Indexation, interest and late payment in obligations

Indexation in a section 106 agreement is contractual, not statutory, so the sum a developer eventually pays is whatever the deed says it is. That distinguishes it from the Community Infrastructure Levy, where indexation is set by the regulations and applied annually to published rates. In a planning obligation the index, the base date, the compounding method and the fallback if the index stops being published are all drafting choices, and a clause that gets any one of them wrong produces a dispute years later when the money falls due. Read the indexation clause before you negotiate the figure, because on a long build programme the mechanism can matter more than the headline sum.

Why sums are indexed at all

A contribution calculated in 2026 and paid on occupation of plot 80 in 2031 buys less infrastructure than it would have done at the outset. Indexation preserves the purchasing power the authority's policy intended, and without it the developer gains from delay.

That is the legitimate purpose, and it also sets the limits. An index should track the cost of the thing the money will buy. A contribution towards building a classroom tracks construction cost. A contribution towards acquiring land tracks land or house prices. A contribution towards running a service tracks general prices or earnings. Indexing a construction contribution to a house price index, or a land contribution to a tender price index, produces a sum unrelated to the need it was calculated against, and that is an argument worth having at drafting stage rather than at payment.

Choosing the index and the base date

Name the publisher, the series and the frequency. An agreement that refers to "the BCIS index" without saying which one has left a choice open between several published series.

The base date is the other half of the definition. It can be the date of the agreement, the date of the committee resolution, the date of the supplementary planning document that set the formula, or a fixed date such as 1 April in the year of calculation. Any of those works. What fails is a clause that gives a base figure without a date, or a date without a stated index value, because two people will then read the series differently.

State the index figure at the base date in the deed. Numbers in the document beat numbers to be looked up later.

Common drafting errors

• No fallback where the index ceases publication, is suspended or is rebased. The retail prices index has been losing official status for years, and a deed relying on it with no substitute mechanism is a problem in waiting.
• Indexation expressed as a percentage uplift per year rather than by reference to a published series, which turns the clause into a fixed escalator regardless of actual inflation.
• Compounding left ambiguous, so the authority calculates year on year and the developer calculates from base to payment date.
• Indexation applied to a sum that already includes an inflation allowance, which double counts.
• No provision for a downward movement, leaving it unclear whether the sum can fall if the index does.
• The index applied from the base date to the trigger date rather than to the payment date, or the reverse, with the two differing by months.
• Monitoring fees indexed on a different basis from the contribution they monitor, for no reason anyone can explain.

Run the formula with real numbers before completion. Take the base index value, take the latest published value, calculate the payable sum, and send the working to the authority asking it to confirm the same answer. Two calculations that agree before signature are worth more than any amount of drafting elegance.

Interest on late payment

Interest runs only where the deed provides for it. A planning obligation is not an ordinary commercial debt, so an agreement silent on interest leaves the authority with the principal sum and its enforcement powers.

Where interest is provided for, three things need definition: the rate, usually expressed as a stated margin over the Bank of England base rate; the period, running from the due date to the date of actual payment; and whether it compounds. Check whether the margin is fixed or floating, and whether the rate is the base rate on the due date or the rate as it varies through the period.

Then read the interaction with indexation. A sum that is both indexed to the payment date and carries interest from the due date is being uplifted twice for the same delay. That may be the intention, and it may not, but it should be deliberate. The cleaner drafting indexes to the due date and charges interest thereafter.

Interaction with instalments

Phased payments make the mechanism harder to follow. Set out, for each instalment, the trigger event, the due date, the index dates that apply and whether the whole sum or the instalment is indexed.

The trigger definitions do as much work as the arithmetic. Occupation of a stated number of dwellings, practical completion of a phase, first beneficial use of a commercial unit and the date of a certificate all mean different things, and a definition of occupation that catches a show home or a site office causes real arguments. Define it by reference to residential occupation under a lease or transfer, or by a certificate, and say who certifies.

The wider question of deferring contributions and its effect on the appraisal is covered in deferred contributions and indexation in section 106.

Modelling the indexed figure in an appraisal

In a residual appraisal, contributions are usually entered at present value with build cost inflation handled separately. That understates the position where indexation runs on a different index from the one used for build costs, because the contribution and the costs then move at different rates.

The practical approach is to model the indexed sum at the expected payment date using the same forecast you have applied to values and costs, then sensitivity test it. A contribution of a few hundred thousand pounds indexed over five years on a tender price index can move by a material margin, and on a marginal scheme that difference is the negotiation.

Where the scheme has a review mechanism, the indexed base figures feed into it, so the definitions have to be consistent between the contributions schedule and the review formula. Review mechanisms are dealt with in viability review mechanisms, and the underlying appraisal sits in the Viability Assessment.

Checking the draft before completion

Four checks catch most problems. First, does every sum in the contributions schedule have a named index, a base date and a base value. Second, is there a successor index provision. Third, is interest defined with a rate, a start date and a compounding basis. Fourth, do the trigger definitions in the indexation clause match those in the payment clause.

Then read the affordable housing provisions separately, because in-lieu payments and cascade mechanisms often have their own indexation drafted by a different hand from the rest of the deed. The tenure and mix commitments they secure are set out in the Affordable Housing Statement submitted with the application, and the two documents should describe the same obligation in the same terms.

PlanScope drafts the supporting statements that sit alongside a section 106 negotiation and flags the figures it cannot verify rather than inventing them. It does not draft the deed, and the indexation clause is work for a planning solicitor. For specialist technical reports, qualified professional input may be required.

Enter the site postcode on PlanScope to see which documents a major application is likely to need.

This is general guidance, not legal advice, so take advice from a planning solicitor on any section 106 drafting before you sign it. PlanScope provides AI-assisted draft reports for planning applications. Reports should be reviewed before submission. We do not guarantee planning approval.