If a section 106 agreement contains various triggers for the payment of a financial contribution in instalments, can the developer pay the full contribution in one early instalment?

First published by Lexis Nexis Planning

United Kingdom Publication February 2023

1. Payment in instalments

1.1. 

Section 106 Town and Country Planning Act 1990 provides a mechanism for the giving of planning obligations by a developer to a local planning authority, to mitigate the effect of a proposed development. Those obligations can include financial contributions, which can be paid “on a specified date or dates or periodically.” Section 106(1) provides as follows:

(1) Any person interested in land in the area of a local planning authority may, by agreement or otherwise, enter into an obligation (referred to in this section and sections 106A and 106C Schedule 7A as “a planning obligation”), enforceable to the extent mentioned in subsection (3)—
(a) restricting the development or use of the land in any specified way;
(b) requiring specified operations or activities to be carried out in, on, under or over the land;
(c) requiring the land to be used in any specified way; or
(d) requiring a sum or sums to be paid to the authority (or, in a case where section 2E applies, to the Greater London Authority) on a specified date or dates or periodically.” [emphasis added] 

1.2. It is therefore clear, that financial contributions can lawfully be paid in instalments.
1.3. Where financial contributions are payable in instalments, a section 106 agreement will identify the trigger for the payment of the respective instalments; common triggers are on “Commencement of Development”, and “On Occupation”, as well as on the anniversaries of Commencement, or a period of months (e.g. 6 months) prior to Occupation. Payments can also be linked to practical completion or occupation of various aspects of the development e.g. on Occupation of the 50th residential unit. It would be usual for all financial contributions to be payable before the final unit of occupation is occupied, or on practical completion of the final unit. Once the final unit of occupation has been completed and sold then the local planning authority has significantly less leverage over the developer to secure delivery of obligations. 
1.4. It would also be usual for a section 106 agreement to include a catch-all obligation, where payment of a financial contribution is made in instalments, so that e.g. Occupation cannot occur until all the instalments have been paid.
1.5. Section 106 agreements that include the payment of financial contributions will usually also include indexation provisions, requiring a financial contribution to be index linked (usually) from the date of completion of the agreement to the date of payment of the contribution. Occasionally an earlier trigger is used if this is supported by adopted policy. Common indices used are the Retail Prices Index, and the Consumer Prices Index. Other indices may be used for highway related contributions. The purpose of indexation is to put the recipient of the contribution into the position that they would have been in if the contribution had been received at the date that indexation is to run from, i.e the indexation sum protects the recipient from the effects of cost rises and inflation, ensuring that the contribution is still worth the same at the date of payment as it was worth at the date that indexation is to run from.  
1.6. Notwithstanding the index used, the indexation sum to be added to the principal contribution sum can be significant. For this reason, if cash flow allows for it, some developers may prefer to pay a contribution before the trigger identified in a section 106 agreement to avoid paying as much in indexation.
1.7. In this scenario, the developer is nonetheless fully compliant with the terms of the section 106 agreement. The agreement will usually require payment of an instalment by or no later than or on or before a trigger date e.g. 6 months prior to Occupation; alternatively the obligation may be worded not to Occupy the 50th residential unit unless the contribution has been paid. If the developer pays an instalment or the entire contribution 9 months prior to Occupation, or before Occupation of the 25th residential unit, then it has nonetheless still paid it, as a matter of fact, 6 months prior to Occupation, or before the 50th residential unit is Occupied, which will accord with the terms of the agreement. It would be very unusual for a trigger to be drafted so that an instalment can only be paid on a fixed trigger date so that it would be a breach of the agreement if it was paid early, in which case the recipient would be obligated to refuse receipt and return the funds.  



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