QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| Parkhurst Road Limited
|- and -
|Secretary of State for Communities and Local Government
The Council of the London Borough of Islington
Mr Tim Buley and Mr Toby Fisher (instructed by GLD) for the 1st Defendant
Mr Daniel Kolinsky QC (instructed by London Borough of Islington) for the 2nd Defendant
Hearing dates: 6th and 7th of March, 2018
Crown Copyright ©
Mr Justice Holgate :
The 2015 public inquiry
"In this context I can understand the wider concern of the Council about the possible effect of inputting purchase prices which are based on a downgrading of the policy expectation for affordable housing on the eventual outcome of a scheme viability appraisal. If such prices are used to justify a lower level of provision, developers could then in effect be recovering the excess paid for a site through a reduced level of affordable housing provision. Such a circularity has been recognised in research for the RICS, and the Council in its SPD and the GLA (in its Development Appraisal Toolkit Guidance Notes of 2014) are alive to this potential outcome of using purchase price as an input in viability assessment. The Council postulates an undesirable scenario of diminishing returns of affordable housing and eradication of the potential to achieve its delivery. It argues that the current appeal is an opportunity to return to a proper approach."
This "circularity," or self-fulfilling prophecy, became a central issue at the inquiry in 2017 which led to the decision now being challenged. The issue may also arise where an actual purchase price is inflated because of overly optimistic expectations about the amount of development for which planning permission might be granted in due course.
The 2017 public inquiry
(i) The bid process in 2013 and the purchase price paid;
(ii) A "Red Book" valuation of market value for the site;
(iii) An unsolicited, unconditional offer for the site;
(iv) Analysis of comparable transactions.
This was substantially the same approach as PRL had relied upon in the 2015 inquiry (paragraphs 41 to 64 of PRL's opening submission).
"48. Whilst I attach limited weight to the Red Book exercise, which is required to be in accordance with professional standards, it is a market valuation which does not, in my view, adequately demonstrate proper consideration of, or give adequate effect to, the guidance in PPG or the requirements of the development plan. I do not accept the appellant's position that the level of affordable housing provision is not relevant to determining land value, as any notional willing land owner is required to have regard to the requirements of planning policy and obligations in their expectations of land value. It is unknown what the expectations of the MoD were in this case, but it would obviously not refuse bids above that expectation.
49. The appellant's case relies to a large extent on the fact that the development plan does not require 50% affordable housing provision on individual sites. However, reliance on policy compliance at any level of provision underplays the strong policy imperative to ensure the 'maximum reasonable' provision with the strategic target in mind. The clear and unambiguous policy position, clarified by the guidance contained in the Council's Development Viability SPD is that 50% affordable housing provision is the starting point and that any provision below that level, whilst capable of being policy compliant, will require robust justification."
Planning policies and related documents
National Planning Policy Framework
"To ensure viability, the costs of any requirements likely to be applied to development, such as requirements for affordable housing, standards, infrastructure contributions or other requirements should, when taking account of the normal cost of development and mitigation, provide competitive returns to a willing land owner and willing developer to enable the development to be deliverable."
National Planning Practice Guidance
"How should the viability of planning obligations be considered in decision-taking?
In making decisions, the local planning authority will need to understand the impact of planning obligations on the proposal. Where an applicant is able to demonstrate to the satisfaction of the local planning authority that the planning obligation would cause the development to be unviable, the local planning authority should be flexible in seeking planning obligations.
This is particularly relevant for affordable housing contributions which are often the largest single item sought on housing developments. These contributions should not be sought without regard to individual scheme viability. The financial viability of the individual scheme should be carefully considered in line with the principles in this guidance." (emphasis added)
The NPPG is similar in effect to provisions in local policies which place the responsibility on the developer to demonstrate non-viability (see paragraph 41 et seq below). No doubt this reflects the point that in cases where viability is in issue, the developer is effectively asking to be allowed to depart from normal policy requirements and, in any event, is normally well placed to provide information on viability which can then be tested.
Central to the consideration of viability is the assessment of land or site value. Land or site value will be an important input into the assessment. The most appropriate way to assess land or site value will vary from case to case but there are common principles which should be reflected.
In all cases, land or site value should:
- reflect policy requirements and planning obligations and, where applicable, any Community Infrastructure Levy charge;
- provide a competitive return to willing developers and land owners (including equity resulting from those wanting to build their own homes); and
- be informed by comparable, market-based evidence wherever possible. Where transacted bids are significantly above the market norm, they should not be used as part of this exercise." (emphasis added)
"Competitive return to developers and land owners
The National Planning Policy Framework states that viability should consider "competitive returns to a willing landowner and willing developer to enable the development to be deliverable." This return will vary significantly between projects to reflect the size and risk profile of the development and the risks to the project. A rigid approach to assumed profit levels should be avoided and comparable schemes or data sources reflected wherever possible.
