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High Court gives important judgment on viability and affordable housing in London

DATE: 30 Apr 2018

Today, Holgate J. gave judgment in Parkhurst Road Ltd v Secretary of State for Communities and Local Government and London Borough of Islington, dismissing the Claimant’s claim for statutory review under section 288 of the Town and Country Planning Act 1990. In giving judgment, the judge provided important guidance on valuation evidence for the purposes of viability assessments in planning applications and appeals. 

The claim involved a challenge to an Inspector's decision refusing an appeal against the decision of the London Borough of Islington (LBI) to refuse planning permission for a residential scheme. The key issue in the appeal was whether the Applicant’s offer 10% of affordable housing was the "maximum reasonable amount of affordable housing” in the context of LBI's overall affordable housing target of 50% of all new housing across the Borough. Central to that issue was the question of what was the correct Benchmark Land Value (BLV) for the appeal site.

The inquiry

At the inquiry, the Appellant had argued that any more than a 10% affordable housing requirement was unviable on the site. It provided a range of market evidence to support its view that the BLV for the site was between £11.9m and £13.6m. LBI contended that the market evidence presented by the Appellant failed to sufficiently reflect the development plan’s expectation for affordable housing.  It provided evidence to support a BLV for the site of £6.75m.

A crucial difference in the Claimant’s and the Council’s assessments was the approach to calculating BLV. In short, the Claimant adopted an approach based purely on market signals and comparable market evidence. The Council adopted an approach which: i) took account of the negligible existing use value of the site (‘EUV’); ii) acknowledged the lack of any realistic alternative use other than the appeal scheme; iii) reflected the fact that value on the site therefore arose from its allocation in the Local Plan and from the prospect of planning permission; iv) consequently required value to be assessed with affordable housing policies in mind; and v) took account of market comparators in that context, that is, recognising that unadjusted market data would not necessarily reflect policy compliant assumptions on affordable housing provision.

LBI argued that the Appellant's approach was circular, seeking support for its assessment of BLV from land sales at prices which assumed little or no affordable housing provision, based on developers' presumptions that market evidence (where other developers may have made the same assumptions) would demonstrate that i) the purchase price was not inflated and ii) the provision of substantial amounts of affordable housing was not therefore viable. The Council contended that this valuation approach was circular and ran counter to policy, as contained in particular in paragraph 023 of the PPG.

LBI’s approach which generated a BLV figure of £6.75m was derived, at least in part, from a ‘per market unit’ analysis of comparable market evidence. LBI contended that the per market unit analysis avoided the circularity inherent in the Appellant’s evidence.  

Having heard 9 days of evidence, the Inspector dismissed the appeal, rejecting the Appellant’s ‘pure market-based’ approach as circular and policy non-compliant and accepting LBI’s assessment of the BLV at £6.75m. 

The High Court

In the High Court the Claimant argued that the Inspector was wrong  to regard LBI’s 'per market unit’ as one which avoided the circularity which concerned him. Holgate J. agreed, noting ways in which LBI’s ‘per market unit’ approach failed to address the circularity problem the inspector was concerned to avoid. However, the judge dismissed the claim because the inspector’s legal error made no difference to the outcome of the appeal. 

At para 47 the judge said (relying on Vicarage Gate Limited v First Secretary of State [2007] EWHC 768 (Admin):

“47. I agree with Mr Buley (who appeared for the Secretary of State) and Mr Kolinsky QC that the effect of the policies in the London Plan and Islington Core Strategy (together with the NPPG) is that where an applicant seeking planning permission for residential development in Islington proposes that the “maximum reasonable amount of affordable housing” is lower than the borough-wide 50% target on viability grounds, it is his responsibility to demonstrate that that is so.”

The consequence seems to be that if an appellant’s valuation evidence is validly rejected then it has failed to demonstrate that its affordable housing offer is the maximum reasonable amount and the appeal will be dismissed on that basis. As a result, an unrelated error in accepting the evidence of another party will not make any difference to the outcome of the appeal.

