Indexation of financial contributions in planning obligations

A financial contribution in a section 106 agreement is almost always indexed, which means the figure you negotiate is not the figure you pay. The agreement fixes a sum, names an index, sets a base date, and provides that the sum is adjusted by the movement in that index between the base date and the date of payment. On a scheme where the first payment falls due at occupation three years after the agreement is signed, three years of construction cost inflation is applied to every pound of it.

Negotiating the quantum and ignoring the indexation clause is the standard mistake. The base date is where the money is, and it is often earlier than the agreement.

Why contributions are indexed

Obligations under section 106 of the Town and Country Planning Act 1990 have to meet the tests in regulation 122 of the Community Infrastructure Levy Regulations 2010: necessary to make the development acceptable, directly related to it, and fairly and reasonably related in scale and kind. A contribution calibrated to the cost of a school place or a junction improvement only continues to meet that test if it still buys the thing it was calculated for.

Authorities also have a practical problem. Infrastructure is delivered years after permission, often by a different part of the council, and a fixed cash sum erodes. Indexation is the mechanism that holds the contribution at constant purchasing power rather than constant cash.

Which is reasonable. The argument is rarely about whether to index and almost always about from when, and against what.

Which index is normally used

For contributions calculated from construction costs, the usual choice is a Building Cost Information Service index published by the Royal Institution of Chartered Surveyors, typically the all-in tender price index or the general building cost index. Highway works, education places, play space and open space contributions normally use one of these.

Where the contribution funds something other than construction, a general price index can be appropriate. Monitoring fees, which regulation 122 permits where they are reasonable and reflect the actual cost of monitoring, are often linked to a general consumer or retail price measure instead.

Three drafting points decide whether the clause works years later:

• name the index precisely, including the series and the publisher, rather than referring to it by initials alone
• say what happens if the series is discontinued, rebased or renamed, with a successor index provision
• say whether provisional figures count or whether the last firm figure applies, because construction indices are published provisionally and later revised

A clause that names a series which no longer exists leaves both sides arguing, and the authority usually has the stronger position because the money is not yet paid.

Setting the base date

The base date is the date of the index figure from which the uplift runs. Three candidates appear in practice, and the difference between them can be years.

The third is the one that catches people. Where an authority's contributions come from an adopted document with a stated base date, the obligation may index from that date rather than from the agreement, so a tariff adopted some years earlier carries all the inflation since. Ask for the base date to be the date of the agreement, and where the authority refuses, price the difference and feed it into the appraisal exactly as you would highway works costs in a development appraisal.

Compounding and the payment trigger

The standard formula is the contribution multiplied by the index figure at the payment date divided by the index figure at the base date. That is a single ratio rather than a year-on-year compounding calculation, so the arithmetic is simple once both figures are identified.

The payment trigger is what fixes the end of the period. Common triggers are commencement, implementation of a specified operation, occupation of a stated number of dwellings, and practical completion, and a phased scheme will have several. Each trigger brings its own index figure, so the same contribution can be indexed differently across phases.

Two traps. First, a clause that uses the date the contribution becomes due rather than the date it is paid removes any benefit from paying late and any penalty for paying early, which is usually what the authority wants. Second, where a payment is made in instalments, check whether each instalment is indexed to its own payment date or whether the whole sum is indexed once at the first trigger.

Disputes about the published figure

Most disputes are mundane. The index figure for the relevant month has not yet been published when payment falls due. The figure published was provisional and has since been revised downwards. The series was rebased, so the numbers before and after are not comparable without a conversion.

Head these off in the drafting. Provide for the last published figure at the date of payment, state whether provisional figures are used, require the paying party to show its calculation, and include a short expert determination route for disagreement rather than leaving the parties to litigate a four-figure difference.

Keep the working. A one-page calculation sheet showing the base figure, the payment-date figure, the source, the publication date and the resulting sum settles most queries by return.

Capping indexation

Caps are negotiable and more common than developers assume. The forms that authorities accept include a ceiling on the total uplift expressed as a percentage, a cap on the period over which indexation runs, a floor preventing the contribution falling below the original sum, and a provision that indexation stops if the authority fails to spend the money within the period provided for repayment.

A longstop is the most useful of these. Where a scheme stalls, an obligation indexed indefinitely becomes a liability that grows while the site produces nothing, and an authority that wants the infrastructure delivered has an interest in the scheme remaining viable.

Modelling the cost at the right date

In an appraisal, index every contribution forward to its expected payment date using the same cost inflation assumption applied to the build cost, and show the indexed figure rather than the agreement figure. Showing the undated sum understates the cost and invites the authority's reviewer to correct it, which is a poor way to open a negotiation.

Then sensitivity test. A twelve-month programme slip moves every payment trigger and every index figure with it, and on a scheme carrying several hundred thousand pounds of obligations the effect on residual value is visible. That is precisely the kind of input an independent review of a viability appraisal will probe.

A Viability Assessment needs the indexed figures, the base dates and the triggers set out transparently, and so does an Affordable Housing Statement where a commuted sum is involved. PlanScope drafts those documents from your scheme inputs and flags the figures it does not have, and you can enter your postcode on the home page to see which reports a site needs. Reports should be reviewed before submission and PlanScope does not guarantee planning approval.

This is general guidance, not legal advice; check the position with your local planning authority or a qualified professional before relying on it.