Planning white paper: what it means for developer contributions and costs of development

However, unless the planning industry takes an active role in helping government to shape the detail of the proposed reforms and anticipate potential problems, we could instead find that the new proposals unfairly raise the cost of development and so put the intended beneficial outcomes of the development at risk.

This is part of a series by Pinsent Masons exploring the practical implications of the government's planning reform proposals for England, as set out in its 'Planning for the Future' white paper. We have already explored what the proposals mean for design and the environment. Other articles in the series will address topics including issues of development and time, engagement and digital, and the delivery of large developments. Here we  look at what the paper says in respect of developer contributions for infrastructure delivery and consider how the proposals will impact the costs of bringing forward development. Registration is now open for a series of webinars Pinsent Masons is hosting this September on planning reform, which focus on what the changes will mean for the timely delivery of new housing, commercial and retail development, the implications for planning across energy and infrastructure, and the relationship between the reforms and the wider decarbonisation and environmental agenda.

Planning for infrastructure and connected places

Developer contributions

The white paper sets out three pillars of reform, with the third pillar – 'Planning for infrastructure and connected places' – containing a bold ambition to reform the system of developer contributions. It proposes the introduction of a new "infrastructure levy", being a reform and extension of the Community Infrastructure Levy (CIL) combined with the abolition of section 106 agreements and planning obligations.

Drawing on the conclusions of its updated report on developer contributions, which explores the extent and value of agreed planning obligations levied in England in 2018-19, the white paper seeks to address common criticisms of the current system, such as time spent negotiating agreements, the "dark art" of viability discussions and inefficiency in capturing land value uplift.

The new infrastructure levy would be charged "as a fixed proportion of the development value above a threshold, with a mandatory nationally-set rate or rates", levied at the point of occupation, with an offset for any affordable housing provided on-site. Importantly, it would be extended to apply to changes of use, not just the creation of new floor space. This is a significant change to CIL.

As always, the details will be critical. These will emerge as and when the government presses on with the reforms. CIL has hardly been a resounding success – with its often impenetrable and much amended legislation, and awkward, punitive procedure, it has frequently caused more problems for local authorities and developers than it ever solved. As well as these enforcement and procedural difficulties, its principal failure has been the complete lack of guaranteed delivery of the required mitigation that it is meant to fund. Section 106 agreements also have their drawbacks, principally inconsistency and delay, though they can provide much needed flexibility and delivery certainty. Seeking to square the circle to achieve the right balance between standardisation and flexibility is certainly not easy.

However, the proposals do give rise to numerous questions and considerations.

Who, between the developer and the local planning authority (LPA), will decide whether, and, if so, how much, affordable housing is to be provided on-site and offset against the levy? The white paper suggests a range of inventive options for LPAs as to how a scheme might deliver against an affordable housing requirement, including on-site delivery, land transfer, rights of first refusal or the opportunity to "flip" a unit back to market housing should market fluctuations result in the levy liability being insufficient to cover the value secured through in-kind contributions. However, but there is little detail as to how this is to be agreed, secured, delivered, varied or monitored on a site by site basis.

Is the white paper's introduction of a "development value" threshold, below which no levy will be charged, too blunt an instrument to fix the complex issue of viability? Developments that are only just viable in an uncertain market may be stymied by an unyielding levy liability, thereby undermining the very purpose of the white paper.

Section 106 agreements do more than just secure payment of contributions and delivery of a specific affordable housing percentage – something which the government has not tackled in the white paper:

• They secure affordable housing in perpetuity by legally binding the land and can give local people priority in taking an affordable dwelling.
• They secure sustainable travel methods, encourage the employment of local people in development construction jobs, provide retail units at an affordable rent and secure on-site facilities such as open space, schools, doctors' surgeries and community facilities.
• They secure mitigation which cannot be conditioned on a planning permission, such as the payment for air quality monitoring stations and the payment for ecological off-setting land.
• If section 106 agreements are abolished, and planning conditions, which are often unsuitable to address such matters, are to be increasingly standardised in line with the white paper proposals, there is a question over how any on-site mitigation measures are to be secured. Reform cannot be at the expense of necessary, but proportionate mitigation otherwise the government's aim of delivering beautiful sustainable places will fail at the first hurdle.

