Drafting a late stage viability review in London

A late stage viability review is a clause in a section 106 agreement that recalculates affordable housing contributions near the end of a scheme, using actual sales values and actual costs rather than the forecasts in the original appraisal. In London it is the price of taking the viability tested route, and the drafting of it decides whether the outcome is arithmetic or litigation.

Most of the money at stake sits in four definitions: the trigger, the fixed inputs, the surplus and the cap. Get those right and the review runs as intended. Leave any of them loose and both sides end up paying surveyors to argue.

Why reviews exist

Policy H5 of the London Plan 2021 sets a threshold approach to affordable housing. A scheme that meets the threshold level, provides the right tenure split and meets its other obligations can follow the fast track route without submitting viability information. A scheme that cannot meet the threshold goes down the viability tested route, submits a full appraisal, and accepts review mechanisms.

The logic is a matter of information. At the point of permission nobody knows what the flats will sell for in four years or what the build will cost. A review replaces a forecast with evidence once the evidence exists, and it stops a developer being rewarded for a pessimistic appraisal.

Fast track schemes are not free of review entirely. They are generally subject to an early stage review if the development has not begun within the period the policy specifies, which is there to catch improved market conditions on a permission left unimplemented.

Which route you are on

Establish this before anything else, because it determines which reviews you are negotiating.

The threshold is higher on public sector land and on industrial land where industrial capacity is lost, which is one reason the designation of your site matters so much to the affordable housing outcome. Our note on industrial land and no net loss covers that designation, and the way an allocation changes the policy position is covered in our piece on opportunity areas.

Trigger points and how to define them

A late stage trigger is usually expressed as a stage of sales or of completion. Each version has a drafting problem.

A sales-based trigger, for example when an agreed proportion of the private units have exchanged or completed, has to say which it means and what happens to units sold to a connected party, sold in bulk to an investor, or let rather than sold. Build to rent schemes need a different formulation entirely.

A completion-based trigger, for example practical completion of the final phase, has to define practical completion by reference to a certificate under the building contract, and has to deal with phased completion where the final block is years behind the first.

Three rules of thumb. Define the trigger by reference to a document that exists and is dated. State the number of working days within which the review must be submitted after the trigger. And provide for what happens if nobody submits it, which should be a longstop payment rather than an unenforceable obligation to co-operate.

On a phased scheme, decide explicitly whether reviews run per phase or once at the end. Per phase reviews give the authority earlier money and give the developer more administration, and the choice is worth making deliberately rather than inheriting it from a template.

Inputs fixed at the outset

The point of a review is to update some inputs and not others. Which ones are fixed should be listed in a schedule to the agreement, not inferred.

Normally fixed: the benchmark land value, the developer's profit percentage and the basis on which it is calculated, the finance rate, and the professional fees percentage. Normally updated: actual private sales revenue, actual build costs, actual marketing and sales costs, and the value of any commercial element.

Fixing the benchmark land value is the one that matters most. Planning practice guidance on viability is clear that the price paid for land is not a justification for failing to comply with policy, so a benchmark derived from the purchase price will be resisted. Settle it at application stage, record the figure in the agreement, and index it on a stated basis if it is to move at all.

Build costs are the other battleground. Agree in the drafting whether costs are taken as incurred, whether they must be open book, whether an independent quantity surveyor verifies them, and how overruns caused by the developer's own delay are treated. A clause that accepts actual costs without qualification hands the developer an easy route to a nil review.

The original Viability Assessment should be annexed to the agreement so that the fixed inputs and the model structure are unambiguous four years later.

Sharing the surplus, and the cap

Surplus profit is the amount by which the recalculated profit exceeds the profit allowed in the original appraisal. The Mayor's viability guidance has applied a sharing arrangement weighted towards affordable housing, commonly expressed as sixty per cent of the surplus to affordable housing provision and forty per cent retained. Check the current version of the guidance, because the detail has been revised since the threshold approach was introduced.

Two drafting points on the sharing.

The cap should be the sum required to deliver policy compliant affordable housing, not an open-ended liability. Say what policy compliant means in figures, by reference to the borough target or the London Plan threshold, so that the ceiling can be calculated rather than argued.

And the developer should have an election. A late surplus can be taken as a payment in lieu or, where the scheme still has unsold units, as additional affordable units on site. Drafting that allows either keeps the option open, and additional on-site provision is usually the better planning outcome. The tenure and the nomination arrangements for any such units should follow the Affordable Housing Statement submitted with the application.

Disputes and expert determination

Review clauses should be determined by an expert rather than an arbitrator, because the question is valuation rather than law. Name the appointing body, normally the president of the relevant professional institution, and state what happens if the parties cannot agree an appointment.

The clause needs to deal with: the expert's qualifications, the timetable for submissions, whether the expert may take their own valuation evidence, whether the determination is final and binding, and who pays. Splitting costs equally removes the incentive to make unreasonable submissions.

Expert determination of a viability review takes real time. Budget three to six months and build that into the payment date drafting so that interest runs from the original due date rather than from the determination.

Drafting traps that cost money

The clauses that come back to bite, drawn from the way these agreements actually fail:

1. No definition of surplus profit, so the formula has to be reconstructed from the appraisal.
2. A trigger tied to an event nobody certifies, such as substantial completion.
3. Actual build costs accepted without verification or a reasonableness test.
4. No treatment of unsold units at the trigger date, so the parties argue about whether to use valuation or wait.
5. No longstop, so a developer who simply does not submit the review faces no consequence until the authority litigates.
6. Double counting with other obligations, where the same money is captured by the review and by a separate contribution.
7. Interest that runs from determination rather than from the date payment fell due.

Draft the review as though the people who negotiated it will have left both organisations by the time it bites, because they will have. A review clause that a new surveyor can operate from the agreement alone, with the appraisal annexed, is the test of good drafting.

Before you sign, run the review clause through a worked example at two value levels and check the answer makes sense in both. You can browse the report types by category to see which supporting documents the appraisal and the statement will rest on.

This is general guidance, not legal advice. Check the position with your local planning authority, the Greater London Authority or a qualified planning solicitor and valuer 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.