A competitive return for the land owner is the price at which a reasonable land owner would be willing to sell their land for the development. The price will need to provide an incentive for the land owner to sell in comparison with the other options available. Those options may include the current use value of the land or its value for a realistic alternative use that complies with planning policy." (emphasis added)
The London Plan (March 2016)
"Developers should provide development appraisals to demonstrate that each scheme provides the maximum reasonable amount of affordable housing output."
Islington Core Strategy and Development Viability SPD
"It is therefore not the case that any level of affordable housing provision between 0 and 100% can be assumed to potentially be acceptable from the outset, without reference to viability testing the application site under the terms of this guidance including an acceptable benchmark. The use of such an assumption as a basis for determining land value, which is then applied as a fixed input within a viability assessment, is not evidence of a genuine viability constraint but, as noted above, is the result of a circular approach which has the potential to pre-determine and distort the outcome of the viability assessment process."
The Developer's responsibility
RICS Professional Guidance: Financial Viability in Planning
"Site Value should equate to the market value subject to the following assumption: that the value has regard to development plan policies and all other material planning considerations and disregards that which is contrary to the development plan."
"Market value" is defined as:
"The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgably, prudently and without compulsion."
This is essentially the same explanation as that given by Hoffmann LJ in IRC v Gray. The RICS's definition of site value is consistent with paragraph 023 of the NPPG (see paragraphs 38 to 40 above).
"A viability appraisal is taken at a point in time, taking account of costs and values at that date. A site may be purchased some time before a viability assessment takes place and circumstances might change. This is part of the developer's risk. Land values can go up or down between the date of purchase and a viability assessment taking place; in a rising market developers benefit, in a falling market they may lose out.
A developer may make unreasonable/over-optimistic assumptions regarding the type and density of development or the extent of planning obligations, which means that it has overpaid for the site."
"Sale prices of comparable development sites may provide an indication of the land value that a landowner might expect, but it is important to note that, depending on the planning status of the land, the market price will include risk-adjusted expectations of the nature of the permission and associated planning obligations. If these market prices are used in the negotiation of planning obligations then account should be taken of any expectation of planning obligations that are embedded in the market price, or valuation in the absence of a price. In many cases, relevant and up-to-date comparable evidence may not be available, or the diversity of development sites requires an approach not based on direct comparison."
Box 13 summarises the position by stating that even limited comparable evidence is important for establishing site value, provided that it is "appropriate".
"Para 4.4 of the RICS Valuation Information Paper 12 states "Generally, high density or complex developments, urban sites and existing buildings with development potential, do not easily lend themselves to valuation by comparison. The differences from site to site (for example in terms of development potential or construction cost) may be sufficient to make the analysis of transactions problematical. The higher the number of variables and adjustments for assumptions, the less useful the comparison."
Housing Supplementary Planning Guidance
"On balance, the Mayor has found that the 'Existing Use Value plus' approach is generally most appropriate for planning purposes, not least because of the way it can be used to address the need to ensure that development is sustainable in terms of the NPPF and Local Plan requirements, he therefore supports this approach. The 'plus' elements will vary on a case by case basis based on the circumstances of the site and owner and policy requirements. "
"4.1.5 A 'Market Value' approach is only acceptable where, in line with the NPPG the value reflects all policy requirements and planning obligations and any CIL charges. Recent research carried out by RICS found that the 'Market Value' approach is not being applied correctly and "if market value is based on comparable evidence without proper adjustment to reflect policy compliant planning obligations, this introduces a circularity, which encourages developers to overpay for sites and try to recover some or all of this overpayment via reductions in planning obligations" (RICS 2015 p 26). Thus, a market value approach should only be accepted where it can be demonstrated to properly reflect policy requirements and take account of site specific circumstances. In many cases this will require an adjustment of market comparables to take account of policy compliant planning obligations."
Islington LBC – Development Viability SPD
- "The full facts of past transactions are rarely available and bids for land may have overestimated actual value.
- There is potential for transactions to not fully reflect current planning policy requirements such as those relating to affordable housing and density, as required by PPG in all cases.
- Sites may have a differing 'inherent' value depending on the presence or absence and nature of income generating existing uses.
