Section 106 Notice - explained

Are you seeking land purchase cost + 100% of build cost?

section 106 Notices - what are they?

Ok well lets give you a quick summary and then the full details are all below.

Section 106 notices, generally apply where you are building multiple houses.  They essentially say how the local council want to mitigate the impact of the new development on the local area, what contributions it might want towards local services, highways contributions etc.

Section 106 and Affordable Housing

Currently as of the time of typing this,  the affordable housing requirement kicked in at over 9 houses per site.

9 houses and below, you would normally be exempt from having to make any of the site affordable housing. Anything over 9 and then the local council would ask that 30% of the site is classed as affordable housing.  There are a number of affordable housing schemes in place and they are constantly changing, so each planning dept  will tell you the options. But as an example  one such scheme might be ‘Rent to Buy’  where the units are sold to the local housing assoc. for about a 30% discount from the builder.

How does that work in practice?

Let’s take the above example further, Lets say you had a site and were going to build 9 x houses with a value of £300k each.   As its under the limit, then none of the properties need to be classed as affordable housing.

But lets say you managed to squeeze one more property onto the site. You now have 10 properties, and that is over the current limit of 9.  Therefore 30% of the site now has to be affordable housing  10 x 30%  = 3 of the properties now have to be offered up as affordable / social housing – on whatever scheme you and the local council agree upon.  But to finish the example lets say you opted for rent to buy at 30% discount,  you would ‘sell’ the 3 x properties to the Local Housing assoc  for £300k – 30% discount = £210k each.

So it can be quite a drop in potential profits, and builders need to plan carefully how many units are going onto a site.

Section 106 details

The Legislation

Planning obligations under Section 106 of the Town and Country Planning Act 1990 (as amended), commonly known as s106 agreements, are a mechanism which make a development proposal acceptable in planning terms, that would not otherwise be acceptable. They are focused on site specific mitigation of the impact of development. S106 agreements are often referred to as ‘developer contributions’ along with highway contributions and the Community Infrastructure Levy. 

The Town and Country Planning Regulations 2013

The common uses of planning obligations are to secure affordable housing, and to specify the type and timing of this housing; and to secure financial contributions to provide infrastructure or affordable housing. However these are not the only uses for a s106 obligation. A s106 obligation can:

  1. restrict the development or use of the land in any specified way
  2. require specified operations or activities to be carried out in, on, under or over the land
  3. require the land to be used in any specified way; or
  4. require a sum or sums to be paid to the authority (or, to the Greater London Authority) on a specified date or dates or periodically.

A planning obligation can be subject to conditions, it can specify restrictions definitely or indefinitely, and in terms of payments the timing of these can be specified in the obligation.

If the s106 is not complied with, it is enforceable against the person that entered into the obligation and any subsequent owner. The s106 can be enforced by injunction.

In case of a breach of the obligation the authority can take direct action and recover expenses.

The planning obligation is a formal document, a deed, which states that it is an obligation for planning purposes, identifies the relevant land, the person entering the obligation and their interest and the relevant local authority that would enforce the obligation. The obligation can be a unitary obligation or multi party agreement.

The obligation becomes a land charge.

The legal tests for when you can use a s106 agreement are set out in regulation 122 and 123 of the Community Infrastructure Levy Regulations 2010 as amended.


CIL legislation page


The tests are:

  1. necessary to make the development acceptable in planning terms
  2. directly related to the development; and
  3. fairly and reasonably related in scale and kind to the development.

National Planning Policy Framework (NPPF) – Policy Tests

As well as the legal tests, the policy tests are contained in the National Planning Policy Framework ( NPPF):

“203. Local planning authorities should consider whether otherwise unacceptable development could be made acceptable through the use of conditions or planning obligations. Planning obligations should only be used where it is not possible to address unacceptable impacts through a planning condition.

204. Planning obligations should only be sought where they meet all of the following tests:

  • necessary to make the development acceptable in planning terms
  • directly related to the development; and
  • fairly and reasonably related in scale and kind to the development.”


Section 106 - Affordable Housing

National Planning Policy Framework (NPPF)- Local authorities’ policy consideration

Over the last few years there has been growing concern about delivery of development and development viability. This is reflected in the NPPF:

“205. Where obligations are being sought or revised, local planning authorities should take account of changes in market conditions over time and, wherever appropriate, be sufficiently flexible to prevent planned development being stalled.”

