Clawback and overage clauses in affordable housing deals

An affordable housing clawback clause is the price of a reduced affordable housing offer. Where a viability appraisal shows that a scheme cannot carry the policy-compliant provision, authorities grant permission on the lower figure and then write a mechanism into the section 106 agreement that returns some of the upside if the scheme performs better than the appraisal assumed. The Planning Practice Guidance on viability supports review mechanisms for this purpose, and most authorities with a viability team now have a standard form.

The exposure a developer takes on is set by three things: the trigger dates, the formula for the additional sum, and the cap. Negotiate those three and the rest of the clause is detail.

Why authorities ask for it

A viability appraisal is a forecast. It fixes sales values, build costs, finance rates and a benchmark land value at a moment in time, and the scheme then takes three to six years to deliver. If values rise faster than costs, the residual improves, and the authority has given away affordable housing on the strength of a forecast that turned out to be pessimistic.

The review mechanism answers that. It is also, bluntly, what makes a reduced offer politically survivable at committee: members are more willing to accept 15 per cent provision against a 35 per cent policy if the report tells them the scheme will be reviewed and the difference recovered if the market moves.

The guidance distinguishes early stage reviews, which test whether a permission that has not been implemented should carry more provision, from late stage reviews, which look at actual outturn once the scheme is largely built and sold. Most agreements contain one of each, or a late stage review alone on smaller schemes.

Trigger events and how they are defined

Trigger definition is where disputes start. The usual pattern:

Three drafting points on triggers.

Define implementation precisely. An early stage review triggered by failure to implement invites the token start: ground works that constitute a material operation under section 56(4) of the Town and Country Planning Act 1990 and nothing more. Authorities respond by defining implementation as substantial commencement, with a list of works that must be complete. Developers should resist definitions so demanding that ordinary programme slippage triggers a review.

Tie the late stage trigger to legal completions rather than to exchanges or reservations, because exchanges can be rescinded and reservations mean nothing.

And agree the long stop. Without a date beyond which no review can be called, the obligation sits on the title indefinitely and complicates a sale of the remaining units.

Calculating the additional sum

The formula usually runs like this. Rerun the appraisal with actual or updated inputs. Compare the resulting residual value with the residual at the original appraisal. Where the surplus exceeds a defined threshold, the authority takes an agreed share of it, up to a cap, delivered as additional affordable units where that is practical or as a commuted payment where it is not.

The variables worth arguing over:

• The share, commonly expressed as a 50:50 or 60:40 split of the surplus, with the authority taking the larger share in some standard agreements
• The threshold, so that a small surplus within the margin of appraisal error does not trigger a payment
• The cap, which should be the amount that would have been payable had the scheme delivered policy-compliant provision from the start. Without that cap the obligation is open-ended
• Whether the developer's return is fixed at the original profit percentage or allowed to move with the risk actually carried

The cap is the clause I would never sign without. An uncapped share of surplus can in principle exceed the value of full policy compliance, which no authority can justify as necessary to make the development acceptable in planning terms.

The inputs that generate the most argument are build cost inflation and the benchmark land value. Our note on independent review of a viability appraisal covers how the starting figure is tested, and our piece on highway works costs in a development appraisal deals with the infrastructure line that most often moves between appraisal and outturn.

Interaction with grant funding

Grant complicates the arithmetic in two directions.

Where the scheme secures grant from the national affordable housing programme to deliver more or better affordable units than the obligation requires, the agreement should make clear that the grant-funded uplift is additional rather than a substitute for the obligation. Homes England's own funding conditions address additionality, and a deed that lets a developer count grant-funded units towards the section 106 requirement creates a problem for everyone.

Where grant is received and the registered provider's acquisition price rises as a result, the question is whether that receipt feeds into the review calculation. Authorities generally say yes, since it improves the scheme's residual. Developers argue that grant is awarded against the provider's business plan rather than the scheme's viability. Settle it in the drafting rather than at review stage.

A related trap: some funding agreements contain their own clawback on disposal or change of tenure. Two clawbacks on the same units, one planning and one funding, can in principle bite together. The registered provider's solicitor should see the draft deed.

Security, guarantees and what happens on a sale

A review obligation that only binds the original applicant is worth very little. The obligation runs with the land under section 106, so a purchaser of the site takes it, but practical security still matters where the paying entity is a special purpose vehicle with no assets after the final sale.

The mechanisms authorities use: a parent company guarantee, a bond or cash deposit held until the review concludes, a restriction on disposal of the final units until the review payment is made, or a charge over retained land. The restriction on disposal is the most common and the most awkward commercially, because it can block the sale of the last few units at the worst possible moment for cash flow. Negotiate for a bond instead where you can.

Where the site is sold mid-delivery, the agreement should say whether the review is recalculated from the sale price. A sale at an improved land value is evidence that the original benchmark was low, and authorities will use it.

Disputes over cost and value inputs

Review clauses include a dispute mechanism, usually expert determination by a surveyor appointed by agreement or by the president of the relevant professional body, with costs shared or awarded. Two practical points.

Keep the evidence as you go. A late stage review three years after commencement requires actual sales values with dates, the actual build cost with the final account, finance drawdowns and the professional fees. Reconstructing that from an incomplete file is expensive and tends to produce the authority's number rather than yours.

Agree the appraisal model and the input conventions at the outset, appended to the deed as a worked template. Appraisals carried out in different software with different conventions on finance, voids and marketing produce materially different residuals from identical inputs, and the review is then an argument about method rather than about facts. An independent review of the appraisal, covered in our note on viability appraisal submission format, is the usual route to resolving that before it becomes a dispute.

Drafting points that protect the developer

Short list, in the order I would raise them.

A cap set at the cost of full policy compliance. A threshold above the surplus that sits within appraisal tolerance. Build cost indexed to a published construction index, named, with a base date. A long stop date after which no review can be called. Payment by instalments tied to receipts rather than a single sum on determination. Expert determination rather than arbitration, with a short timetable. And a clear statement that the review is the authority's only route to additional contributions, so the same upside is not recovered twice through another clause.

The Viability Assessment submitted with the application and the Affordable Housing Statement are the documents the review will be measured against, so the assumptions in them need to be the assumptions you can defend three years later.

Draft both with PlanScope, then have the appraisal reviewed by an RICS-registered valuer.

This is general guidance, not legal advice; check the position with your local planning authority or a qualified professional before relying on it. PlanScope provides AI-assisted draft reports for planning applications. Reports should be reviewed before submission. We do not guarantee planning approval.