“Landmark” viability decision

A recent case - Parkhurst Road Limited v SoS for Communities and Local Government and the London Borough of Islington Council [2018] EWHA 991 (Admin) examined the viability assessment of a development and, in particular, the relevance of the purchase price when determining the amount of affordable homes it should provide.

A developer made several attempts to redevelop a former Territorial Army site in Holloway, London, for which they had paid the Ministry of Defence £13.25 million in 2013. In 2014, the London Borough of Islington (LBI) refused to grant planning permission for a scheme for 112 homes, 16 of them affordable, on the site.

In 2016, a further application for 96 homes, without any affordable housing, was refused. The developer appealed but the refusal was upheld by the planning inspector. The developer mounted a legal challenge in the High Court against the planning inspector’s decision.

The issue before the court related to affordable housing and the viability calculations for the development.

The LBI Core Strategy provides for a borough-wide 50 per cent affordable housing target. One of LBI’s reasons for refusing consent in 2016 was that the developer had “failed to demonstrate that the proposed development will provide the maximum reasonable amount of affordable housing taking into account the borough-wide strategic target of 50 per cent and the financial viability of the proposal”.

The developer argued that in view of the purchase price it had paid for the site, the project was financially unviable if a 50 per cent affordable housing provision was applied.

LBI countered that viability should be assessed according to the ‘EUV Plus’ (Existing Use Value with an added financial incentive for the seller) methodology, which resulted in a lower assumed land value and therefore a more profitable project for the developer. EUV Plus was consistent with the Mayor of London’s Supplementary Planning Guidance on Affordable Housing and Viability and also the draft London Plan. Both provide that EUV Plus is usually the most appropriate approach when determining viability for planning purposes.

LBI also argued that the “market value” approach of the developer to determine viability should only be considered in exceptional circumstances and the developer had failed to demonstrate that these existed.

The court dismissed the developer’s challenge. The planning inspector had been correct in agreeing with the LBI approach and in concluding that the developer’s proposals would not provide the maximum reasonable level of affordable housing in accordance with the relevant planning policies.

Viability assessments have been a cause of much controversy in recent years. Significantly, the judge in this case added a footnote: “The present case strikingly illustrates the importance of seeking to overcome uncertainty on how viability assessment should properly be carried out…”

The judge added that it might be an opportune moment for the RICS to reconsider its 2012 Guidance Note on Financial Viability and Planning to address any misunderstandings about market valuation concepts and the so-called ‘circularity’ issue, whereby developers seek to recover excess purchase prices by reducing affordable housing provision.