Challenges for developers and opportunities for landowners: Nutrient Neutrality, Water Neutrality and the Natural Capital Economy

What is the emerging Natural Capital Economy?

Developers and commercial operators are increasingly reliant upon the emerging “natural capital economy” to obtain consent for activities with potentially adverse environmental impacts. In this economy, landowners create and sell natural environment enhancements to developers and operators who are required to offset (and even create overall gain from) the natural environment impacts of their activities. Examples of this in action are landowners creating and selling “nutrient credits” (see below), biodiversity units or carbon credits from their land to allow developers and operators to comply with various environmental regulatory frameworks.

 What is Nutrient Neutrality and what are Nutrient Credits?

The impact of nutrient pollution (nitrates and phosphates) on our sensitive natural habitats is a serious issue which threatens not only the natural environment itself but also proposed developments up and down the country.“Nutrient neutrality” is a mitigation approach that Natural England (most recently in March 2022) has advised 74 local planning authorities (LPAs) across England to adopt when determining development applications. The nutrient neutrality mitigation approach allows proposed wastewater-producing developments (typically developments offering overnight facilities e.g. housing, hotels) to obtain planning permission by reliance on measures which negate (neutralise) the risk of the developments worsening nitrate and/or phosphorus pollution of protected / designated habitats (known as European and Ramsar sites). 

These habitats are most often on the coastline or in rivers.Without this mitigation approach, a proposed wastewater-producing development in an affected area could risk harming these sensitive habitats (notwithstanding that the wastewater produced will be treated at a wastewater treatment works) and face a refusal of planning permission and other consents.  This is due to non-compliance with the “Habitats Regulations Assessment” process which protects these habitats (under the Conservation of Habitats and Species Regulations 2017).

Under this mitigation approach, a developer in an affected area must identify a means of demonstrating that its wastewater-producing development is “nutrient neutral” by offsetting its potential wastewater impacts through an on-site or off-site mitigation solution (or a combination of both). An offsite solution may typically involve the developer purchasing “nutrient credits” from another landowner (with land in the same catchment) who has created such credits by changing the use of their land so as to reduce its output of nutrients (e.g. by desisting from agricultural activity).

Natural England's nutrient neutrality mitigation approach has been confirmed as lawful by the Court of Appeal in R (Wyatt) v Fareham BC & Natural England [2022] EWCA Civ 983. The Government announced on 20 July 2022 that Natural England will develop a new “Nutrient Mitigation Scheme” to assist developers, although full details are not yet known.  In the meantime, a number of private nutrient credit schemes are already up and running around affected areas in England and more are being created by entrepreneurial landowners.

What is Water Neutrality?

“Water neutrality” is a separate emerging approach from Natural England to protect water-stressed protected habitats. This also has the potential to cause significant difficulties for developers. Natural England has issued standing advice to LPAs in West Sussex (Arun Valley) to enable proposed developments in water-stressed areas to receive planning permission where they are demonstrated to be “water neutral”, meaning that the development's predicted increase in water demand is offset by reducing water demand elsewhere in the community. Mitigation solutions to address this emerging approach are much less well developed than those for nutrient neutrality and are potentially more difficult to deliver. There is potential for this approach to extend to other areas as they become more water-stressed. 

How can Freeths LLP's Natural Capital Legal Team help with Nutrient Neutrality/Water Neutrality legal issues?

Freeths' Natural Capital Legal Team is here to support you in every aspect of the natural capital economy, whether you are a landowner, developer / operator, entrepreneurial intermediary or consenting authority.

Our services are as follows:

If you are a developer/operator required to demonstrate nutrient/water neutrality

If you are a developer making a planning application in a nutrient neutrality or water neutrality area:

• We provide strategic advice on the complex legal (legislation and caselaw) and policy requirements underpinning nutrient and water neutrality and when the requirements “bite”.
• We legally review / strengthen the reports you must submit to the LPA in support of your application e.g. typically your nutrient / water neutrality report and your “shadow Habitats Regulations Assessment” report.
• We engage with Natural England and the LPA to obtain their agreement / overcome objections to your proposed mitigation.

If you are a developer looking to purchase land for a future development which will require nutrient or water neutrality:

• We ensure that your land purchase is conditional upon planning permission being “nutrient / water - deliverable”.

If you are a developer wishing to purchase nutrient credits from an offsite nutrient mitigation scheme:

• We carry out due diligence on the legal documents underpinning the offsite scheme (to check if the scheme is sufficiently robust to meet Natural England's requirements).
• We negotiate the nutrient credit purchase agreement under which you will purchase the credits.

If you are a developer looking to deliver your own off-site nutrient credits to use as mitigation for your development:

• We assist you in securing appropriate ownership of the relevant land to deliver your nutrient credit mitigation scheme.
• We assist you in considering whether other “natural capital products” might also be deliverable from the relevant land. There are a number of ways that land could be enhanced to deliver different environmental outcomes and it may be possible to generate multiple natural capital income streams from the same land.
• We advise you on the type of activity on land that would be most likely to meet Natural England's nutrient credit mitigation requirements.
• We identify the appropriate legal mechanism to secure the creation of the required nutrient credits in perpetuity (i.e. a s106 or potentially a conservation covenant).
• We draft the s106 or conservation covenant and negotiating it with the body which will enforce it (this body will depend on which sort of agreement it is).
• We draft and negotiate a nutrient credit purchase agreement (the agreement by which the nutrient credits can be sold, if this is necessary).
• We work with Natural England and LPAs to obtain their sign-off of your nutrient credit scheme.

If you are a landowner wanting to generate income by creating nutrient credits

If you are a landowner wanting to create nutrient credits to sell to developers:

• We assist you in considering whether other “natural capital products” might also be deliverable from the relevant land.  There are a number of ways that land could be enhanced to deliver different environmental outcomes and it may be possible to generate multiple natural capital income streams from the same land.
• We advise you on the type of activity on land that would be most likely to meet Natural England's nutrient credit mitigation requirements.
• We identify the appropriate legal mechanism to secure the creation of the required nutrient credits in perpetuity (i.e. a s106 or potentially a conservation covenant).
• We draft the s106 or conservation covenant and negotiate with the body which will enforce it (this body will depend on which sort of agreement it is).
• We draft and negotiate a nutrient credit purchase agreement (the agreement by which the nutrient credits can be sold).
• We work with Natural England to obtain their sign-off of your nutrient credit scheme.

If you are a entrepreneurial intermediary

If you want to create a business by working with landowners and developers to generate and sell nutrient credits

• We advise on the different business models available to you (e.g. taking leasehold interests from landowners or brokerage arrangements).
• We advise on the commercial and management agreements needed between the intermediary and the landowners.
• We identify the appropriate legal mechanism to secure the creation of the required nutrient credits in perpetuity (i.e. a s106 or potentially a conservation covenant).
• We draft the s106 or conservation covenant and negotiate it with the body which will enforce it (this body will depend on which sort of agreement it is).
• We draft and negotiate a nutrient credit purchase agreement (the agreement by which the nutrient credits can be sold).
• We advise on the interface between private nutrient schemes and the now-publicised Natural England scheme.

If you are a consenting LPA or other authority creating your own nutrient scheme or reviewing developer reliance on nutrient credits

• We advise on s106 agreements or conservation covenants that landowners may request you to enter into, to secure delivery of nutrient credits from their land.
• We advise on how you can become a statutory “responsible body” for the purpose of conservation covenants.
• We advise on the legal robustness of nutrient neutrality mitigation proposed by developers.

Please contact Freeths LLP's Penny Simpson, Partner, or Richard Broadbent, Director, if you'd like more information.