Planning Practice Guidance (PPG) – amended March 2015

The Government in response to its consultation on on measures to speed up the negotiation and agreement of S106; and on affordable housing contributions and student accommodation has made significant changes to the Planning Policy Guidance (PPG) particularly the S106 section but also related areas including the viability guidance.

The PPG changes emphasise the S106 legal and policy tests and relationship with the development plan (including neighbourhood plans).  In terms of the process- the changes focus on early engagement by the Local Planning Authority (LPA) with applicants and infrastructure providers and  S106 being part of the pre-application process. There are also a number of suggested improvement to the way LPAs approach S106 e.g. standard templates, and working with other authorities to pool expertise, There is a greater emphasis on public access to information and the S106 being available as part of the planning register. Further guidance has been provided on the operation of the vacant building credit.

In addition, following the ministerial statement on starter homes, the guidance states that LPAs should not seek section 106 affordable housing contributions from developments of starter homes (but can still seek s106 that mitigates the development impacts). 

S106 – Amendments and Modifications – changes

Under the Planning Act s106 (A) a person bound by the obligation can seek to have the obligation modified or discharged after five years.

The Town and Country Planning (Modification and Discharge of Planning Obligations) Regulations 1992 set out the procedure for making an application to amend planning obligations, including standard forms. The principles for modifying an obligation are that it “no longer serve a useful purpose” or “continues to serve a useful purpose equally well”.

There has been an amendment (28th Feb 2013) to the 1992 regulation and it is now possible to apply to amend any planning obligations entered into between 28 March 2008 and before 6 April 2010. Therefore obligations that were entered into 3 years ago can now be appealed. This amendment will become irrelevant after 6 April 2015.

The Growth and Infrastructure Act (clause 7) inserts new clauses into s106 of the 1990 Town and Country Planning Act that introduces a new application and appeal procedure for the review of planning obligations on planning permissions which relate to the provision of affordable housing. The changes require a council to assess the viability arguments, to renegotiate previously agreed affordable housing levels in a S106, and change the affordable housing requirement or face an appeal.

An appeal can be made if the authority does not modify the planning obligation as requested, or fails to make a determination within a specified time. Obligations which include a “requirement relating to the provision of housing that is, or is to be made available, for people whose needs are not adequately served by the commercial housing market” are within scope of this new procedure.

The application and appeal procedure will assess the viability of affordable housing requirements only. It will not reopen any other planning policy considerations or review the merits of the permitted scheme.

These new application and appeal procedures don’t replace existing powers to renegotiate Section 106 agreements on a voluntary basis. In addition, this provision related to affordable housing does not replace the provisions to modify an obligation set out in the 1992 regulations and updated by the 2013 regulations (see above).

Section 106 affordable housing requirements – Review and appeal

DCLG have issued a guidance document to support the changes in the Growth and Infrastructure Act 2013 that provides more detailed information on what is required to modify, and assess requests to modify, the affordable housing provision in a section 106 obligations. This is guidance on the format of the application, appeal and evidence; particularly what viability evidence will be required and how it should be assessed.

S106 Agreements and CIL

The Government viewed S106 as providing only partial and variable response to capturing funding contributions for infrastructure. As such, provision for the Community Infrastructure Levy (CIL) is now in place in the 2008 Planning Act.

In terms of developer contributions, the Community Infrastructure Levy ( CIL) has not replaced Section 106 agreements, the introduction of CIL resulted in a tightening up of the s 106 tests. S106 agreements, in terms of developer contributions, should be focused on addressing the specific mitigation required by a new development. CIL has been developed to address the broader impacts of development. There should be no circumstances where a developer is paying CIL and S106 for the same infrastructure in relation to the same development.

The balance between the use of S106 and CIL will be different depending on the nature of the area and the type of development being undertaken. There is further guidance on the balance between s106 and CIL set out in the CIL Guidance April 2014:


Relevant appeal and examination decisions

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100% development loans for builders

Bridging finance for development is used to build a new building or convert an existing building. This can be residential houses, shops, offices or industrial buildings. It can be for investment purposes or owner occupied. You can be an experienced developer / builder or a first-time developer: A builder by profession who has purchased land and wants a loan to build houses that he will build and sell on. The developer may or may not have built from scratch before.

The maximum you can borrow to purchase the site is anywhere between 50-60% of the purchase price depending on the project. The site would need to have full planning in place or can be agreed subject to planning.


