Whether you are new to the property sector or seasoned property developer, Section 106 agreements are terminology you will no doubt be familiar with.
Usually applicable to larger-scale developments, s106 agreements are a key tool used by local planning authorities (LPAs) to make proposed developments acceptable in planning terms.
Effectively, to give the go-ahead for a development, LPAs require you to take measures that reduce its impact on the locality. This can be achieved in various ways but typically involves contributing towards the development or upgrading of local infrastructure and amenities (such as affordable housing, schools, public transport, and green spaces). It might also mean restricting or prescribing the development, use, operation and/or activities on the land in some way.
We understand that as a developer, you are keen to get started, run to timelines and maximise your return on investment. While taking measures to implement s106 obligations can slow you down and cost you more, there are both immediate and long-term benefits.
In this article, our commercial property team walk you through the key benefits and challenges of s106 agreements, what you can do to help your project remain profitable, and how we can help.
Benefits of s106 agreements
Facilitates planning approval
If the alternative is simply that your development is unviable in planning terms, the benefit of s106 agreements suddenly becomes very clear. s106s are a potential solution, workaround or compromise offered by LPAs to facilitate planning approval for a project that would otherwise be deemed unacceptable. The measures sought by LPAs are often designed to mitigate any negative impact of your proposed development on the community (such as by improving local infrastructure and adding amenities). By entering into the s106, you are therefore addressing local needs that may be strained by the arrival of your new development, which in turn helps secure the green light.
Flexibility in networking
Unlike other planning obligations, s106 agreements can be negotiated and ironed out with the LPA to achieve a mutually acceptable position. Put simply, they are not rigid, standardised ‘take it or leave it’ documents that you might come across in other areas of your business. The flexibility to negotiate and tailor the terms to your specific needs means there is an opportunity to protect your commercial interests.
Supporting community relations
Engaging with the community and making a positive contribution to local services and sustainable practices can foster goodwill. This in turn can reduce the risk of opposition from the community, establish your name as a socially responsible entity, and ultimately lead to smoother project execution and future business opportunities.
Enhances project appeal
Contributing to and improving local infrastructure and amenities can serve your project both in the medium and long-term. It might attract potential buyers or occupants to the development itself, and new investment into the area. This in turn can increase property values and lead to better outcomes long-term.
Potential for future projects
Working closely with LPAs to put in place s106 agreements that make positive contributions to community needs is a great way to build the foundation for lasting relationships. Once you have established yourself as a reliable partner, this could open the door for future projects and business opportunities in the locality.
Potential pitfalls for developers
Financial Impact
One of the most immediate concerns is the financial burden s106s can impose. The costs of fulfilling the obligations can rack up and impact profit margins. This financial pressure can make projects less viable, especially for smaller developers. Additionally, fluctuations in the market can further complicate financial planning – the value of properties may not keep pace with associated s106 costs over time.
It is important to monitor and weigh up costs against profitability to ensure your project delivers return on investment.
It is equally as important to maintain open lines of communication and negotiate carefully with LPAs about the scope of obligations to help address these concerns.
Negotiation challenges and delays
Negotiating the terms and obligations of a s106 agreement is not a task to be taken lightly or rushed. They tend to be quite lengthy and complex documents, so ironing out the issues can naturally take some time.
However, while this is happening your project is on hold. The outlook is bleaker if negotiations become contentious or protracted, for example, over the extent and scope of obligations or contributions.
Delays can have a cascading effect on project timelines, leading to increased holding costs and potentially missed market opportunities. Starting negotiations early can lead to better outcomes in the long-term, allowing more time to accommodate any disagreements that may arise.
Long-term commitments
In the fast-moving business world, once your project is complete and you’ve cashed in, you want to focus on your next opportunity.
Unfortunately, s106 agreements can impose long-term commitments on developers that continue long after your project is done. You may find yourself tied down to ongoing costs, such as the maintenance of public spaces, community facilities, or green spaces.
These ongoing costs can put a strain on your resources and complicate financial planning. It is important to factor any ongoing costs into your financial models. You could also try to ramp up negotiations so that obligations are not open-ended and indefinite.
Timing of payments
S106 payments present another layer of complexity for developers. These payments are typically made at various stages of the project, with some required early in the process. This can complicate financial planning, affect cash flow and lead to cost overruns, especially projects with tight budgets.
A blend of tactful negotiations and compromises between parties can help achieve a more commercially realistic and viable payment timeline.
How we can help
Early Engagement with LPAs
Previous experience has shown us that starting negotiations early can lead to better overall outcomes for developers. Our lawyers kick-start the negotiation process shortly after the s106 is presented by an LPA.
We understand the importance of keeping your project on track and avoiding costly last-minute revisions. We aim to quickly agree and initiate a negotiation strategy that works for you and your project. Our experience with local government processes means we can help anticipate potential challenges and establish a collaborative relationship with LPAs from the beginning, paving the way for smoother negotiations and results.
Viability assessments
These are an essential tool in analysing the financial capacity of a development to meet its s106 obligations. It is important that all relevant factors, such as construction costs, market conditions, and profit margins, are thoroughly considered.
Viability assessments are not a one-off function – they should be completed at the outset and then continually reviewed as the project unfolds. The key here is to balance your s106 obligations with project profitability, considering the scope and extent of obligations.
Legal expertise
Tackling s106 agreements can be a daunting task for even the most experienced developers. Commercial property lawyers play a crucial role in safeguarding your legal and commercial interests in the deal.
Our technical understanding and industry insight means that we can help you understand the specific requirements and expectations of the LPA, highlight, and negotiate any onerous obligations, and ultimately secure terms that are more favourable while still addressing community needs. This legal oversight can prevent costly disputes and litigation down the line, promote smoother project execution, and protect your investment.
Consider alternative agreements
Sometimes the uncertainty of what you will ultimately get with s106 agreements makes other arrangements more attractive. These can offer a clearer, more predictable, and manageable financial framework.
One example of this is the Community Infrastructure Levy (CIL). CIL rates are levied according to published tariff schedules and are based on the type and size of development.
This fixed rate allows developers to understand their financial obligations upfront, enabling better financial planning and reducing uncertainty compared to s106 agreements, which can vary widely based on negotiations. In some cases, you may still be required to enter into s106 agreements alongside CIL, particularly for site-specific mitigation measures or affordable housing. CIL can, however, reduce the overall number of negotiations and obligations, making the process more manageable.
Summary
If handled effectively, s106 agreements can create value for both developers and the communities they serve.
In the short-term, meeting community needs can facilitate planning approval and generate community support for easier project execution. Long-term, positive relationships and good reputation among LPAs and their residents can carve the way for future projects.
However, it is important to understand and manage the potential risks involved to help ensure your project remains commercially viable. This is where a solid legal team like Harper James can really make a difference. We understand your priority is to get your development to the market while maximising returns. We have successfully negotiated s106 agreements with numerous LPAs to achieve positive outcomes for developers.
If your project has s106 obligations and you need advice, get in touch with our friendly commercial property team today.