We are told that the levy will be available for wider purposes than CIL but what infrastructure items will the levy cover and will it allow for credit against all on-site infrastructure provided, as is being suggested for affordable housing? For instance, a developer will want to know whether they would be able to offset the value of a primary school that it provides on-site, but which will also serve children who do not live on the development. In those situations, it is going to be difficult to value how much of an offset is fair and proportionate.

Is the levy actually going to be an improvement on CIL? The levy will be payable on occupation rather than on commencement, which should help developers with cashflow and getting developments out of the ground. Levy rates are also proposed to be fixed at the grant of planning permission, which should give developers a level of certainty of the costs they are facing. However, LPAs will be faced with the dilemma of whether to commit to the expenditure on local infrastructure in advance of receipt of the levy intended to pay for it and developers may seek to deliver more infrastructure themselves "in kind" to achieve both a levy offset and to ensure timely delivery if it is not certain when LPAs would deliver the necessary infrastructure via the levy.

One of the solutions outlined in the white paper is to allow LPAs to borrow against future levy receipts. This is not a new idea, it is akin to tax increment financing, but it gives rise to financial risk and forecasting considerations and does not guarantee delivery of infrastructure mitigation any more than the current CIL system. It remains to be seen whether the levy will come with the same discounts and exemptions that we were used to under CIL and also whether it can be paid in instalments – presumably now linked to first occupation of development phases rather than their commencement – which was an early amendment to the CIL Regulations that proved critical for the cashflow and delivery of large residential schemes. The new levy will certainly require better legislation and a less-complex procedure than its predecessor in order to be effective.

Planning application costs

A less eye-catching proposal from the third pillar of the government's white paper is the proposed reform to planning application costs. The paper has something for both LPAs and developers in this respect. 

LPAs will be glad to see that there will be seemingly higher planning application fees continued "to be set on a national basis" and to "cover at least the full cost of processing the application type based on clear national benchmarking", with recognition that the "current fee structure means the costs of processing some applications can be significantly greater than their individual fee". That said, there is still no recognition that geography and local circumstances dictate that no one LPA has the same cost base as another LPA. The quid pro quo is that there will be "greater regulation of discretionary pre-application charging to ensure it is fair and proportionate", which will be music to the ears of those who have ever been left wondering what they were given in return for that planning performance agreement fee.

What's next?

The government's plans are undoubtedly ambitious. It should be applauded for seeking to refresh a planning system that most would agree is not as efficient in producing deliverable planning permissions and high quality development as it could and should be. The current system undoubtedly struggles to deliver much wanted and needed sustainable development and very importantly the infrastructure required to support it.

It remains to be seen what the replacement for s106 agreements, or at least payments made under them, and CIL will look like, and whether the proposed new infrastructure levy will be capable of achieving a more efficient system that better engages the community and delivers the local infrastructure that they, and we all, want to see.

Industry and local authorities both have an opportunity to shape the final proposals and help the government configure a new system that achieves its aims and good deliverable outcomes. The responses to the white paper consultation, which closes on 29 October, will be vital in isolating issues, proposng solutions and ultimately shaping the look of the new system. Whether you are concerned that the financial burden of the increased application fees and levy will act as a hand break on smaller schemes, or that the levy loophole created by the new 'use class E' is too wide, or think that the proposals do not go far enough to help LPAs in the timely delivery of the vital infrastructure that the new levy is to fund, it is important you make your views heard.

Co-written by Lucy Thomas, Iain Gilbey and Reza Newton, specialists in planning law at Pinsent Masons, the law firm behind Out-Law. Registration is now open for a series of webinars Pinsent Masons is hosting this September on planning reform, which focus on what the changes will mean for the timely delivery of new housing, commercial and retail development, the implications for planning across energy and infrastructure, and the relationship between the reforms and the wider decarbonisation and environmental agenda.