Coronavirus planning update: Community Infrastructure Levy and Section 106 Obligations

What started as an epidemic limited to China has now become a truly global pandemic. Its effects have been felt throughout many sectors including those impacted by planning law, and below we set out the main changes and issues relating to the Community Infrastructure Levy and Section 106 obligations that you should be aware of as of 8 July 2020. The situation is constantly changing, and we will aim to provide the most up-to-date information where possible.

Further advice regarding the impact of the Coronavirus outbreak on planning law, and how to prepare for any impact on your business, is offered by the Freeths Planning team. Please contact us should you wish to know more.Community Infrastructure Levy - temporary changes in-coming for developers with an annual turnover not exceeding £45 million in EnglandUnless there is an instalment policy in force, subject to some exceptions, all of the CIL liability must be paid within 60 days of commencement of development. The Government have acknowledged that these requirements may have a negative impact on developer cashflow in the current circumstances and consider that “smaller developers may need more help”.On 30 June the Government published draft regulations and updated guidance to enable charging authorities on a temporary basis to:

• defer payments;
• temporarily disapply late payment interest, which otherwise would accrue automatically; and
• provide a discretion for charging authorities to return interest already charged where they consider it appropriate to do so.

The draft guidance confirms that: “[t]he government expects collecting authorities to take a positive approach when considering a deferral request. This new regime is intended to be a quick route to allow developers more time to make CIL payments for a limited period of time. The government expects this regime will be administered quickly and fairly in everyone's interests”.Below we set out further details of the draft regulations and guidance.

Who is eligible?

Developers can only make a deferral request if they:

• have an annual turnover not exceeding £45 million;
• have been served with a demand notice for payment;
• are required to pay an amount of CIL (whether by instalment or otherwise) between the date the regulations come into force and 31 July 2021; and
• are experiencing financial difficulties because of the effect of Coronavirus and is having difficulty making an amount of CIL (whether by instalment or otherwise) from the date the regulation comes into force until 31 July 2021.

The draft guidance indicates that: “[w]here there are questions around the eligibility of an applicant, the collecting should engage with the applicant as soon as practicable to establish whether it would be appropriate to approve a deferral at an early stage and look to provide a degree of certainty to the applicant”.

What classes as “financial difficulties”?

The draft regulations say this includes “such difficulties which would be likely to have an unacceptable impact on the economic viability” of the applicant.

When must the deferral request be made?

If a developer qualifies, a deferral request must be submitted to the collecting authority no more than 14 days before or on or as soon as practicable after the day payment of the CIL amount is due.

What must the deferral request include?

The draft regulations do not prescribe this. However, the draft guidance suggests “it should be in writing and...[a]pplicants are encouraged to engage with the collecting authority at the earliest opportunity to discuss what relevant information they should provide, but as a minimum they should supply a copy of the relevant demand notice, and where there is likely to be any doubt, evidence that they have an turnover not exceeding £45 million and that they are experiencing financial difficulties as a result of the Coronavirus”.The draft guidance goes on to set out that: “Examples of evidence in support of the annual turnover can include:

• A declaration from a responsible person or organisation, such as a chartered accountant or auditor. This can set out what the turnover is and whether the business meets the criteria of sole enterprise or is part of a linked business or has partners...
• Information provided to Companies House including the company's confirmation statement (annual return).”

The applicant must give the collecting authority information requested by the authority, within 14 days of receiving the request, so they can carry out their functions and decide the request provided that the requested information is within the applicant's possession or control. It is a reason for refusal if the applicant does not provide the requested information within the required timeframe.It will be interesting to see what approaches collecting authorities take on this.

Must the collecting authority approve the deferral request?

It is a discretionary power. The collecting authority would need to consider “it is appropriate in the circumstances”. Collecting authorities will have discretion but the draft guidance says that collecting authorities “are encouraged to take a positive approach”. The collecting authority must consider a deferral request as soon as practicable after it is received and notify the applicant of its decision within 40 days of receipt. The draft regulations would not require collecting authorities to give reasons of refusal but the draft guidance indicates that “the government expects that as a matter of good administrative practice reasons should be provided wherever possible to do so”.

What happens if the collecting authority grants a deferral request?

The collecting authority must serve a revised demand notice on the applicant as soon as practicable. The revised notice must confirm the amount of CIL payable (including any surcharges and interest) and the day that the CIL amount is now due. A deferral can be for no more than six months beginning with the day the authority receives the deferral request in writing. The CIL must then be paid in accordance with the revised demand notice.

What happens if the collecting authority refuses a deferral request?

The CIL liability must be paid either in accordance with the original demand notice or pursuant to a standalone revised demand notice which the collecting authority may later issue. If the applicant does not make payment within 7 days of the refusal the collecting authority is then able to impose surcharges and charge interest.

Can you appeal a refusal?

