Deferred contributions and the security an authority accepts

A deferred section 106 contribution is a financial obligation payable later than the point at which the authority would normally want the money, and almost every authority that agrees to defer will want security for it. The security is the real negotiation. A cash payment on starting work costs the developer cash flow. A deferred payment secured by a bond costs a premium, ties up facility headroom and brings a surety into the deal, and a deferred payment secured by a legal charge puts a restriction on the title that a funder will scrutinise.

The legal starting point is section 106 of the Town and Country Planning Act 1990 and the tests in regulation 122 of the Community Infrastructure Levy Regulations 2010. An obligation must be necessary to make the development acceptable in planning terms, directly related to the development, and fairly and reasonably related in scale and kind. Those tests govern the amount. They say nothing about when it is paid, which is a matter for negotiation.

Why a payment is deferred

Deferral exists because the money is needed to make the scheme acceptable and the scheme cannot fund it at the point the authority would prefer. Three situations recur.

The first is cash flow on a phased scheme, where contributions linked to the whole development are front-loaded into a first phase that cannot carry them. The second is a viability case, where the appraisal shows the scheme cannot support the full policy contribution at the start of works and the authority prefers deferral to reduction. The third is a trigger mismatch, where the infrastructure the contribution funds is not going to be delivered for several years and the authority has no immediate use for the money.

Deferral is not a concession to be asked for lightly. An authority that agrees to it is accepting a risk it would rather not hold, and it will price that risk in the security it demands. Where the underlying argument is that the scheme cannot afford the policy position at all, that is a different conversation and belongs in a Viability Assessment rather than in the deferral clause.

Forms of security and their cost

The last of those is underused. A clause preventing occupation of more than a stated number of units until the deferred sum is paid gives the authority a strong position without any instrument, any premium or any title entry. It works where the units are being sold or let on completion, and it is usually the cleanest answer on a residential scheme.

Bond and guarantee pricing is set by the surety or the bank on the facts: the bonded sum, the duration, the covenant strength of the obligor and the nature of the obligation. There is no published schedule, so obtain an indicative quotation before you offer a bond in heads of terms, because the premium is a real cost that belongs in the appraisal alongside the figures discussed in highway works costs in a development appraisal.

Bonds, guarantees and legal charges

A performance bond is a three-party arrangement. The surety's liability is defined by the bond wording, and the wording is where arguments happen. An on-demand bond pays against a certificate from the authority. A conditional or default bond requires proof of breach. Authorities ask for on-demand wording and developers resist it, and the usual landing point is a bond payable on the authority certifying non-payment after a stated notice period.

Watch three things in any bond. The expiry date, because a bond that expires before the trigger is worthless and an evergreen bond is expensive. The step-in or extension mechanism where the trigger slips. And whether the bonded sum is indexed, because an unindexed bond over a five-year deferral will not cover an indexed obligation.

A legal charge is simpler in concept and harder in practice. It secures the sum against the land, it is registered at the Land Registry, and it has to rank somewhere against the development funder's security. Most funders will not accept a prior-ranking charge in favour of a local authority, so the charge is second-ranking, which reduces its value to the authority, which in turn makes the authority ask for something else as well. Deeds of priority take time to negotiate and the time comes out of your programme.

Interest and indexation on deferral

An authority deferring a payment will want the real value preserved. Two mechanisms do different jobs and are frequently conflated.

Indexation adjusts the sum for changes in cost, usually by reference to a published construction cost or tender price index, or to the Consumer Prices Index or Retail Prices Index. It is applied from the date of the agreement or the date of the permission to the date of payment. Check which index and which base date the draft deed specifies, because a tender price index can move very differently from a general inflation measure.

Interest compensates the authority for not having the money. It is usually expressed as a margin over base rate and runs only from the trigger date to the date of actual payment, so on a payment made on time it is zero. Default interest at a penal margin is standard and reasonable.

Resist a deed that applies both indexation to the payment date and interest from the agreement date on the same sum, which double counts. One honest uncertainty here: authorities vary widely in how they draft this, and the clause is often inherited from a template nobody has reviewed for years, so reading it properly is worth the hour.

Default provisions and enforcement

A planning obligation is enforceable against the person entering into it and against anyone deriving title from them, and it is registered as a local land charge. The authority can enforce a financial obligation as a debt, and it can seek an injunction to restrain a breach of a restrictive obligation such as a prohibition on occupation.

Check who is bound. If the obligation is given by a special purpose vehicle with no assets beyond the site, the security is doing all the work and the covenant is worth nothing. If it is given by the landowner and the developer jointly, the landowner needs to understand that liability survives the sale of the land unless the deed releases them on disposal.

The mortgagee exclusion clause matters here. A lender taking security will insist that it is not bound by the positive obligations while it is only a mortgagee, and only becomes bound if it takes possession and develops. That is standard and authorities accept it. What they often resist is an exclusion so wide that a receiver can sell the site free of the obligation, and that is a fair objection.

Effect on funding and title

Tell the funder early. A deferred obligation secured by a charge changes the security package, and a bond counts against facility headroom in a way the credit paper has to reflect. A funder discovering a second-ranking local authority charge at the report-on-title stage will slow the drawdown.

On sale, the deferred obligation and its security are disclosure items. A plot buyer's solicitor will raise an enquiry on the local land charges entry, and an unsatisfied deferred contribution on a site where the trigger has passed is a genuine problem on a unit sale. Build the discharge and release mechanism into the deed: payment, then a written confirmation from the authority, then removal of the charge.

Negotiating a workable structure

Lead with the restriction on occupation, offer a parent company guarantee where there is a parent worth guaranteeing, and keep the bond and the legal charge in reserve. Set the trigger on an event you control, such as occupation of a stated unit number, rather than on a date, because a date trigger converts a programme slip into a default.

Then write the release mechanism, the indexation base date and the notice period into the heads of terms rather than leaving them to the draft deed, because by the time the deed arrives the committee resolution has fixed the principle and you are arguing about wording from a weaker position. The format and content expectations for the supporting appraisal are covered in viability appraisal submission format, and the affordable housing element usually needs its own Affordable Housing Statement.

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.