The great Section 106 and CIL scandal

It is not just the eye-watering sums involved they take issue with. All too often, there is scant evidence of the supporting or mitigating infrastructure the payments are supposed to have financed. The suspicion is that councils are spending only a fraction of what they have received and that the rest has disappeared into a sizeable black hole.

Quite how big, no one knows. There has been no requirement on the part of local authorities to disclose the figures and dozens haven’t. Until now.

This month, new laws came into effect requiring councils to publish an annual report disclosing the size of their payments and how much they have spent.

The figures are not expected to paint a pretty picture and, as a six-month investigation by Property Week reveals, when that full picture does emerge, it could be even more damning than feared.

In February, Property Week sent freedom-of-information (FOI) requests to all 343 local authorities in England asking how much in Section 106 and CIL payments they had received between 2013 and 2018, and how much they had spent.

Having crunched and analysed the responses, we can reveal that local authorities across England received at least £4bn in infrastructure contributions from developers over the period, but only spent 37% of what they had received. More than £2.5bn – or 63% – of the money they were paid by developers remains unspent.

Tip of the iceberg

These numbers are just the tip of the iceberg. Of the 343 councils sent the FOI request, 43 failed to respond, some refused to disclose their figures and many that did provided only partial data.

So far, Property Week has only been able to analyse 61% of the data collected.

Even the figures to date have sparked outrage among senior industry figures.

“I think it’s a scandal,” says Barry Jessup, director at developer First Base.

He points out that in paying the CIL and Section 106 levies, developers are making a promise to communities about improvements in public realm, jobs and the financial contributions that will result from their projects.

“To effectively be breaking those promises is scandalous,” he says.

“I think it’s a scandal. To effectively be breaking those promises is scandalous”

Barry Jessup, First Base

His views are echoed by Steve Sanham, the former managing director of developer HUB who is currently launching a development vehicle with a focus on community-centred projects. Sanham says the figures are “disappointing and will further fuel the mistrust between many developers and local authorities.”

Many developers Property Week spoke to declined to comment on the record about the findings, but they share Jessup’s and Sanham’s concerns.

Our research shows that the bulk of the money paid by developers to local authorities was made under Section 106 regulations, which first came into effect in the early 1990s.

Property Week’s analysis of local authority financial data shows that between 2013 and 2018, at least £3bn was collected as Section 106 payments, of which £1.3bn was spent – leaving about 58% of the money collected unspent.

Decline in payments

Our research also reveals an overall decline in Section 106 payments over the five-year period. This has been offset by an increase in CIL payments, which more councils have only just started collecting despite CIL being almost 10 years old.

Our numbers show that local authorities received CIL payments totalling £967m, of which just £191m – or 20% – was spent. The analysis did not calculate how much money was taken by London boroughs under the mayoral CIL, which is passed on to London City Hall for large infrastructure projects.

Of England’s six biggest cities, the largest discrepancies between what was taken in through CIL and what was spent were in Birmingham and Newcastle. Neither Birmingham City Council nor Newcastle City Council reported spending any of the £2.4m and £324,000 in funds they took in respectively.

Responding to subsequent questions from Property Week on the discrepancies, councillor Ged Bell, Newcastle City Council cabinet member for employment and culture, said: “We became a CIL charging authority in 2016 and over the next five years, we expect to have collected more than £4.6m in CIL charges. We have not spent any of the contributions so far as the money is earmarked for large infrastructure projects as we prepare for the expansion of our city.”

He added that the council reported its figures every six months on both CIL and Section 106 and that it would updating the report to ensure it complied with the new regulations.

“We have not spent any of the contributions so far as the money is earmarked for large infrastructure projects as we prepare for the expansion of our city”

Ged Bell, Newcastle City Council

In a statement, Birmingham City Council said it had received £1.8m in Strategic CIL, which it said was “relatively small compared with the cost of individual items of strategic infrastructure to be funded through CIL”.

It added: “The amount of Local CIL received is £350,000 and the council is working with local communities to determine how this should be spent.”

A review of its CIL charging schedule would be undertaken next year, it said.

The findings of our FOI request mirror a 2018 analysis of CIL payments and spending undertaken by the Association for Consultancy and Engineering (ACE) and show that roughly 40% of total CIL receipts were unspent.

Considerable underspend

“Property Week’s analysis of CIL spending across England confirms ACE’s findings in our report Scrapping the Levy a year ago,” says Julian Francis, director of policy at ACE.

“It is clear that there is considerable underspending across local authorities, which is to the detriment of residents who are suffering the costs of development without any of its benefits.”

Our research reveals that London alone accounted for almost 40% of all money received through Section 106 contributions, at more than £1.5bn.

“It is clear that there is considerable underspending across local authorities, which is to the detriment of residents who are suffering the costs of development without any of its benefits”

Julian Francis, ACE

In the capital, the largest discrepancy between what was taken in through Section 106 agreements and what was spent was in the borough of Merton, which has held on to 80.4% of the £32m it has collected from developers.

The second-highest appears to be the borough of Hackney, with a 66.7% discrepancy, but the true figure for the borough could be higher, as only partial data was supplied.

