Contracts conditional on planning permission – a practical guide

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Residential development land is often secured before planning consent has been granted.  A developer may enter into an option to acquire land if he is successful in obtaining planning consent for it, or a contract conditional on planning.

 

In either of those cases, ownership of the land remains with the seller and only when the option is exercised, or the contract becomes unconditional, does it pass to the developer.

 

The developer will routinely have obligations to obtain a satisfactory planning permission.  If the site is of any size or complexity, it is highly likely that a planning application will require an agreement under Section 106 of the Town and Country Planning Act 1990.  Under section 106 the local planning authority can secure a planning obligation that binds the development land.  A planning obligation enables the authority to secure such things as financial contributions towards local facilities and infrastructure or to impose restrictions on the use of land.

 

A planning obligation must be binding on all parties with a legal estate or interest in the land.  Accordingly, the option agreement or conditional contract should contain a requirement on the landowner to enter into planning obligations if required – otherwise the developer may be frustrated in its attempts to obtain planning permission.

 

A landowner may not, however, be prepared to commit to entering into a section 106 agreement without some pre-conditions.  For example, it is common to give a landowner comfort that the planning obligations will not come into force until the development is undertaken.  The landowner may also want to be satisfied that the extent of the planning gain secured by the section 106 agreement is consistent with policy and not excessive.

 

Particular issues arise where the landowner is also retaining other land that will not be the subject of the development.  The landowner may not want that retained land to be subject to restrictions or to be adversely affected by the proposed development.  On the other hand, the principal purpose of the contract with the developer is to secure planning permission for the development site and the developer will be devoting significant resources to that end.

 

This apparent tension was litigated recently in the case of Nirah Holdings Limited v British Agricultural Services Limited and Hanson Building Products Limited (2009 EWHC 2282 COMM).

 

In this case the local planning authority was minded to grant outline planning permission for a freshwater visitor attraction and science research park subject to a section 106 agreement being entered into.  Amongst other things, the section 106 agreement would require a shuttle bus service to be agreed with the local planning authority before the development opened to visitors.

 

The landowner was not happy with this requirement.  It claimed that the developer had not supplied sufficient information about the route of the proposed bus link to enable it to decide whether the obligation in the Section 106 agreement would be prejudicial to its retained land.

 

The court concluded that the landowner did have enough information and that the landowner was unreasonably withholding its approval.

 

The option agreement in question did set out some provisions relating to the retained land.  These were designed to protect the landowner’s ability to continue its business activities, enhance the value of its retained land and promote and undertake its redevelopment.

 

The developer’s stated objectives were to maximise the value and amenity of the development land.  Each party was to pursue its obligations in accordance with the other stated aims.

 

The court felt that the objectives for the retained land were very wide.  However, it drew a distinction between the requirement to “enhance” the value of the retained land as opposed to “maximising” the value of the development site.

 

So, on the facts and wording of this particular agreement, the landowner was required to enter into the section 106 agreement.  It was however a fine balance.  The agreement had been drafted to reflect the potentially conflicting aims of the two parties.  It did contain safeguards designed to protect the value of the retained land but in the event these were not sufficient to override the objective of maximising the value of the development site.

 

Practical tips

• If you are dependent on the landowner entering into a planning obligation, make sure that your agreement requires him to do so.

• Where the landowner is retaining land, consider carefully the implications both for  the developer and the landowner.

• Set out as clearly as possible in your agreement the objectives of the parties.

• Where there is a potential conflict between those objectives, make sure that there is an order of priority.

 

Bill Mackie

 

Partner

 

December 2009

 

This article first appeared in Housebuilder Magazine, 1 December 2009