The updated planning practice guidance on viability sits alongside the revised National Planning Policy Framework (NPPF 2018), both of which were published on 24 July 2018.
The NPPF 2018 is to be used for all planning decisions taken from that date. For plans in the plan-making process, those submitted on or before 24 January 2019 will be examined against the original National Planning Policy Framework (NPPF 2012) and the previous guidance.
The updated guidance advocates use of viability assessments at the plan-making, rather than the decision-taking, stage. An Existing Use Value plus approach is required which categorically excludes the price paid for the land being used in viability assessments. The guidance also seeks to standardise the inputs into viability assessments.
What is viability?
In this article, we are looking at the guidance surrounding the concept of whether a proposed development is financially viable, i.e. the value generated by the development is more than the cost of developing it. This is a concept which barely existed in planning policy before its appearance in the NPPF 2012, and it has significantly evolved to the present day.
Approach to viability no longer contained in the Framework
The NPPF 2018 does not talk about the approach to be taken to viability. The infamous paragraph 173, which was the central provision of the NPPF 2012 in respect of viability (and talked about the costs of development and competitive returns etc), has been removed. Instead one needs to look to the planning practice guidance (PPG) and the specific updated viability guidance to understand viability in plan-making and decision-taking.
Key areas of guidance
These are the key areas of guidance contained in the new PPG:
Plan-making
- The role for viability assessment is primarily at the plan making stage. Viability assessment should not compromise sustainable development but should be used to ensure that policies are realistic, and that the total cumulative cost of all relevant policies will not undermine deliverability of the plan.
- Policy requirements, particularly for affordable housing, should be set at a level that takes account of affordable housing and infrastructure needs and allows for the planned types of sites and development to be deliverable, without the need for further viability assessment at the decision making stage.
- It is the responsibility of site promoters to engage in plan making, take into account any costs including their own profit expectations and risks, and ensure that proposals for development are policy compliant. The price paid for land is not a relevant justification for failing to accord with relevant policies in the plan.
Decision-taking
- Where up-to-date policies have set out the contributions expected from development, planning applications that comply with them should be assumed to be viable. It is up to the applicant to demonstrate whether particular circumstances justify the need for a viability assessment at the application stage.
- Where a viability assessment is submitted to accompany a planning application this should be based upon and refer back to the viability assessment that informed the plan; and the applicant should provide evidence of what has changed since then.
- Plans should set out circumstances where review mechanisms may be appropriate. Where contributions are reduced below the requirements set out in policies to provide flexibility in the early stages of a development, there should be a clear agreement of how policy compliance can be achieved over time.
- Review mechanisms are not a tool to protect a return to the developer, but to strengthen local authorities’ ability to seek compliance with relevant policies over the lifetime of the project.
Loss of flexibility
The PPG seems to remove the flexibility that was contained within the previous guidance. For instance, the previous guidance stated that ‘where the viability of a development is in question, local planning authorities should look to be flexible in applying policy requirements wherever possible’. Provisions such as these do not appear in the new PPG.
Standardisation
The previous guidance stated that there is no standard answer to questions of viability, nor is there a single approach to assessing viability. The new PPG, however, looks to standardise inputs to viability assessments in relation to the approach to development value, costs, returns and premiums etc. It contains a huge amount of detail that will need to be looked at closely in any given case.
Land value
In terms of land value for any viability assessment, the PPG makes it clear that a benchmark land value should be calculated based on the existing use value of the land, plus a premium for the landowner (EUV+). This was the approach taken by the High Court in the recent Parkhurst case. In terms of the premium, this ‘… should reflect the minimum price at which it is considered a rational landowner would be willing to sell their land’.
The assessment should assume a return of 15 to 20 per cent of gross development value for the developer in appropriate circumstances. It should be noted that the draft PPG referred to 20 per cent and this has, until now, been the accepted level of return. The PPG recognises that a lower figure ‘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’. It also acknowledges that different figures may be appropriate for different development types.
Openess
The courts have grappled with the issue of whether viability assessments should be confidential and increasingly the move has been toward demanding openness. The PPG covers this issue and provides that ‘Any viability assessment should be prepared on the basis that it will be made publically available other than in exceptional circumstances’. It is not clear what those exceptional circumstances might be. The PPG refers to ‘commercially sensitive information’ and certainly previous attempts at non-disclosure included arguments that to reveal information in an assessment would result in developer competitors seeing the developer’s development model which is a trade secret. It is questionable whether this would now be be accepted as ‘exceptional’ and, therefore, a valid reason to withhold information. Indeed, notwithstanding the PPG, requests to disclose under the Environmental Information Regulations 2004 leave little room for discretion.
Areas left open to debate
The key message from the revised guidance is clear – a uniform approach should be taken to viability and under no circumstances will the price paid for land be a relevant justification for failing to accord with relevant policies in the plan. With the PPG, and the Parkhurst decision, local authorities will be proceeding with some considerable comfort in requiring that developers ensure (and show) that policy compliant costs are factored into the site acquisition costs. However, there are still a number of factors that will no doubt play out at planning appeals and in the courts, such as the approach to the developer’s profit return and landowner premiums. We can expect to see these debates over the next few years.
How can Burges Salmon help?
We work with local authorities, developers and landowners in all areas of development and are experienced in complex regeneration projects. For more information on the approach to viability assessments and/or linked matters such as planning obligations please contact Gary Soloman.