The City of London Corporation also provided only partial data, and only relating to CIL payments. In response to our FOI request, the corporation wrote that “to comply with the request would exceed the cost/time” mandated under FOI law.

Discrepancies

Property Week was only able to find data for the City of London for one year of Section 106 payments online: 2015. This shows a 63.6% discrepancy between what was taken in and spent that year. The data provided by the corporation on CIL contributions shows a 98.6% discrepancy.

In response to our subsequent questions about the discrepancy, the corporation said it did monitor Section 106 contributions and spend. “A report is in preparation to be received at the Planning and Transportation Committee on 22 October,” it added. “The City Corporation will be complying with the requirements of the new regulations to publish the relevant data.”

“I’m actually surprised that they [some of the councils] have released the figures in the first place. There’s a total lack of transparency. Everyone in the industry knows about it, but they don’t do anything about it”

Anonymous London agent

Other London boroughs, including Bexley and Ealing, either refused or failed to comply with our FOI request.

In a response dated 19 March, Bexley said it was “collating the information” and would provide it in “due course”. No information has subsequently been submitted. Ealing released a series of misnamed and duplicate Excel files.

Industry figures shown the responses by Property Week say they are not good enough.

“It’s taxpayer’s money. It should be relatively easy to track,” says First Base’s Jessup, incredulously.

A London agent, who prefers to remain anonymous, adds: “I’m actually surprised that they [some of the councils] have released the figures in the first place. There’s a total lack of transparency. Everyone in the industry knows about it, but they don’t do anything about it. I find it very depressing.”

In the dark

Ian Fletcher, director of policy at the British Property Federation, is also frustrated by the lack of transparency.

“At the end of the day, it shouldn’t be down to investigative journalists or individual citizens firing off FOIs to ascertain this information,” says Fletcher.

“The more transparent we can make this, the better for all those concerned – whether developers, communities or national government objectives.”

The hope is that the changes to the law governing CIL and Section 106, which came into force this month, will address the lack of transparency.

“If the removal of Regulation 123 results in the re-emergence of tariff-type obligations, untested through the examination process, then plainly this would subvert the principle of transparency”

Michael Hutchinson, Mayer Brown

However, many in the sector are sceptical. They argue that amendments to the law may just further cloud the issue. Their concerns relate to the removal of Regulation 123, part of the original CIL legislation that mandated councils to state how they intended to spend the money collected.

“If the removal of Regulation 123 results in the re-emergence of tariff-type obligations, untested through the examination process, then plainly this would subvert the principle of transparency,” says Michael Hutchinson, a partner at law firm Mayer Brown who specialises in regulatory compliance and development issues.

This will be “compounded by the removal of the requirement for a second round of public consultation on the charging schedule”, he adds.

‘Double dipping’

Changes to the law also give councils the ability to charge developers under both CIL and Section 106, leading some to speculate that ‘double dipping’ will become an issue.

“The people you’ll double-dip on are the bigger, wealthier developers,” says Robert Bruce, planning partner at the law firm Freeths, who adds that this is “a questionable approach”.

“[Local authorities] should be using the substantial Section 106 and CIL contributions for what they’re intended: delivering local community infrastructure and affordable housing”

Dean Clifford, Great Marlborough Estates

In defence of the local authorities that have failed to spend Section 106 and CIL contributions, large cuts to central government funding means they have to do more with much less. The savage cuts will amount to a £3.2bn gap in funding this year, according to the Local Government Association.

“At the centre of this are the local authorities, which are feeling the strain after nearly a decade of austerity measures and are keen to use the money to plug funding gaps,” says Dean Clifford, co-founder of Great Marlborough Estates. “But they should be using the substantial Section 106 and CIL contributions for what they’re intended: delivering local community infrastructure and affordable housing.”

Refunds available

It is also important to point out that some local authorities that have not spent the money they received from developers could well do so in the future.

There is a time limit imposed on when Section 106 payments need to be spent by and under the law, developers can negotiate to reclaim their contributions if the money has not been spent in the agreed time frame. Property Week’s analysis identified £7.4m in refund payments made between 2013 and 2018.

However, sources say many developers will not seek a refund even if it is due for fear of souring their relationship with a local authority in whose borough they might want to build again in future. It would also be bad publicity for developers that are keen to build better relationships with communities.

“Whether it’s a large-scale regeneration project or relatively small residential scheme, the strain on social infrastructure that comes with new homes is one of the primary drivers of Nimbyism across the UK”

Pete Ladhams, Assael Architecture

“Whether it’s a large-scale regeneration project or relatively small residential scheme, the strain on social infrastructure that comes with new homes is one of the primary drivers of Nimbyism across the UK,” says Pete Ladhams, managing director of Assael Architecture.

To stem that tide, he says local authorities need to “better utilise the contributions that developers make”.

As our investigation reveals, many are not doing that at the moment. But as far as the public are concerned, it is the developers that are seen as breaking promises rather than the councils.

Nobody is deluding themselves that the new legislation will win developers any sympathy when the truth emerges. But if it at least introduces greater transparency and accountability on the part of the local authorities that should be spending the money they receive, that would be a start.