Commuted sums for off-site affordable housing

A commuted sum for affordable housing is a payment made in place of building the homes on site, and national policy treats it as the exception. Affordable housing should be delivered on the development itself unless off-site provision or a payment of broadly equivalent value can be properly justified, and unless the agreed approach helps create mixed and balanced communities.

The argument therefore runs in two parts: why not on site, and why this figure. Most negotiations go wrong because the applicant prepares the first and assumes the second.

When a payment is accepted instead of homes

Councils accept commuted sums for a short list of reasons that recur across authorities.

The site is too small to hold a meaningful affordable component, or the policy percentage produces a fraction of a unit. The scheme is a conversion or a constrained urban site where the required tenure cannot be arranged with separate access or management. No registered provider will take the units, usually because a handful of flats in a private block carries management and service charge costs out of proportion to the rent. Or the service charge in a high-specification development would make nominally affordable homes unaffordable in practice.

Each of those needs evidence rather than assertion. Letters from registered providers declining the units, with reasons, are the strongest material you can put in front of an officer, and they should be recent and specific to the scheme rather than generic.

Set the case out in the affordable housing statement rather than leaving it to the section 106 negotiation, because the policy test is a planning judgement made when the application is determined.

How authorities calculate the sum

There are three approaches in general use, and which one applies is usually set by the local plan or a supplementary planning document rather than being open to choice.

The subsidy gap method is the one that produces arguments, because it depends on two valuations: what the units would sell for on the open market, and what a registered provider would pay for them. Both are contestable, both move with the market, and the authority's figures are often drawn from an evidence base prepared several years earlier for the local plan.

The transfer value gap

A registered provider does not pay open market value. It pays a figure it can support from the rental stream after management and maintenance costs, discounted for the tenure, which for social rent is materially lower than for affordable rent or shared ownership.

That difference is the subsidy the commuted sum is meant to replace. It follows that the tenure assumed in the calculation matters a great deal, and that a sum calculated on a social rent assumption will be larger than one calculated on shared ownership for the same number of homes.

Ask which tenure split the authority has assumed and whether it matches its own current policy. Where the local plan seeks a tenure mix that has shifted since the evidence base was produced, that is a legitimate point to raise.

Challenging the formula with evidence

A published formula is policy, not law, and it can be departed from where the applicant demonstrates that applying it would make the scheme unviable.

The route is a viability assessment prepared in line with national guidance. That guidance sets out the standardised inputs: benchmark land value based on existing use value plus a premium, rather than on what was actually paid, and a return to the developer that the guidance suggests may be in the range of 15 to 20 per cent of gross development value for the purposes of the assessment.

Two practical points. Viability assessments are published, with limited exceptions, so write yours knowing objectors will read it. And an assessment that relies on an inflated purchase price is dealt with quickly, because the price paid for a site is not the benchmark.

Where the shortfall is genuine but temporary, a review mechanism is often the answer: a lower sum now, with a re-appraisal at a defined trigger and an additional payment if values have improved.

Indexation and payment triggers

A sum agreed in a section 106 agreement and paid four years later has lost value unless the drafting says otherwise, so indexation is standard and the index chosen matters.

Construction cost indices and house price indices move differently, sometimes sharply so. An authority will usually propose the index that protects its position, and this is a negotiable point rather than a formality. Fix the base date, name the index and the series, and say what happens if that series is discontinued.

Payment triggers are the other half. Paying the whole sum when development starts is simple for the authority and expensive for cash flow. Phased payment tied to occupation of a stated proportion of the market units is common and defensible, since the sum is funded from sales receipts. Late payment interest and a mechanism for the authority to require payment before further occupation belong in the same clause.

What the authority must do with the money

The obligation has to meet the statutory tests: necessary to make the development acceptable, directly related to the development, and fairly and reasonably related in scale and kind. A payment that cannot be spent on affordable housing related to the scheme fails the first of those.

Negotiate a spending period with a repayment clause. A clause requiring the sum to be applied to affordable housing within a stated number of years of receipt, failing which the unspent balance and any interest are returned, is common and is a reasonable ask.

You can also check what the authority has done with previous receipts. Every charging authority publishes an annual infrastructure funding statement reporting what it collected, what it spent and what it holds, and the note on infrastructure funding statements explains how to read one. A pattern of unspent affordable housing receipts is a useful fact in a negotiation.

Choosing between units and a payment

Run the comparison properly before deciding what to argue for.

On-site provision removes the payment, transfers long-term management to a registered provider, and satisfies policy without needing a justification. It also constrains the layout, affects sales values on the private units in some markets, and brings a capital receipt from the provider that a commuted sum does not.

An off-site payment keeps the scheme simple and the tenure uniform. It costs cash at a point in the programme when cash is scarce, and it exposes you to the policy argument at determination, which is a risk to the permission itself rather than to the margin.

For specialist residential products the analysis differs again, and the treatment of purpose-built student housing is set out separately in the note on student accommodation contributions.

This is general guidance, not legal advice. Commuted sum formulas, indexation and spending periods are set locally, so check the adopted policy and take valuation advice before agreeing a figure.

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