Closing the “viability loophole”? A return for the developer must be taken into account when setting local plans

Authors: Matthew White, Partner and Head of UK Planning; Catherine Howard, Partner; and Lucy Morton, Professional Support Lawyer, Planning, London

The Government is recommending that viability is assessed in detail by the local authority at the stage of setting its development plan and allocating land for certain uses, and that specific assumptions should be made at that stage regarding land value and what is a reasonable return for a developer – using the ‘existing use value plus’ (EUV+) land valuation method and assuming a return of 20% of gross development value (GDV) for the developer in appropriate circumstances.  It could then be more difficult for a developer to re-open negotiations on viability at a later stage.

The Government’s new Draft Planning Practice Guidance for Viability sets out more detail on the new proposals, as we explain in this post.  This draft guidance is one of a raft of new publications which the Government have released, including new draft National Planning Policy Framework (NPPF) and a consultation on developer contributions including Community Infrastructure Levy (CIL) which are all aiming to increase the supply of housing, provide certainty for developers, capture land value more effectively and improve and speed up the planning process.

An assessment of land values and viabilities will be made by a local authority at the stage of drawing up a development plan which allocates land for certain uses and sets out specific policies in relation to the use of land, with some engagement from landowners, developers, affordable housing providers and other organisations. The new draft guidance recommends that the ‘existing use value plus’ (EUV+) method is used to calculate benchmark land value at the stage when the local authority sets its local plan policies. As part of this calculation, a premium for the landowner will be calculated, and separately, a suitable return for the developer will be calculated.  The draft guidance sets out that an assumption will be made that the return to the developer “may be 20% of GDV” for the purposes of plan making, in order to establish viability of the development plan policies. A lower figure of 6% of GDV “may be more appropriate in consideration of delivery of affordable housing in circumstances where this guarantees an end sale at a known value and reduces the risk”. And it is also acknowledged that different figures may be appropriate for different development types, for example build to rent. The suggested assumption of 20% of GDV provides an interesting contrast with some recent experience in London, where schemes with returns for developers of 15% or even lower are being challenged by the Mayor’s viability team.

No viability assessment will need to be submitted with a planning application for a policy-compliant scheme (this is the current position but is now also confirmed in a new paragraph in the revised NPPF). Where a viability assessment is required with a planning application (for non policy-compliant schemes or certain defined types of application), this will need to refer back to the original viability assessment that informed the authority’s development plan, and if anything has changed, the developer will need to provide evidence of that change. The guidance and the revised NPPF state that where viability assessments are required, they should follow a standardised format with a non-technical summary, and should usually be made publicly available. Consistency between the approach to viability assessment for plan making, decision making, section 106 planning obligations and CIL is also required.

The defined method for calculating land value and the assumptions on the developer’s return at the stage of the authority making the local plan could mean it is more difficult for a developer to re-open negotiations on viability at a later stage.  Review mechanisms could still be used in section 106 agreements where appropriate, to adjust certain contributions, and the draft guidance states that the circumstances for their use should be set out in local plan policies.

Review mechanisms may also be used to capture increases in the value of a scheme over time, and to allocate this between the local authority and developer. This is intended to give more certainty around delivering infrastructure (and this is likely to tie in to the Government’s recent inquiry on land value capture).

We have written here about one angle of the Government’s new reforms – there is much more detail, and this draft guidance document was published alongside the new draft NPPF with its consultation, the consultation on developer contributions including CIL, and a new housing delivery test, as well as the Government’s response to the consultations ‘Fixing our broken housing market’ and ‘Planning for the right homes in the right places’. These are all addressing the need for more housing, capturing land value and how to improve and speed up the planning process, and further announcements and legislation are expected to follow. We also expect the recommendations in these new documents to be consistent with the Government’s response to its recent inquiry on land value capture, the results of which are now being assessed.

Our Herbert Smith Freehills team are reviewing the Government’s new documents in further detail. Please do get in touch if you would like more information.

See also our recent post on calculating the level of affordable housing the Mayor of London deems viable.

Catherine Howard
Catherine Howard
Partner, Planning, London
Email | Profile
+44 20 7466 2858
Matthew White
Matthew White
Partner and Head of Planning, London
Email | Profile
+44 20 7466 2461
Lucy Morton
Lucy Morton
Professional Support Lawyer, Planning, London
+44 20 7466 2626

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