Section 106 review mechanisms and clawback

A section 106 review mechanism is a clause that reopens the viability position after permission has been granted. It is the authority's answer to a scheme that pleads poor viability at application stage: you may provide less affordable housing now, but if the numbers improve we recalculate and you pay. Clawback is the money that falls out of that recalculation.

For a developer the drafting matters more than the principle. Two agreements with the same headline, a late stage review sharing surplus profit equally, can produce wildly different outcomes depending on which inputs are fixed, what the cap is, and when the trigger bites.

What a review mechanism is for

Policy expects a defined level of affordable housing and a set of contributions. Where an applicant says the scheme cannot carry them, national guidance on viability allows the authority to look at the evidence and, if it agrees, to accept less. The obvious problem is that the evidence is a forecast made years before the flats are sold.

Reviews close that gap. They accept the applicant's figures as the best available estimate at the time, then test them against what actually happened. The policy logic is that the public should share in an uplift it effectively paid for by relaxing its own requirements.

They also change behaviour at application stage. An applicant who knows a late stage review is coming has less incentive to present an aggressive sales forecast, because an optimistic figure in the original appraisal becomes the baseline against which surplus is measured.

Early stage reviews

An early stage review is triggered by delay. The standard formulation is that if the development has not been substantially implemented within a defined period from the grant of permission, commonly 18 to 24 months, the viability position is recalculated before work can continue or before occupation.

Its purpose is to stop a developer banking a consent on soft viability evidence and sitting on it until values rise. The clause does not care why the delay happened.

The definition of substantial implementation is therefore the most contested phrase in the agreement. A loose definition such as "commencement of development" can be satisfied by digging a trench. A tight one requires completion of substructure works across a defined area, or completion of a specified percentage of the works, certified by the employer's agent. Expect the authority to want the tight version and to want a certificate.

In London the threshold approach in the London Plan sets this out explicitly. A scheme meeting the relevant affordable housing threshold on the fast track route is not subject to a late stage review, though an early stage review still applies if it is not implemented in time, while a scheme on the viability tested route carries both.

Late stage reviews and the surplus split

A late stage review happens near the end. The usual trigger is the sale or legal completion of a stated proportion of the private units, often 75 per cent, or practical completion of the final building in a phase.

At that point the appraisal is run again using actual costs and actual values, and any profit above the agreed level is treated as surplus. The surplus is then shared, with a 50:50 split between the developer and the authority being the common starting point, and the authority's share converted into an additional affordable housing contribution or a cash payment.

Three features of the arithmetic deserve attention. The developer's return is fixed at the level agreed in the original appraisal, so efficiency gains flow partly to the authority. Benchmark land value is almost always fixed at the original figure, which means paying over the odds for the site does not reduce the clawback. And the cap, discussed below, is what stops the mechanism becoming open-ended.

Triggers, formulas and the inputs that get revisited

The formula is usually a simple surplus calculation: gross development value, less development costs, less the agreed developer return, less the benchmark land value, with the remainder shared.

What varies is the treatment of each line, and this is where negotiation earns its fee:

• Gross development value. Actual sales prices where units are sold, and a valuation where they are retained for rent. The valuation basis for retained units should be stated, because a build to rent block valued on an investment yield produces a different answer from one valued on an aggregate of vacant possession values.
• Build costs. Open book, evidenced by the final account, with a mechanism for the authority's assessor to query line items. Agree in advance whether cost overruns caused by the developer's own change of specification are allowable.
• Finance costs. Actual or notional. Notional is cleaner and avoids an argument about intra-group lending.
• Developer return. Fixed, usually as a percentage on gross development value or on cost, at the figure in the original appraisal.
• Benchmark land value. Fixed. Resist any suggestion that it be revisited upwards, and expect the authority to resist any suggestion it be revisited at all.
• Professional fees, marketing, sales and letting costs. Capped by reference to the original appraisal, with an allowance for inflation.

A viability assessment prepared at application stage sets all of those baselines, and the convention under the RICS professional statement on financial viability in planning is that it is prepared transparently and on an open book basis. Councils usually expect a suitably qualified author and professional review is strongly advised, because the figures in that document govern the review years later.

Caps, audit and who pays for the assessor

A review without a cap is unacceptable to any lender. The standard cap is the policy compliant level of affordable housing, expressed either as the number of units the policy would have required or as the cash equivalent. Some agreements use an absolute maximum sum instead, index-linked.

The audit process needs to be set out in the agreement rather than left to goodwill. Who appoints the independent assessor, from what panel, on what terms of reference, to what timetable, and what happens if the parties disagree with the outcome. A dispute resolution clause naming an expert determination route, with the expert's decision binding, is far better than silence.

The developer pays for the assessor in almost every agreement I have seen, and the authority's own monitoring fee sits on top. Budget for it.

Build in a deadline. Without one, a review can drift for months while the final units sit unsold and the authority waits for information, and a clause requiring the submission of the review appraisal within a stated number of days of the trigger, with interest running on any payment from that date, protects both sides.

Drafting points that decide how painful a review is

Five things to get right before signing:

1. Define the trigger by reference to events you can evidence. Legal completion of units, not exchange. A certificate of substantial implementation, not a site visit.
2. Phase the obligation where the scheme is phased, so a review on phase one does not capture profit from a phase that has not started.
3. Say what happens on a part disposal or a sale of the whole site, because clawback obligations run with the land and a purchaser will want them quantified.
4. Agree the index. The Consumer Prices Index, the All in Tender Price Index and a house price index give different answers, and the choice should match what is being indexed.
5. Secure payment in a way that works commercially. An occupation restriction is enforceable but can stop a whole block being let; a charge or a bond is usually easier to fund around.

Where affordable housing is being varied rather than paid for, the affordable housing statement should set out the tenure split and the review assumptions together, so the planning committee understands what it is agreeing to.

What reviews do to programme and funding

Lenders read these clauses closely. An uncapped review, a vague trigger or a wide audit discretion will show up in the credit paper and may change the facility terms. An exit at practical completion becomes harder where a late stage review is outstanding, because the purchaser inherits a contingent liability of unknown size.

Buy-side due diligence should price the clause rather than merely noting it. And where a scheme is being acquired with a consent already in place, the original appraisal is the document to get hold of first, because every review input traces back to it.

Section 106A allows an agreement to be modified or discharged by agreement at any time, or by application after five years, so a review mechanism is not permanent. In practice authorities rarely release one while the development is live.

Smaller sites can sometimes avoid the whole question. Rural exception sites and First Homes exception sites work on different policy tests, as we set out in First Homes exception sites and their tests.

This is general guidance, not legal advice; take advice from a planning solicitor and a viability surveyor on the drafting of any review mechanism before you complete.

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