No. In this scenario, however, we wonder whether there would be scope to make a further deferral request within the above 7-day period to obtain the benefit of a further temporary suspension in surcharges and interest whilst that new application is being determined? No doubt, this is a situation that developers will face. We will need to watch this space on this as this is yet to be tested.

What happens if the collecting authority fails to make a decision within 40 days?

The draft regulations are silent on this point and we note that there is no deemed approval mechanism. Practically, if the collecting authority fails to make a decision within 40 days the suspension of surcharges and interest may continue to apply. However, of course this is yet to be tested.

Suspension of levying surcharges and automatic interest accrual whilst determining application

Whilst the collecting authority consider the application, they cannot impose any surcharges and the applicant would not be required to pay interest for the period within which the application was being determined, as it would stop accruing.

Can a developer seek to remove liability for late payment interest that has already accrued?

If the late payment interest on the applicable CIL accrued between 21 March 2020 and ending with the day the collecting authority receives the deferral request, the applicant can request that the collecting authority credits that accrued interest under the revised demand notice. The draft guidance suggests that such an interest request can be made if a deferral request is granted, which may indicate that an interest request cannot be made alongside a deferral request. However, we consider the legislation is currently unclear as to the timing of the interest request and it is unclear what form the application should take. Practically, it seems like it would make sense to put both the deferral request and interest request in at the same time as it appears that the intention is for collecting authorities to issue revised demand notices (which would address the interest request) shortly after they approved the deferral request. We will need to see how this works in practice. The collecting authority needs to consider that crediting is “appropriate in the circumstances”. An applicant cannot make an interest request if the collecting authority refuses to grant an interest request - the interest must be paid in accordance with the regulations.

What about Mayoral CIL?

A collecting authority may only grant a deferral request if the Mayor considers it is appropriate for the Mayoral CIL to be deferred. This is also the case for an interest request on Mayoral CIL.

If a deferral request is granted can you seek a further one?

The draft guidance indicates that if the new payment date is before 31 July 2021 “the developer could submit a further deferral request if the criteria...are fulfilled again”.

What is 'turnover' for the purpose of checking eligibility?

Is it is not defined in the draft regulations - instead this is considered in detail within the draft guidance which we would refer you to here.

What is the position until the legislation changes?

Changes to the CIL Regulations are subject to an affirmative resolution procedure, which requires debate in Parliament. The original rules would continue to apply, however, the draft guidance indicates that:

• “CIL charging authorities are encouraged to consider making use of the ability to introduce an instalment policy (or amend an existing instalment policy); and
• noting the provisions in the draft legislation which are explained below, CIL collecting authorities are encouraged to use their discretion in considering what, if any, enforcement action is appropriate in respect of unpaid CIL liabilities; and
• CIL authorities should take a positive approach to their engagement with developers, to ensure CIL liabilities do not cause undue burdens over the period of disruption caused by the Coronavirus”.[ela_accordion]

Below is a diagram setting out the process from the draft guidance:We await passage of the amendments and issues of the final guidance.

Community Infrastructure Levy - other reliefs and should the Government go further?

The above temporary relaxation will not assist all developers who are affected by the Coronavirus outbreak, especially the larger ones. The Government's 13 May version of the guidance did stress that “CIL authorities should note the existing flexibilities they have around enforcing CIL for larger developers, including flexibilities over the imposition of surcharges. Late payment interest will remain mandatory where such flexibilities are used”. However, the Government have removed this from the 30 June version as the focus is clearly on “smaller developers [who] may need more help”. Are the largest developers going to be unfairly penalised?

What are the other reliefs?

To combat the somewhat artificial 60-day timeframe, noted above, collecting authorities could introduce an instalment policy, or make their existing one more developer friendly by allowing further deferments via Regulation 69B of the CIL Regulations. However, how quickly this could happen would depend on the relevant collecting authority's adoption requirements. Additionally, the amendment/introduction of an instalment policy would not apply retrospectively.If the changes to the regulations would not benefit your business and you are yet to commence development where CIL will be payable, we consider it is worthwhile checking the relevant collecting authority's position on deferments (and ascertaining how it may change in the future). This may have a significant financial impact in determining when you consider it is most appropriate to commencement development, especially in light of the recent Government news on the automatic planning permissions which are due to expire - see here.The CIL Regulations enable a collecting authority to grant “exceptional circumstances” discretionary relief from CIL liability where they consider the exceptional circumstances justify it and they consider relief is expedient. However, the relief is very limited and may only be granted if:

• the relief has been made available in the charging authority's area;
• an agreement under section 106 of the Town and Country Planning Act 1990 has been entered into; and
• the collecting authority under Regulation 55 of the CIL Regs:- considers payment of CIL liability would have an unacceptable impact on the economic viability of the development; and- to grant relief would not constitute a state aid required to be approved by the European Commission.

