Local authorities' role in habitat banking to deliver biodiversity net gain

An article discussing how local authorities in England can create habitat banking mechanisms to assist developers in achieving their mandatory biodiversity net gain requirements for new developments under the town and country planning regime.

Reproduced from Practical Law with the permission of the publishers. For further information visit www.practicallaw.com

This article considers the opportunities for local authorities (LAs) arising from the introduction of mandatory biodiversity net gain (BNG) for new planning applications in England under the town and country planning regime from November 2023.

Developers will be required to deliver at least 10% BNG, with the option of some or all of this being met by developer’s purchasing off-site biodiversity projects.

An LA can consider creating a Habitat Banking Vehicle (HBV) that:

• Holds the leasehold property interests of its spare land that is unsuitable for development (or other purposes).
• Uses that spare land to create off-site biodiversity units for sale to developers in the newly emerging BNG markets.

The need for nature recovery in the UK

The UK is one of the most nature-depleted countries in the world. According to the Natural History Museum's 2020 study , the UK has only half of its entire biodiversity left, putting it in the bottom 10% of the world’s countries for biodiversity.[1]

There are multiple reasons for this decline, including the fact that the UK industrialised and urbanised early, placing nature under pressure from pollution and habitat loss. Despite growing awareness that biodiversity is in crisis, the decline continues at an alarming rate.

If nature recovery is to take place on a scale that can reverse biodiversity decline, then much more work will be needed, and at a landscape scale. Given the size of that task, it is not possible for this to be done by the state alone. Private investment is needed, incentivised by legal and policy drivers. A leading example of this in action is the introduction under the Environment Act 2021 of mandatory Biodiversity Net Gain (BNG) for new housing, commercial and infrastructure developments in England requiring planning permission under the Town and Country Planning Act 1990 (TCPA 1990) from November 2023. Doing this will create “demand side regulatory reform” which will “unlock new investment streams for nature”.[2]

The government’s aim is that, by introducing new laws requiring biodiversity gains, markets will form which will efficiently deliver habitat creation to meet those demands. In this way, private finance will be channelled into nature recovery projects. This drive towards incentivising nature recovery is further encouraged by additional provisions under the Environment Act 2021, including new duties requiring local authorities to develop and deliver Local Nature Recovery Strategies to drive spatial planning for nature as well as enhanced statutory biodiversity duties.

This context presents challenges and opportunities for local authorities. One major opportunity for local authorities is the option of creating a Habitat Banking Vehicle (“HBV”) into which it can transfer the leasehold property interests of the spare land that it owns which is unsuitable for development (or other purposes) with the view to using that land to create off-site biodiversity units for sale in the newly emerging BNG markets.

Mandatory BNG as a new general planning condition

From November 2023, new housing, commercial and infrastructure developments in England that require planning permission under the TCPA 1990 will be required to deliver at least 10% BNG.

There are some limited exemptions to mandatory BNG. For example, it will not apply to permitted development or “self-build” homes. Small sites will also be subject to a longer transition period until April 2024 (See Practical Law, Mandatory biodiversity net gain on new developments and https://www.gov.uk/government/news/new-developments-to-deliver-for-people-and-nature).

Furthermore, where a site’s (pre-development) baseline biodiversity score is zero (for example, because the pre-development site is an area of hardstanding, with sealed surfaces) then there is no need to provide 10% BNG (this is because 10% of zero is zero).

The provisions under section 98 of, and Schedule 14 to, the Environment Act 2021 will impose a new statutory “general planning condition” on planning permissions granted under the TCPA 1990. This new general condition requires that development may not begin unless:

• A “Biodiversity Gain Plan” has been submitted to the planning authority.
• The planning authority has approved that plan. [3]

This new general planning condition must be discharged prior to commencement of development.

The Biodiversity Gain Plan must explain how the development will meet the “biodiversity gain objective”. The biodiversity gain objective (in essence) requires at least 10% BNG measured from a baseline of the pre-development biodiversity value of the redline boundary site. Specifically, the biodiversity gain objective is met if the biodiversity value attributable to the development exceeds the pre-development biodiversity value of the onsite habitat by at least 10%.

