The prospect of the new planning gain supplement has generated much dispute, but it has long been the practice of local planning authorities to require agreements – such as section 106 agreements – to be entered into pursuant to the Town and Country Planning Act 1990 when granting planning consent for a development. Under the terms of these agreements, and as conditions to the planning consents, the owner or developer may be required to pay money towards improvements to public facilities and the environment, and/or enter into restrictive covenants relating to use of the property once developed.

The statutory scheme under which a section 106 agreement is made is contained in Part III of the Town and Country Planning Act 1990. The effect of ss106, 106A and 106B is that any agreement that is a planning obligation entered pursuant to these provisions is a covenant that binds and runs with the land. The difference between these covenants and ordinary restrictive covenants is that they cannot be discharged or modified by the Lands Tribunal (as provided for under the terms of the Law of Property Act 1925). The only way in which a planning obligation under s106 can be varied or discharged is by making an application to the relevant planning authority, with the usual right to appeal to the Secretary of State in the event of a refusal of consent.

What happens if the local authority does not make use of the payment?

A question that may not necessarily be at the forefront of the parties’ minds at the time a planning agreement is entered into, and particularly where payment of money is concerned, is what happens if the local planning authority delays making use of, or never makes use of, moneys paid to it, notwithstanding compliance by the developer/owner of the subject property with the covenants or obligations imposed on it under the relevant agreement. At what point, if ever, is the money returned?

Patel & ors v Brent London Borough Council (No 2) [2005]

The decision of the Court of Appeal in Patel confirmed the principle that local planning authorities do not necessarily have the automatic right to hold onto moneys paid to them under planning agreements indefinitely. If the authority does not use the money for the purposes for which it was paid, then the developer can, in some circumstances, ask for it back, or at the very least the unspent balance of it.

The facts

In 1990 the appellants, who were trustees of a religious charity, the Swaminarayan Hindu Mission, had purchased from the respondent a site that had formerly housed Neasden High School. The original intention of the charitable trustees had been to develop the site as a temple for their own use. However, the trustees changed their minds and contracted to sell the site to Fairclough Homes Ltd, who obtained planning permission for a housing development at the site on 17 December 1992.

It was a condition of the planning permission that a section 106 agreement be entered into by the owner of the site, and it was under the terms of such an agreement, also dated 17 December 1992, that the Swaminarayan Hindu Mission agreed to pay £550,000 to the respondent. The payment was intended to provide money for highway improvement works at a named junction. The section 106 agreement essentially dealt with works within the development site, and the access from the site onto existing roads, open space/landscaping works, and other matters of detail (see the box on p24 for the relevant clause of the section 106 agreement).

The charitable trustees deposited the £550,000 payment with the council as required, and the council accordingly paid the money into a designated interest- bearing account. Under the terms of the section 106 agreement, the council had agreed to use its reasonable endeavours to complete the highway works within two years of the date on which the planning consent was granted and to return any unspent moneys to the charitable trustees.

The planning permission was implemented by Fairclough Homes Ltd. It proceeded with the development, and the works were completed in or around September 1994. The council issued a certificate of substantial completion of highway improvement works on site on 21 October 1994. Rather confusingly, these were not the works for which the £550,000 was intended to pay.

The highway works for which the £550,000 was intended to pay should have been carried out by 17 December 1994, two years after the date of the planning permission. They were not. Time passed, and there was no sign of them being carried out.

On 17 August 1999, by which time the works had still not been carried out, the charitable trustees’ solicitor wrote to the council demanding a refund of the entire £550,000 paid and all interest accrued on it. After receiving no response, proceedings were threatened, and it was only then that the council turned its attention to carrying out the works covered by clause 5.1, as well as other works. There was correspondence between the parties and the works were finally completed in March 2003.

Having drawn down on the deposit to pay for works that it asserted were covered by clause 5.1, the council offered to reimburse the charitable trustees the balance of £75,000.

At first instance

In first instance proceedings, the charitable trustees claimed entitlement/relief on the basis of:

• a declaration that the charitable trustees were entitled to a full refund together with interest as a result of the council’s delay in carrying out the works, the argument being that the council’s delay amounted to a repudiatory breach of the contractual agreement; the charitable trustees argued that the section 106 agreement had therefore been terminated; or

• a declaration that none or only part of the work carried out by the council had been covered by clause 5.1 of the section 106 agreement, and therefore the council was not entitled to draw on as much of the £550,000 as it had; and

• damages for delay, in either case. The trial judge found that the charitable trustees were not entitled to the return of the deposited sum on the grounds that the section 106 agreement had been repudiated by the council being in breach of covenant. Sections 106, 106A and 106B of the Town and Country Planning Act 1990 provided the proper statutory mechanism for the variation and discharge of obligations under a section 106 agreement, and the charitable trustees had not invoked this procedure. The judge also found that on the evidence, all of the work carried out by the council was work for which it was entitled to recover the cost from the deposited sum, however the council was in breach of contract insofar as delay was concerned, and the charitable trustees were therefore entitled to damages.

The appeal

The charitable trustees appealed the judge’s first two findings. Against the first finding, they argued that their only planning obligation was to pay the £550,000 to the council, which they had done, therefore they were not seeking to modify or discharge their obligations, because they had already discharged them – all they were seeking was a declaration as to the council’s contractual obligations.

The Court of Appeal did not accept the arguments, and found:

• The section 106 agreement dated 17 December 1992 created a planning obligation. The obligation was, however, not simply for the deposit by the charitable trustees of the £550,000 with the council. The deposit of the money with the council was for the specific purposes outlined in the section 106 agreement (ie the carrying out of the highway improvement works) and this created a form of trust.

• The charitable trustees were the beneficiaries of this trust, unless and until the money was drawn down by the council.

• However, the charitable trustees could not exercise their right of ownership of the money so long as the trust was in place. They were obliged not only to deposit the money with the council, but also to allow the council to use it for the purposes of the trust. This was a continuing planning obligation, and the only way to discharge or modify it was under the statutory procedure in ss106A and 106B.

In other words, the charitable trustees lost on the first point. They were not entitled to a full refund as of right. However, that did not give the council freedom to spend the money however it chose. The council held the money under a trust, and was bound by the terms of the trust.

The section 106 agreement specified the precise works covered by the trust. The question turned on the nature of the junction referred to in clause 5.1. The trial judge had concluded that the layout was such that there were, in fact, two separate junctions to which the agreement related. The charitable trustees considered that the council was only entitled to draw down moneys in relation to works to one of the junctions, and the council asserted that the scheme covered by the section 106 agreement included both junctions. Interpreting clause 5.1 itself, the Court of Appeal’s conclusion was that only one junction was covered by the agreement, and as such, the council was not entitled to draw money from the trust for the cost of the works to the other junction, which it had carried out as part of the overall process.

So the council was not entitled to take all the money it had spent out of the £550,000. The Court of Appeal ordered an enquiry by a master into what work did qualify, with power to order how much money should have been drawn down and therefore how much should be repaid to the charitable trustees.

Conclusion

This case serves as a reminder for both developers and councils to be on their toes when it comes to section 106 agreements, their negotiation, and the payments and covenants to be made under them. Consideration should be given to:

• the time limit for the carrying out of any works;

• whether or not a return date should be negotiated for deposited moneys should the works not have been carried out, measures implemented, or council’s policies change;

• the possibility of staged payments;

• the detail in the specification for the extent and nature of the works being or to be carried out; and

• whether there should be an incentive for early completion of the works.

This will assist in clarifying the position for all, particularly when it comes to selling the property. As the covenants run with and bind the land, remember, successors will always be interested. © Property Law Journal