In this case, the judge held that the Inspector had validly rejected the evidence of the Claimant because that evidence had failed to include any adjustment of market evidence to ensure it was policy compliant. The Claimant's purely market-based approach plainly did not comply with paragraph 023 of the PPG. Having had its evidence rejected on that basis, the Claimant could not meet its burden of demonstrating that its offer of 10% was the “maximum reasonable amount of affordable housing”. The fact that the Inspector erred in his reasons for accepting LBI’s evidence did not vitiate the fundamental rejection of the Claimant’s evidence. 

Postscript

The judge included a lengthy postscript to the judgment which bears careful reading. The postscript emphasises the importance of a nuanced approach to valuation evidence in the context of viability assessments in planning applications / appeals and the application of paragraph 023 of the PPG. In a key part of that postscript the judge noted:

"The present case illustrates the tension that has arisen in the application of paragraph 023 of the PPG. But the plain intention of that paragraph is to promote harmonisation between the three specified requirements when they are applied in decision-making. Thus, when estimating a BLV for a site, the application of the second and third requirements should “reflect”, and not “buck,” relevant planning policies (including those for the delivery of affordable housing). On the other hand, the proper application of those policies should be “informed by,” and not “buck,” an analysis of market evidence which reflects those policies (or where appropriate is adjusted to do so). As the PPG recognises, “realism” is needed when these matters are taken into account in decision-making. So, to take one example, a judgment may need to be made on relaxing one or more planning requirements or objectives where that would render a development on the site in question non-viable according to a viability case which uses (inter alia) land values which have adequately taken planning policies into account.

According to the basic principles set out in the NPPF and the NPPG, it is understandable why a decision-maker may, as a matter of judgment, attach little or no weight to a developer’s analysis which claims to show a “market norm” for BLV by doing little more than averaging land values obtained from a large number of transactions within a district. If those values are inflated by, for example, a misjudgment about a site’s development capacity and/or by a failure to factor in appropriate planning requirements, such an exercise does not establish a relevant “norm” for the purposes of paragraph 023 of the PPG. Such data should be adjusted (subject to any issues about reliability and cross-checking). A failure to obtain adequate information about comparables relied upon (including the planning context and circumstances influencing bids and the transacted price) would not be acceptable where development appraisal or viability is dealt with in the Lands Chamber or in an arbitration, and it is difficult to see why the position should be different where the same type of issue arises in the present type of case.

On the other hand, it is understandable why developers and landowners may argue against local policy statements that BLV should simply conform to an “EUV plus a percentage” basis of valuation, especially where the document has not been subjected to independent statutory examination prior to adoption. Some adherents appear to be promoting a formulaic application of “EUV plus.” But as the RICS advised its members in its 2012 Guidance Note, an uplift of between 10 and 40% on existing use value is an arbitrary number and the method does not reflect the workings of the market (see paragraph 57 above). It has not been suggested that this valuation approach takes into account the value of the new land use for which the site is to be sold, whereas it might be said that a reasonable landowner would treat that as a primary consideration in valuing his property. In this context a document issued by a professional institution setting out “accepted good practice” for chartered surveyors ought to command great respect in the planning process unless there is a sound reason to the contrary. If, for example, a site value were to be negotiated so as properly to respect planning policy requirements but that price substantially exceeded an uplift of say 40% (or any other policy-specified percentage) on the existing use value of the site, the question would be posed why should that evidence not be treated as relevant to BLV? Otherwise, might it not be suggested that there is a risk of policy attempting to “buck” the market (see paragraph 143 above)? There is a difference between a policy which may have the effect of influencing market value, as compared with one which disregards levels of market value arrived at quite properly in arm’s length transactions and consistent with the correct application of planning policies and sound valuation principles.

In concluding his postscript, the judge invited RICS to reconsider its 2012 Guidance Note on viability, perhaps in conjunction with DHCLG and the RTPI, in order to address any misunderstandings about market valuation concepts and techniques, the “circularity” issue and any other problems encountered in practice over the last 6 years, so as to help avoid protracted disputes of the kind seen in the present case.

Russell Harris QC appeared for the Claimant.

Tim Buley and Toby Fisher appeared for the Defendant.

Dan Kolinsky QC appeared for the London Borough of Islington.