Why developers might need to buy off-site biodiversity units

Developers can deliver at least 10% BNG on development sites in the following ways:

1. On-site, within the redline boundary of the proposed development.
2. Off-site, by developers creating their own off-site habitats or purchasing the required “biodiversity units” directly from landowners in the local area (or via intermediaries acting on behalf of those landowners).
3. As a last resort, purchasing statutory biodiversity credits as part of a national scheme provided by the government (and which will be made deliberately expensive so as not to undermine the emerging market for off-site biodiversity units).

In many instances the full 10% (or more) BNG is unlikely to be deliverable within the redline boundary of development sites. Given the high cost of relying on the government’s statutory biodiversity credits scheme, it is likely that developers will need to rely on purchasing off-site biodiversity units from third parties.

Requirements when relying on off-site BNG units

In order for a developer to rely on off-site biodiversity units as contributing to its 10% BNG target, the off-site biodiversity units must be registered on a national register which will be administered by Natural England. This is to facilitate the controlled sale and purchase of biodiversity units and to provide some transparency for sites containing such off-site gain.

Various requirements must be met for off-site biodiversity units to be included on Natural England’s register,  including that:

1. The off-site biodiversity units are being delivered under a legally-binding conservation covenant or planning obligation (that is, a section 106 agreement) which binds the landowner and any successors in title. The covenant or agreement must require works to be carried out on land for the purpose of habitat enhancement and must allow the enhancement to be made available to be allocated (conditionally or unconditionally, and whether for consideration or otherwise) to one or more developments for which planning permission is granted.
2. The legal agreement must require the landowner (or another person) to maintain the biodiversity enhancement for at least 30 years after the completion of those works.

For more information, see Practice notes, Conservation covenants and Planning obligations: overview.

Timescales for implementation

The precise date on which BNG will become mandatory is currently unknown as we are awaiting the secondary legislation to provide for its commencement. However, the Environmental Improvement Plan 2023 (see Environmental Improvement Plan (publishing.service.gov.uk)) confirms that implementation will be some time in November 2023. This is in line with the government’s February 2023 consultation response which stated that there would be a two year transition period from the point at which the Environment Act 2021 received Royal Assent on 9 November 2021 (see Practical Law, Legal update, Government publishes government response to consultation on mandatory biodiversity net gain implementation ).

Why local authorities might want to enter the BNG unit market

A proportion of developers in each local authority area will, from time to time, need to rely on the supply of off-site biodiversity units in order to achieve their (at least) 10% BNG obligations. Consequently, there is an opportunity for local authorities to use some of the land they own to provide those off-site biodiversity units. Doing this will ensure that at least some of the private investment unleashed by mandatory BNG can be directed into sites under local authority control that are not needed for development or other purposes and which can be enhanced for nature, which will benefit biodiversity and local residents in the process. Doing this has the following additional benefits for local authorities:

• By providing additional local capacity for the supply of off-site biodiversity units, it reduces the risk of shortfalls in local biodiversity units which may otherwise slow the delivery of much needed development. The government’s February 2023 consultation response on BNG said that local authorities could provide biodiversity units “but they cannot direct buyers towards their land in preference over other suppliers to the market unless there are clear ecological justifications for doing so”.[4] Therefore, while local authorities could not preferentially require their own biodiversity units to be used, by making additional biodiversity units available they are giving developers more options.
• Land that previously did not attract funding and was not being used for other purposes can be used to generate an income for the benefit of local communities.
• It helps local authorities deliver their new Local Nature Recovery Strategies if that land for off-site biodiversity units is included in those strategies.
• It helps local authorities comply with their new enhanced biodiversity duties under section 40 of the Natural Environment and Rural Communities Act 2006, which came into force in January 2023. The newly amended biodiversity duty requires public authorities to “from time to time consider what action the authority can properly take, consistently with the proper exercise of its functions, to further the general biodiversity objective”. Public authorities now must take a strategic approach to determine policies and specific objectives for taking action to further the general biodiversity objective. This includes taking action to further the general biodiversity objective. Local authorities (but not all public authorities) must also report on the action they have taken to comply with their new biodiversity duties. These new duties will naturally be met for land within a local authority’s control if that land is being used for the delivery of off-site biodiversity units. This is because doing this will ensure that the land is properly managed for nature and that there will be regular reporting on whether the land is meeting its ecological goals.
• It helps local authorities deliver more and improved green spaces in and around urban areas for the benefit of local residents. Doing this is consistent with the objectives of the Green Infrastructure Framework, which seeks to increase access to green spaces in urban area, boosting green cover by 40% and deliver on the government’s target that everyone in this country should have access to green spaces within 15 minutes’ walk of their homes.
• The profits generated from the sale of the off-site biodiversity units can be reinvested into community projects for the benefit of local residents. Local authorities may already be paying for the management of the land and so converting its use into off-site biodiversity units will create an income stream which can cover those costs. The costs of managing land as off-site biodiversity units may also be less than the current costs of land management, providing further savings.