- Land transactions are typically based on assumptions of growth in values (whereas viability assessments are normally based on current values).
- Transactions may relate to sites of different sizes, densities, mix of uses and costs to facilitate development.
- Reliance on transactions that are not comparable, that do not reflect the Development Plan policies as they relate to the application site, or that are based on assumptions of growth may lead to inflated site values. This would restrict the ability to secure development that is sustainable and consistent with the Development Plan."
Consequently, paragraph 6.61 states that it is vital that transactions are "genuinely comparable and that they reflect planning policy."
A summary of the issues between the parties in these proceedings
LBI's case at the 2017 Inquiry
i) PRL's use of market evidence to appraise site value did not make necessary adjustments for differences between comparables and the assumptions required to be made for the appeal site applying paragraph 023 of the PPG and RICS guidance;
ii) PRL's revised site value of £11.9m should be rejected;
iii) PRL's proposal of 10% affordable housing was inadequate because its estimate of BLV was unsound.
In their conclusions (paragraph 302 to 306), LBI submitted that PRL had not shown that the proposal provided the maximum reasonable amount of affordable housing and so the appeal should be dismissed.
i) Although sensitive to small changes in inputs, a residual valuation has the potential to provide a "helpful signpost" for what the BLV should be, particularly in the valuation of complex sites for which comparable evidence is hard to come by;
ii) The range of residual land values is a relevant part of the evidence base for testing the BLV's adopted by each side at the inquiry;
iii) During the inquiry, Mr Jones, LBI's valuer, had substantially revised his residual valuation downwards to £2.4m, with the consequence that it no longer "actively support[ed] his BLV of £6.75m, but that did not mean that residual land values had ceased to be a material part of the overall evidence base;
iv) When CBRE's residual valuation relied upon by PRL was adjusted to provide 50% affordable housing instead of an assumed 16%, the residual land value was £7.32m, very much closer to Mr Jones's BLV of £6.75m;
v) But care must be taken to avoid misusing residual appraisals. Because PRL's expert valuer, Mr Fourt, had inappropriately continued to use a BLV of £13.26m as a fixed input in those appraisals, as the development capacity of the site had been progressively reduced, so the affordable housing proportion had been artificially diminished. Instead, the proper approach was to reassess site value by taking proper account of both development capacity and policy requirements as inputs.
i) It is necessary to look for comparable evidence as close as possible to that which is being valued, to ascertain the circumstances of those transactions, and make appropriate and transparent adjustments to reflect (a) differences from the appeal site and (b) the assumptions required by paragraph 023 of the PPG and the RICS Guidance Note. Whether evidence can properly be regarded as comparable can be affected by difficulties in making such adjustments, including the extent to which a market bid has disregarded or diminished the effect of planning policy requirements (paragraphs 125 to 130);
ii) No weight could be placed upon the price paid for the site in 2013 in different market conditions and with inflated expectations as to the development capacity of the site. The development appraisal which would have been prepared by PRL to inform its bid for the site had not been produced to the inquiry (paragraphs 133 to 143);
iii) There was insufficient information on the factors which had informed competing bids for the site in 2013 (eg. site capacity or level of affordable housing) and so no sensible conclusions could be drawn from this material (paragraphs 144 to 151);
iv) No weight could be placed on the unsolicited offer in May 2015 by an unsuccessful bidder in the 2013 sale because of the absence of any information on the assumptions which had informed that offer (paragraph 152);
v) CBRE's residual valuation approach undermined PRL's case and supported LBI's position for reasons summarised in paragraph 73(iv) above (paragraphs 153 to 155);
vi) Mr Fourt's attempt to identify "market norms" for deriving land value from 27 transactions was of no use. A good many of the sites were not remotely comparable. Some did not involve the application of relevant planning policies. The range of factors affecting the sites prevented the making of meaningful comparisons with the appeal site (paragraphs 156 to 162). Mr Kolinsky showed the court paragraphs 6.4 to 6.8 of Mr Fourt's proof which stated that his analysis of the 27 transactions in Islington between 2010 and 2016 had been "deliberately high level". It made no adjustments for planning permission, location, planning obligations or site specific development costs. The exercise simply involved averaging all this high level data and stating that the level of affordable housing provided had been 16% on average. A second exercise which adjusted for land price inflation but which otherwise averaged the data set produced similar answers;
vii) Mr Fourt's five "key comparables" did not, as a set, provide a reliable foundation for drawing conclusions on the value of the appeal site, given the differences between them although the Coppetts Wood Hospital site was "more promising" (paragraphs 163 to 170). Mr Kolinsky showed the court those parts of Mr Fourt's evidence which dealt with this material so as to confirm that he made no adjustments to deal with, for example, differences between the sites. However, LBI submitted to the Inspector that analysis of three of the sites more closely comparable to the appeal site produced figures for land value much nearer to LBI's assessment than PRL's, even before making any other necessary adjustments (eg. for high EUVs) which might well have reduced the analysed land value further (paragraphs 171 to 175);
viii) LBI relied upon 351 Caledonian Road because of its comparability to the appeal site in terms of location and size and submitted that it indicated a land value for the appeal site of £6.432m (paragraphs 176 to 192);
ix) A pattern of evidence supported Mr Jones's opinion that the BLV was £6.75m, namely the winning bid for the site even if adjusted solely for development capacity (£8.32m), 351 Caledonian Road (£6.432m) and a per unit analysis of Mr Fourt's 3 best comparables (using figures accepted by Mr Fourt), subject to the need for further adjustments (paragraph 193).