Key Features of typical Development Loans

  • Loans from £100,000 upwards
  • No tie-ins. In most instances you can repay the loan without incurring any early repayment charges
  • No experience is required provided a building contractors contract has been provided
  • Funds are available in stage payments and interest charged only on the money drawn
  • Can use other properties as collateral
  • You are not liable to borrow the full agreed amount should your build go below budget/plan
  • With property development finance the valuations tend to be higher than standard valuations and take longer to perform.

 One can also borrow up to a 100% of the build cost provided that it is within 60% – 70% of Gross Development value (GDV) depending on the lender and experience (set on a case by case basis). Maximum term you can borrow for development finance is between 12- 36 months. Exit is usually sale of properties or refinancing.


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Advantages of 100% development finance loans

The biggest benefit of development finance is the way in which it allows borrowers to access much larger sums of money. In fact, it is the most extensive borrowing facility currently available on the UK market. Initially, funds are provided to get the project underway. As the project continues, grows and edges closer to reaching its goals, more money is released for the developer along the way. The total sum of money lent can be up to 100% of the total cost of construction, with no specific upper-limits as to how much can be borrowed.

Additional advantages to development finance include:

  • The ability to secure money on properties, plots and developments that may be considered unsuitable or unviable by other lenders. This includes rundown and derelict buildings.
  • Development finance can be repaid relatively quickly, keeping overall borrowing costs to absolute minimums. Far more affordable than many long-term borrowing facilities.
  • Interest is only charged on the funds released which again can impact the overall costs of the facility in a positive way. A benefit of funds being released in stages throughout the project.
  • No specific limitations on how much can be borrowed. If the project is deemed viable, development finance may be offered to cover up to 100% of the costs, irrespective of the total construction cost.
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Main Development Finance Costs

What Costs to Expect on a Development Finance Loan?
This is dependent on the experience of the property developer. Rates can be as low as 4% pa and they can go as high as 20% pa for say an ex-bankrupt, so the range can be anywhere in between. Also, most lenders charge an arrangement fee of between 1-2% of the loan amount. Some Lenders also charge an exit fee, although not all. This is usually a percentage of the GDV (gross development value), and around 1% to 1.25% depending on the Development Loan period, i.e. 1% of gross development value for a 12-month loan 1.25 % of GDV for an 18-month loan.

What Are the Main Development Finance Costs?

Fees, charges and general borrowing costs vary significantly from one lender to the next. The following will apply in most instances as the primary costs of development finance:

Facility fee – More commonly referred to as an arrangement fee, the facility fee is calculated as a percentage of the total cost of the loan (gross or net).

Interest rate – Interest on a development finance loan can be charged on an annual or monthly basis. Annual interest rates of 7% are not uncommon, as are monthly interest rates of 1%. Longer-term facilities attach lower rates of interest, though cost more than those that are repaid quicker.

Exit fee – Sometimes called a completion fee, the exit fee is usually calculated as a percentage of the total cost of the loan (gross or net). Some lenders charge a percentage of the total value of the completed project – not the sum borrowed.

Broker fee – Most brokers charge typically 1%  to 1.75%  of the total value of the loan. If a fee is charged, you will be informed of this in our initial quotation.

These are just some of the primary costs to take into account when considering development finance. Working with an independent broker will help ensure you gain access to the best possible deal to suit both your requirements and your budget.

Other Development Finance Costs to Take Into Account

Additional development finance costs to take into account (which may or may not be applicable) include the following:

Valuation fees – It will usually be necessary for an initial valuation to be carried out by a neutral third party, in order to assess the open market value of the security. This will also typically include a projected valuation of the completed project.

Application fees – UK Property Finance does not charge application fees. Some lenders and brokers impose fees simply for submitting an initial application, or seeking advice on development finance.

Legal fees – If it becomes necessary to hire a solicitor or seek qualified legal advice, the applicant will be responsible for meeting all such costs accordingly.

Administration fees – This is a somewhat vague term, which can apply to almost any additional cost imposed by the lender. Some brokers also charge administration fees – UK Property Finance does not.

Monitoring fees – Development finance lenders will naturally need to monitor the progress of the project, in order to ensure it is reaching its predetermined goals. This is to make sure their investment is sound, and the funds allocated are being used as agreed. All monitoring fees are picked up by the borrower.

Draw down fees – Each time a new instalment of funds is transferred to the borrower, an additional fee known as a draw down fee may apply. This could be a set fee, or charged in accordance with the size of the instalment. 

Telegraphic Transfer fee (TT Fee) – This is a cost imposed by the banks handling the money transfers, which in the case of development finance can be comparatively large. Nevertheless, TT fees are generally quite small and charged at a fixed rate.


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