Requirements for donor land

There are no limits on how much or how little land that local authorities may want to put forward to deliver off-site biodiversity units. The only constraint would be the ecological suitability of the land for the creation or enhancement of off-site biodiversity units.

A key consideration will be:

• Whether the land is encumbered by restrictive covenants or easements which would frustrate its ability to be used to create or enhance biodiversity units in accordance with the requirements of the BNG Metric.
• That it will need to be managed for over the 30 year period in a way necessary to deliver BNG.

What does a local authority need to do?

The best option for local authorities is to create a company that will act as a HBV for the land which can be leased to it. This newly formed company would then become responsible for the creation and maintenance of the off-site biodiversity units created on the land. By creating a separate HBV, the local authority ensures a degree of separation between it and the entity responsible for the delivery of the off-site biodiversity units. This is important because, in many instances, local authorities will be responsible for enforcing the section106 obligations which will legally underpin the off-site biodiversity units sold and managed by the HBV.

When creating the HBV, the local authority will need to put in place the following documents:

Corporate and commercial documents

• Articles of Association and Shareholder/Members Agreement for the HBV. This should also include a Business Plan for the HBV.
• A Management Services Agreement for the HBV (covering the supply of such services from the Services Provider to the HBV).

Delivery of BNG document

• Lease documentation between landowner and the HBV (as tenant) for the land on which biodiversity enhancements would be carried out.
• A Land Management Agreement between the HBV and the entity that will physically carry out the biodiversity enhancement work (which could be the local authority).
• The contract of sale between the HBV and developers for the sale of the off-site biodiversity units.
• The section106 agreement between the HBV and the local authority which secures the biodiversity enhancements and allows for the units to be registered on Natural England’s register of off-site biodiversity units. The alternative mechanism to this would be a conservation covenant between the HBV and a responsible body appointed by the Secretary of State.

Once the HBV is up and running and capable of delivering off-site biodiversity units, it will need to go through the administrative process of registering the land on Natural England’s register of off-site biodiversity units.

Getting started

The first step for local authorities interested in this option is to work with their ecologists to survey the land in their ownership and consider which areas may be suitable for the creation or enhancement of biodiversity units. It can then consider any encumbrances over that land which may prevent ecological enhancement works. In this way it can identify a portfolio of potential sites and determine from this whether it is financially viable to invest in an HBV model.

Case Study: Plymouth City Council HBV

The  approach outlined in this article is that being taken by Plymouth City Council, assisted by Freeths LLP on the legal documentation and Finance Earth on the financial arrangements. Plymouth City Council decided to create an HBV that holds leasehold interests in several areas of land which are currently unsuitable for development and in need of investment. The HBV created by Plymouth City Council is a not-for-profit organisation meaning that any revenue generated by the sale of off-site biodiversity units can be reinvested into local communities. In this way, the quality of local green spaces will be improved, funding will increase, and biodiversity will benefit: a result which benefits both people and nature.

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(1) See https://www.nhm.ac.uk/discover/news/2020/september/uk-has-led-the-world-in-destroying-the-natural-environment.html(2) See Defra: Nature recovery green paper: protected sites and species (16 March 2022), page 32. The Government says in the Nature Recovery Green Paper that it “ … has set an ambitious new target to raise at least £500 million in private finance to support nature’s recovery every year by 2027 in England, rising to more than £1 billion by 2030”.(3) See Schedule 7A to the Environment Act 2021 for more information as to what these terms mean.(4) See section 5.3 of the Government’s Consultation response: https://www.gov.uk/government/consultations/consultation-on-biodiversity-net-gain-regulations-and-implementation/outcome/government-response-and-summary-of-responses