A summary of the 2017 decision letter
"In this case, the appellant has not provided as evidence the assumptions made in its viability appraisal supporting its winning bid for the site and this information is also unavailable for the other bidders, or any other 'comparable' site identified. Therefore, I treat the market evidence provided with some caution. That is not to diminish the importance of market evidence as a key consideration in determining land value, but it must be truly comparable and meet the other aspects of PPG guidance at paragraph 023 on viability."
That conclusion underlay the remainder of the Inspector's reasoning on the BLV issue. It should be noted that Mr Harris QC did not seek to challenge it. Indeed, it could not be challenged.
"Having engaged with market evidence, something that it failed to do in the previous appeal, the Council consider that a value of £6.75m is the appropriate BLV, including a significant uplift above the EUV, and representing the Plus element of the EUV Plus approach."
This confirms that the Inspector correctly understood the way in which LBI had used the EUV Plus method in accordance with paragraph 3.4.1 of the RICS Guidance Note. DL 40 does not suggest any inconsistency in the Inspector's reasoning. He considered that the EUV Plus method, in the manner applied here, was an appropriate method in this case and preferable "to a purely market value approach, allowing for value to have regard to the market as a consideration, rather than the determining factor" (emphasis added). In that paragraph the Inspector was referring to his criticisms of PRL's purely market based approach, which he had already rejected in DL 31 to 36.
The Inspector's comments on using units of accommodation to compare land prices
"this attributes value to the affordable housing units (where provided) and it is agreed between the parties that the commercial value of these is limited. It can, therefore, have the effect of artificially reducing land or site values when comparing sites that provided affordable housing against those that did not."
"The appellant seeks to discount the affordable housing units and divide the land value by the number of market units but this has the result of inflating the unit prices on schemes that have provided larger proportions of affordable housing, incorrectly giving an impression of higher land value. As the full circumstances that led to the various levels of affordable housing on other sites is unknown, neither of these methodologies is of particular value"
"A more reliable comparison is the Council's methodology, which assumes a 50% affordable housing contribution for all transactions analysed (as the starting point in policy) and to divide the land purchase price by the remaining 50% market dwellings. Whilst actual affordable housing provision on various sites differs, this can be assumed to account for downward revisions from 50% affordable housing provision in light of site specific circumstances evidenced in those individual planning applications. Therefore, this method allows a comparison across sites without being affected by differing levels of affordable housing provision and avoids importing assumptions and circumstances from other sites that do not apply to the appeal site." (emphasis added).
"These matters alone render the submitted [unilateral undertaking] incapable of securing an appropriate review mechanism, were the appeal to succeed."
This freestanding basis for the dismissal of the appeal constitutes a separate reason as to why the decision should not be quashed because of the legal error identified above.
Whether there was an internal inconsistency in the decision letter
Adequacy of reasons
Coppetts Wood Hospital
52 Tollington Way
"The Tollington Way scheme is in Islington but provided in excess of 50% affordable housing so this does not alter my conclusions on the appeal site"
PRL complains that the italicised words involved a non-sequitur and inadequate reasoning.
Outcome of the claim
Addendum: Extracts from the 2017 decision letter.
(i) Reflect policy requirements and planning obligations and, where applicable, any Community Infrastructure Levy charge;
(ii) Provide a competitive return to willing developers and land owners (including equity resulting from those wanting to build their own homes); and
(iii) Be informed by comparable, market-based evidence wherever possible. Where transacted bids are significantly above the market norm, they should not be used as part of this exercise.
Affordable Housing Conclusion