA area, there is the risk that a decision to grant permission could be taken unlawfully, as the contribution should not have been taken into account.

There are ministerial appeal decisions that clearly illustrate this approach. For example, Mersea Homes CBRE, Land at Westerfield Rd, where the Secretary of State gave no weight to a number of financial contributions, for education, playing fields and a country park on the grounds that they did not meet the statutory tests. The site was considered already to make a good contribution to open space, the country park was not directly related to the development and there was sufficient capacity within existing schools. The contributions were not fair and reasonable. And, to take another example, Doepark Ltd, American Wharf Southampton, where the Secretary of State gave no weight to financial contributions for public open space, play space, sports pitches and transport infrastructure on the basis that there was insufficient information to decide whether they met the tests of being necessary to make the development acceptable in planning terms, directly related to the development and reasonable in scale and kind.

So, in the absence of any evidence of a specific identified need to provide for community, education and/or health facilities in association with a particular development proposal, and any evidence that replacement, additional or enhanced facilities are genuinely required within that particular area, it would appear that a planning obligation to secure such financial contributions would be unlawful when tested against the criteria laid down in Regulation 122(2) of the CIL Regulations, if it cannot be demonstrated that this is necessary to make the development acceptable in planning terms, is directly related to the development and is fairly and reasonably related in scale and kind to the development.

I understand that advice to this effect has been issued by the Planning Officers’ Society.

Reverting to CIL itself, when this comes into full effect the actual calculation and collection of the tax (because that is what it is – a development tax) is going to be an absolute nightmare. I strongly believe that it will become such a shambles and will cause such an outcry that CIL will be dropped within a few years, but we shall have to cope with it as best we can in the meantime (like each of the other failed attempts to tax development in the past).

To take one small example, very few people seem to be aware that CIL will be payable on house extensions and outbuildings erected as Permitted Development, unless the tax payable would come to less than £50. I bet that will come as a bombshell to householders!

As I indicated earlier, CIL is not really my subject, and I would much prefer to leave it to David Brock to try to explain it, as he did so succinctly and alarmingly at our seminar last month. Bearing in mind the timing, I reckon that CIL is going to become a real albatross around the neck of the coalition government in the run-up to the 2015 General Election, together with the ‘bedroom tax’ on housing benefit claimants and various other bright ideas the government has had, which will all be showing their true practical effects by that time.

© MARTIN H GOODALL

4 comments:

Martin H Goodall LARTPI said...

It may take some time for any comments on this piece to appear here, as I am not going to have time to moderate comments for at least a week, due to other commitments.

Anonymous said...

"To take one small example, very few people seem to be aware that CIL will be payable on house extensions and outbuildings erected as Permitted Development, unless the tax payable would come to less than £50. I bet that will come as a bombshell to householders!"

Well, they sneaked that one in on us, then. My word.

Sure supports your concluding sentence.

Good for you for posting your corresponent's piece. Excellent stuff.

Martin H Goodall LARTPI said...

For reasons that I can't quite explain, an interesting comment about CIL from Andy Ward got posted on an item dated 16 March relating to listed buildings. I can't shift it myself, so would suggest that readers go to that item and read Andy's comment there.

Simon said...

From my memory of the regs, CIL is only chargeable on developments of more than 100 sqm or on new dwellings, so any extension below 100 sqm in floorspace would not pay CIL and all but the largest extensions will stay CIL-free.