Overage clauses and review mechanisms in a section 106

A section 106 review mechanism is the clause that lets a local planning authority come back for more affordable housing, or a cash equivalent, if a scheme turns out to be more profitable than the appraisal said it would be. It is the price of consent where a policy-compliant level of affordable housing has been reduced on viability grounds. Nothing in statute creates one. Every review is a drafted obligation, and the drafting decides whether it works, whether it is enforceable, and what it costs.

Get the definitions wrong and the mechanism either catches nothing or catches everything. Both outcomes end up with valuers arguing three years after permission, at the developer's expense.

What a review mechanism is designed to capture

The Planning Practice Guidance on viability supports reviews where permission is granted with less than the policy level of affordable housing because the scheme could not viably support it. The logic is straightforward: the appraisal is a forecast, forecasts are wrong, and the authority should share in the upside it agreed to forgo.

What a review captures is the difference between the profit assumed at permission and the profit actually achieved, measured against a fixed benchmark land value and a defined target return. Where the actual position is better, a share of the surplus is directed to affordable housing or paid as a contribution.

What it does not capture is a scheme that simply sells well because the developer built it better or faster. That distinction is impossible to draw in a formula, which is why caps exist. It also does not work backwards: a scheme that performs worse than appraised does not generate a refund, and developers who expect symmetry are usually disappointed.

The starting evidence is the Viability Assessment submitted with the application, and every input in it becomes a defined term in the agreement.

Trigger points and how they are defined

Three trigger types are standard, and a scheme may carry more than one.

An early stage review fires if the permission has not been substantially implemented within a set period, commonly 18 months to two years from the grant. Its purpose is to stop a developer sitting on a consent with a reduced affordable offer while values rise. In London, Policy H5 of the London Plan and the Mayor's supporting guidance set out a threshold approach in which schemes meeting the threshold level of affordable housing face a lighter review regime than those going down the viability tested route.

A mid stage review applies to phased schemes and fires at the start of a later phase.

A late stage review fires when a defined proportion of the private units have been sold or let, typically expressed as a percentage of open market units with legal completion as the test. Seventy five per cent is a common figure, though it is a matter for negotiation rather than policy.

"Substantially implemented" is the term that causes the most trouble. Leave it undefined and the parties argue about whether a service trench counts. Define it by reference to identifiable milestones, for example completion of foundations to a stated proportion of the units, and both sides know where they stand.

Defining surplus and who audits it

Surplus is the amount by which the actual return exceeds the target return, once actual costs and actual values are substituted into the original appraisal model.

Five definitional questions decide how much that number is.

1. Is profit measured on gross development value or on cost, and at what target percentage.
2. Is the benchmark land value the figure agreed at permission, and is it indexed or fixed in cash terms.
3. Which index applies to costs, and which to values, with the source and the base date stated.
4. Are actual costs used, or original costs indexed, and what happens where the two diverge.
5. Is finance treated as an actual cost or as a notional rate applied to the cash flow.

Audit follows from those definitions. The usual arrangement is open book disclosure to an independent assessor appointed jointly, or by the authority with the developer paying the fee. Specify the assessor's scope, the information they may require, the time limits for producing it, and a dispute resolution route to an expert rather than to litigation.

Assumptions about return are where reviews are most often contested, and the reasoning behind them is set out in full in developer return assumptions in planning viability.

Caps on the additional contribution

Almost every review is capped. The standard cap is the amount that would bring the scheme up to the policy-compliant level of affordable housing, expressed either as units or as the cash equivalent of those units.

Without a cap, a scheme that performs exceptionally well could in theory be asked for more affordable housing than policy ever required, which fails the tests in regulation 122 of the Community Infrastructure Levy Regulations 2010 requiring an obligation to be necessary, directly related to the development and fairly and reasonably related in scale and kind.

Two further points are worth fixing in the drafting. Whether the surplus is shared, and in what proportion, because a share rather than the whole surplus preserves an incentive to perform. And whether the cap is expressed in money at the date of the agreement or indexed forward, since a cash cap agreed in year one is worth less by year four.

Treatment of cost overruns and delays

This is where developers and authorities see the world differently.

If actual costs are used without qualification, a developer who overspends reduces the surplus and the review yields less, which gives an authority a reason to insist on original costs indexed by a published tender price index. If original indexed costs are used, a developer facing a genuine abnormal has no relief, which is unfair in the other direction.

The workable compromise is usually actual costs subject to a reasonableness test, with categories of cost that may be substituted only where evidenced and where the item was not foreseeable at the date of the appraisal. Set out the evidence required in a schedule. Costs that were argued as abnormals at application stage deserve particular attention, since the treatment of abnormal costs in a viability appraisal at permission should govern how the same items are handled at review.

Delay is the other variable. A long build period increases finance cost and may increase values. Fixing the finance rate rather than using actual interest removes one argument, at the cost of accuracy.

Phased schemes and mid stage reviews

On a scheme built out over several phases, the question is whether each phase is reviewed on its own or whether results are aggregated.

Phase by phase reviews are simpler to administer and give the authority earlier receipts. They also let a strong early phase generate a payment while a weaker later phase produces nothing, which the developer experiences as being taxed on the good years only.

Aggregation across the whole scheme is fairer and slower, and it needs a mechanism for interim payments with a final reconciliation. Whichever route is chosen, allocate shared infrastructure and abnormal costs between phases in a schedule attached to the agreement rather than leaving it to be worked out later.

Build to rent schemes need their own treatment, because there are no open market sales to trigger a late stage review and the value is in the investment yield. The affordable private rent discount and a valuation-based trigger usually replace the sales percentage.

Drafting traps that cost money later

The recurring ones, in the order they cause trouble:

• No long stop date, so a review remains theoretically live for years with no mechanism to close it out.
• Undefined "Private Units", which becomes an argument about whether intermediate tenure, staff accommodation or a retained show home counts.
• An index named without a base date, or an index that has since been discontinued.
• No obligation on the developer to notify the authority that a trigger has occurred, leaving the authority to discover it from the sales website.
• Silence on what happens if the site is sold, since the obligation binds successors in title but the appraisal records sit with the original developer.
• A dispute mechanism that points to arbitration for a question of valuation, where an expert determination would be quicker and less expensive.

Section 106A allows an obligation to be modified or discharged by agreement at any time, and by application after five years. That is a slow remedy for a badly drafted clause. Spending two extra weeks on definitions before the agreement is completed is the better investment.

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, and viability work is normally expected from a suitably qualified valuer. We do not guarantee planning approval. To see the documents a viability-led application needs, enter your postcode on PlanScope.