Deferred contributions and indexation in section 106

Indexation in a section 106 agreement is a drafting matter, not a statutory one. Unlike the community infrastructure levy, where indexation is built into the regulations, a planning obligation is indexed only if the agreement says so, and the clause that says so does three things: it names an index, it fixes a base date, and it defines the moment the figure is recalculated. Leave any of the three vague and you have a contribution nobody can calculate without an argument.

The base date is the one that costs money. Authorities routinely index from the date of the agreement when the underlying figure was set years earlier in a published tariff, which understates the sum, and developers routinely accept an index from the date of a cost study that predates the agreement, which overstates it.

Why contributions are indexed at all

A contribution is calculated when permission is granted and paid when the trigger occurs, which on a large scheme can be several years later. Without indexation the authority receives a sum that buys less than the mitigation it was calculated to fund, and the obligation stops meeting the statutory tests, since it has to be fairly and reasonably related in scale and kind to the development.

Indexation is therefore in both parties' interests, and resisting it in principle wastes negotiating capital that would be better spent on triggers. What is worth arguing about is the mechanism.

Choosing the index

Match the index to what the money buys. That sounds obvious and is frequently ignored, with a single index applied across every obligation in the agreement.

Name the index precisely, including the publisher and the series, because several similar series exist and a reference to a construction cost index without more is unenforceable. Add a fallback clause covering what happens if the series is discontinued or rebased, nominating a successor index or an agreed substitute. Series do get discontinued, and an agreement drafted without a fallback ends up back before the parties for a variation.

The base date, which is not the date of the agreement

The base date should be the date of the evidence that produced the figure. Where a contribution comes from a published tariff or a supplementary planning document, the base date is the date that document's costings were prepared, not the date the developer signed.

Three points make the clause work.

• State the base index value as a number, with its publication date, rather than describing it
• Define the recalculation date as the last published figure preceding the payment date, since indices are published in arrears and provisional figures get revised
• Say whether a provisional figure is used or whether the parties wait for the firm figure

Illustrative example: a contribution of £120,000 derived from a cost study prepared two years before the agreement was completed. Indexing from the agreement date rather than the study date loses the authority two years of construction cost inflation on the whole sum. Indexing from the study date, which is what the evidence supports, is the position the authority should take and the one a developer will concede once the derivation is on the table.

That is also why the derivation should be recorded in the agreement or annexed to it. A figure with no visible origin cannot be indexed correctly by anyone reading the document later.

Payment triggers and how they are defined

Triggers are where most disputes actually arise, and the drafting is more important than the amount.

A start on site is the loosest trigger and the one to define carefully. The statutory concept of a material operation is broad enough that site clearance can start the clock, which suits nobody. The usual approach is to define implementation for the purposes of the agreement and to exclude a list of works: demolition, site clearance, archaeological investigation, remediation, ecological mitigation, service diversions, fencing and the construction of site access. Get that list into the definition rather than into a side letter.

Occupation triggers need their own definitions. First occupation should exclude occupation for marketing, sales or security purposes, or a show home creates a payment obligation before anything is sold. On phased schemes, tie payments to a stated number of occupations within a defined phase, with the phase shown on an annexed plan.

Practical completion is a clean trigger for works obligations and a poor one for financial contributions on a residential scheme, because it can arrive after the developer's cash has gone.

Deferral and security for payment

Deferral is normally the developer's ask and security is the authority's price for granting it. The two travel together.

1. Stage the payment across occupation thresholds rather than deferring the whole sum
2. Where a sum is deferred beyond the point at which the developer's interest may be sold, provide security
3. Bonds and parent company guarantees are the usual forms, with a charge over land used where neither is available
4. State the trigger for calling the security and the notice period
5. Where a unit is retained as security, identify it and restrict its disposal

An unsecured deferred contribution on a scheme built by a special purpose vehicle is the risk authorities most often overlook. If the company is dissolved after the last sale, the obligation survives against the land but the practical recovery route is poor.

Interest, recovery and unspent sums

Three clauses that are often missing, all of which matter.

Interest on late payment should be stated as a rate above a named base rate, running from the due date, with the compounding basis specified. Without it, late payment is effectively free.

Recovery costs should be recoverable, so the authority is not out of pocket for enforcing its own agreement.

Repayment of unspent sums is the developer's protection. A clause requiring the authority to repay any part of a contribution not spent, or committed, on the specified purpose within a stated period, commonly five or ten years from receipt, with accrued interest, is standard and reasonable. Define spent or committed, because an authority that has allocated a sum in a programme will say it is committed and a developer will say it is not.

Pair that with a purpose clause tight enough to be meaningful. A contribution towards sustainable transport measures in the borough is almost impossible to police. A contribution towards specified improvements at a named junction is.

Where to spend your negotiating capital

Not on the principle of indexation. Spend it here.

The base date, since a two year difference on a large sum is real money. The trigger definitions, and particularly the exclusions from implementation. The staging of payments against occupation. The purpose clause and the repayment period. And the monitoring fee, which authorities now commonly charge and which should be proportionate to the actual monitoring burden rather than a percentage of the contributions.

Then read the agreement as a whole for consistency. Definitions used in the affordable housing schedule and in the contributions schedule should match, and the plans referred to should be the ones annexed. The most expensive disputes come from two schedules using the same word differently.

Where the agreement also contains a review mechanism, the indexation and the review interact, and both should use the same base date conventions. Our note on overage clauses and review mechanisms covers the review side. Where an existing agreement has become unworkable, the route out is set out in modifying or discharging a section 106 obligation.

The affordable housing figures that most of these clauses attach to belong in the Affordable Housing Statement submitted with the application, and where the level of contribution itself is contested, a Viability Assessment prepared to recognised professional practice is the document that carries that argument.

This is general guidance, not legal advice; take advice from a qualified professional on the drafting of any planning obligation before relying on it.

See PlanScope pricing if you want to draft the supporting statements in house. PlanScope provides AI-assisted draft reports for planning applications. Reports should be reviewed before submission. We do not guarantee planning approval.