A collecting authority still does have the power at any time to:

• issue a revised liability notice (Regulation 65(5));
• withdraw a liability notice (Regulation 65(7)); and
• serve a revised demand notice (i.e. for a lower amount) (Regulation 69(3))

Developers should note that surcharges and interest are not the only means to encourage payment of outstanding CIL liability - the collecting authority has a raft of available measures including a CIL Stop Notice which would prevent all work on site, and is akin to a Planning Stop Notice under the Town and Country Planning Act 1990 (as amended). However, the Government have now highlighted that collecting authorities have discretion “whether and when to take such enforcement actions” and that they could “choose not to impose the surcharge for late payment and are encouraged to consider using this discretion where appropriate”.We will continue to follow this with interest, in particular how collecting authorities use their discretionary powers to impose surcharges and issue CIL stop notices, especially for those developers who are unable to benefit from the legislation changes but are undoubtedly impacted by the Coronavirus outbreak.

Section 106 agreements - seek to renegotiate and force majeure clauses in the future?

On 13 May the Government also highlighted that local authorities should be “encouraged to consider whether it would be appropriate to allow the developer to defer delivery” for obligations, such as a financial obligation, already secured via an existing Section 106 agreement which would be triggered during this period. A deed of variation under Section 106A of the Town and Country Planning Act 1990 would be the method to agree a deferral period. Such a deferral could be either to a specific period or linked to the Government's wider legislative approach and the lifting of CIL easements. In the latter case, the Government does encourage the use of a back-stop date. The Government's guidance states that: “Local authorities should take a pragmatic and proportionate approach to the enforcement of section 106 planning obligations during this period. This should help remove barriers for developers and minimise the stalling of sites.” We are already acting for developers seeking to re-negotiate their existing section 106 agreements or looking to take advantage of this guidance when negotiating future section 106s, and we expect this to rise. We would note that we have also seen an increase in seeking to use force majeure clauses. We will continue to update this with what we see in practice over the coming months.

S106 planning obligations - the way forward for signature and sealing?

We have found a number of local authorities who are either currently unable to seal and complete S106 agreements or are facing significant delays. Often real estate transactions can be conditional on the grant of planning permission so ensuring planning obligations are secured in an appropriate, and timely manner, is significant. Whilst S106 agreements are required to be entered into as a deed, it is our view that there is no absolute requirement for execution in wet ink because a S106 agreement is not a “dispositionary” document. We consider electronic signatures could be inserted via a digital signing platform, although companies would need to check their individual arrangements (memorandum/articles). If the company is permitted to execute deeds via a director in the presence of a witness, that witness needs to be physically present when the signatory executes the document (a view supported by the Law Commission's recent report on electronic signatures).In terms of who could witness the execution by a Director, the position is that a party to a deed cannot be an attesting witness (e.g. of another party's signature). However, the witness does not, technically, need to be independent or disinterested (in the transaction, not in life generally), although this is best practice given the purpose of requiring a signature to be witnessed in the first place. However, in cases of directors who are self-isolating but live with a spouse, civil partner etc., this may be the only option and the Council would need to be persuaded that such an approach is satisfactory.There is also some dispute about the ability of a Council to seal deeds electronically.  The safest assumption at present is that electronic sealing of deeds is not permitted.Other options to consider are:

1. a)    whether it is possible to proceed via a unilateral undertaking instead so that the Councils do not need to seal;
2. b)    whether a negatively worded pre-commencement planning condition could be included on the consent requiring a planning obligation to be entered into before commencement. The Government's Guidance makes clear that this approach is only to be used “in exceptional circumstances...where there is clear evidence that the delivery of the development would otherwise be at serious risk” and specifies that detailed heads of terms are required. You would need to consider the judicial review risk of taking this course of action. It may be that the Government may issue a Written Ministerial Statement to LPAs to confirm that the Coronavirus outbreak is considered as “exceptional circumstances” for the purposes of the existing Guidance;
3. c) whether executing via counterparts (i.e. each party signs its own engrossment version rather than one set being signed by all parties) may help speed up the process; and/or
4. d) to check with the Council's solicitor whether the Council has amended its constitution/scheme of delegation to enable officers to sign, rather than having to seal.

However, in reality the bigger issue for developers is probably getting already stretched Local Planning Authorities to progress planning applications and make decisions on them as, until that point, a planning obligation or condition (suggested above) cannot be used.

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Our Planning team can help you navigate the impact of Coronavirus on planning law and your business.  Contact Robert Bruce and Stephanie Gozney for planning-related legal enquiries and Paul Brailsford and Mark Harris for planning consultancy enquiries. This update was originally published on 8 April 2020 and was last updated on 8 July 2020.Whilst you are here we would also recommend our additional Coronavirus planning updates:

• Coronavirus planning update: Community Infrastructure Levy and Section 106 Obligations
• Planning Inspectorate's Updated Guidance

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If you would like to talk through the consequences for your business, please email us and one of our team will get in touch.