Legal briefing | Real Estate, Real Estate Development, Real Estate Investment, Planning | 30 Oct 2019

“The jaws that bite, the claws that catch…”

Overview

There is an emerging trend towards post-completion or post-occupation reviews of the efficacy of planning obligations which result in clawbacks or uplifts in financial contributions or mitigation works, sometimes for a number of years post-completion.  This leaves frayed edges to completion-driven real estate transactions and can leave tenants potentially exposed to unknown or unquantified additions to service charges.

Emerging "extended" obligations

Planning conditions and s.106 obligations that apply for the lifetime of a development are very familiar to developers, owners and tenants or occupiers of buildings. Such conditions often relate to restrictions on changes of use, business hours or delivery routes.  Conditions attached to planning consents and s.106 obligations generally run with the land, and new owners or tenants acquiring title will also potentially be bound by them.  Where such conditions or obligations are “fixed”, there is certainty in what the new owner or occupier is obliged to comply with.

However, this certainty is being eroded by the increased use of extended reviews and reassessments of approved plans and strategies.  From the point of view of local planning authorities, this enables them to have another bite at the compliance cookie, and ensure that standards that might have been met for the first six months of occupation, for example, are still being met two or even five years on.  If they are not, it also gives them another bite of the contribution cake too, by requiring additional mitigation measures to be implemented or a further financial contribution in lieu. 

The table below summarises briefly the nature of a few such obligations from s.106 agreements recently entered into by London Boroughs. 

Biodiversity net gain - another ongoing post-completion obligation?

This may not be the end of the trend: the biodiversity net gain ("BNG") provisions in the Environment Bill currently going through Parliament propose a requirement that post-development biodiversity should be 10% greater than pre-development levels.  The requirement is couched in terms of a pre-commencement condition, rather like the way in which the requirement to prove suitable alternative natural green space ("SANG") provision in developments adjacent to Specially Protected Areas currently operates.  How long will it be before a review of biodiversity provision is subject to post-completion re-assessment in the same way as affordable housing viability reviews?  The pre-commencement and post-completion obligations relating to BNG and SANG will be the subject of a further briefing.  

Where will the burden lie?

Whilst it is most likely to be landlords of multi-tenanted properties who are responsible for any reviews or reassessments post-completion/occupation, in accordance with plans and strategies that they have agreed with the local planning authority during the planning application or construction phase, it is inevitable that deferred uplifts in financial contributions or the costs of any additional mitigation works (or share thereof) will filter down to the tenants or otherwise pass to future owners or occupiers.

However, not all developers, tenants and owners will necessarily consider some of these initiatives to be burdensome: active engagement with sustainability footprints can be a significant element of corporate social responsibility, even at the cost of increased service charges. Likewise, owners of property may see green credentials delivered in an accountable (and demonstrable) way as a means of attracting a premium in rental or sales pricing. In addition, in the same way that the recent prohibitions on renting property that does not meet minimum EPC standards has come into force, it is likely that environmentally-related building standards will become more stringent in the future, and the greener the building now, the less likely it is that major investment in building improvements will be required in the short to medium term.

It is therefore important for investors and lenders to consider both the mechanisms and the potential obligations or financial liabilities of such ongoing responsibilities as part of due diligence on a purchase, and to manage these risks as part of the transaction process.

Completion considerations

The list below is not definitive, and the nature of the conditions or obligations involved may raise other specific issues, but the following are some generic suggestions for matters to consider as part of the completion process:

  • Where possible, buyers need to be aware of the content and scope of proposed or approved plans and strategies with which they may have to comply in occupation.

  • How long does the review period/plan last? 2-5 years is common; some for lifetime of building/approved use.

  • Who is responsible for undertaking the reviews? Whilst tenants may wish to have a say in what is agreed in reviews of plans, landlords may be cautious, as meeting the diverse views of many tenants may make the plan review process very difficult to conclude.

  • Will the tenant/occupier have any input or say in what additional mitigation measures are agreed with the council?

  • Will there be a cost cap on additional measures for which the tenant(s) may be responsible?

  • Will any additional cost be incorporated into service charges, or specific service charge exclusions in relation to matters such as, for example, connection to a DHN in the future or in relation to affordable housing uplift, which should remain a developer/seller/landlord’s liability?

  • Plans are often qualified by “reasonable” efforts to achieve targets etc – it is not always clear what “reasonable” might entail, particularly in an environment of tightening regulatory standards (e.g. for carbon emissions).

  • Consider whether warranties/undertakings/escrow/costs caps might be appropriate if any of these matters apply and, if so, how to “future-proof” these protections to capture future liabilities.

  • Consider also whether the lifetime of warranties needs to be extended to accommodate obligations that are still likely to be “live” for longer than the standard warranty period.

  • This may be an area in which a new or adjusted insurance product could become available, along similar lines to Chancel Liability insurance.

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