Welcome to the November 2009 edition of E-Gen the newsletter covering legal tips, topics and issues in Regeneration and Development.

If there are any particular issues that you would like more information on then please do let us know using the feedback section below.

Please select from the list below to view this editions articles:

In the last issue, we looked at managing disputes and deadlocks within joint ventures. We turn now to consider the means by which joint venture participants can conclude their involvement in a joint venture

Click here to read article>>

OGC Guidance on Development Agreements

In September's edition of E-Gen, we reviewed the relevance of the Procurement Regulations to development agreements entered into by local authorities (and other contracting authorities). OGC guidance on the matter following the French case of Roanne was expected and has now been published (see Information Note 11/09 dated 16th October).

Click here to read article>>

On 30 July 2009 the Department for Communities and Local Government published for consultation detailed proposals and draft regulations for the introduction of the Community Infrastructure Levy (CIL). The consultation finished on 23 October 2009.

Click here to read article>>

District heating and Combined Heat and Power ("CHP") schemes are rapidly becoming a staple feature in new developments. This briefing looks at some legal and practical headaches that these schemes can cause.

Click here to read article>>

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In the last issue, we looked at managing disputes and deadlocks within joint ventures. We turn now to consider the means by which joint venture participants can conclude their involvement in a joint venture.

As with dispute-resolution provisions, thinking about the termination of a joint venture and exit arrangements before it has even begun can be unpopular. However, joint ventures can come to an end for all sorts of reasons, and there is much to be gained from planning exit arrangements before a substantial financial commitment has been made and/or differences in approach arise.

There are three main routes out of a joint venture. One option is to negotiate a sale of interests held to a third party. The second is for a party to buy out the other party's interest or, alternatively, sell its own interest to the other participant (thus turning the joint venture into a business with a sole-owner). The third and most extreme option is to wind up the joint venture entirely, settling liabilities and selling associated assets in the process.

Sales to a third-party

From time to time, a joint venture participant may wish to sell its stake to a third-party. This might be appropriate where the participant's main role was to provide investment and no restrictions on transfer to others were imposed at the outset. In many joint ventures, however, the parties will be required to work closely together and will have chosen each other because of their particular identity and expertise. In these joint ventures, it may not be desirable to allow a new party to join in place of the outgoing party. As a consequence parties often agree at the outset to prohibit such transfers altogether, or instead require that the remaining party be offered the first opportunity to purchase the outgoing party's interest at the price no higher than that previously said to have been agreed with the third-party.

It may be that a third-party would rather acquire the whole joint venture. In the case of a 50:50 joint venture, this would normally require the cooperation and agreement of both participants. A party who owns a substantial interest in a joint venture may find itself in the frustrating situation whereby the other party is blocking the sale. For this reason, some joint venture agreements award each party drag along rights which can be used to force the other party to join in with the sale. Conversely, the parties may grant themselves tag along rights, which gives each the power to require the other party to include their interest in the sale too. Whichever approach is adopted, careful consideration needs to be given to timing and valuation of disposals.

Sales to other participants

In cases where one party is unwilling or unable to continue to participate in the joint venture, the other party may decide to buy that party out.

Subject to any contrary provisions, the parties to a joint venture may agree to such a sale whenever they wish. If a party anticipates such a sale when setting up a joint venture, it may wish to negotiate a put option (which is the right to sell one's interest) or a call option (which is the right to buy another's interest) or both. These options will usually run for a certain period of time and will either specify a price or detail how it is be calculated on a disposal. It is possible to draft a joint venture agreement that only gives these options to a party if the other party breaches some term of the agreement.

What happens if the parties cannot agree a sale? One solution that can be written into the joint venture agreement is known as a Russian Roulette mechanism. This involves party A offering to buy party B's interest for a quoted price. B must either accept that offer or purchase A's interest at that same price. Because A is not sure whether it will have to pay or receive this amount, this method aims to ensure that it will quote a fair price. It does assume, however, that A is fairly indifferent about whether it continues to operate the business or not. A slightly less drastic option, known as Texas Shoot Out mechanism, involves the parties making secret bids for each other's interests. Once the bids are opened by a third party, the most generous bid wins.

Winding up the joint venture

The final exit option is to wind up the joint venture entirely. This may be the preferred option when the joint venture has served its purpose, or the venture is terminated by reason of unforeseeable hurdles. It may be less desirable in other cases as the parties will only receive their share of the joint venture's assets and will lose out on any trading goodwill or gains associated with a finished product (such as a developed site).

Since it is a fairly draconian outcome, a mechanism entailing the winding up a joint venture should generally be drafted to require consensus as between the parties. If a limited company is used, a party can apply to the court for permission to wind up the company without agreement, but this is not guaranteed.

Following the exit

In any case where the ownership of a joint venture changes hands, there will be a number of additional concerns. For example, should the joint venture continue to use the intellectual property of its former shareholder? What will happen to any seconded employees? Should the parties be able to compete with each other, or with the joint venture? These are questions best resolved in drafting at the outset while the parties enjoy a good relationship.

Conclusion

There are a number of options available for those wishing to exit a joint venture arrangement. It is important to ensure that this eventuality has been planned for from the start. Although parties to joint ventures often resolve exit arrangements through agreement, even in cases of dispute, setting up an agreed framework in advance can ensure clarity between the parties is maintained and the risks and rewards associated with the venture properly managed.

For further information on this topic please contact Richard Tinham.

Richard Tinham - Partner

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020 7593 5165

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Joint Ventures: Exit Strategies

OGC Guidance on Development Agreements

Community Infrastructure Levy Consultation

CHP and District Heating Systems

Clarity or confusion?

In September's edition of E-Gen, we reviewed the relevance of the Procurement Regulations to development agreements entered into by local authorities (and other contracting authorities). OGC guidance on the matter following the French case of Roanne was expected and has now been published (see Information Note 11/09 dated 16th October). Whilst not pretending to be definitive or indeed comprehensive, the Guidance tries to help answer some of the questions that have been troubling local authorities and developers for some time. There is a sense however that this may be too little too late as the number and scope of procurement challenges increases and the EU position hardens. The Remedies Directive, due to come into force on the 20th of December, puts the risk of breach on the contractor as well as the authority as transactions can for the first time be set aside if a breach of the Regulations has occurred.

Key Questions

The Guidance identifies three key questions. If the answer to each of the questions is yes, it is likely the agreement will be subject to the Procurement Regulations.

1 – Is there a work or works required or specified by a contracting authority?

To elaborate, the Guidance draws distinctions between different kinds of arrangements and whether any works being carried out would be works required or specified by the authority. Developers' proposals for a site to be acquired from the authority, whilst these may have influenced the selection of a developer, will not amount to works being procured by the authority if the specification is broad rather than detailed and the developer's autonomy in approaching the development is preserved. Works consistent with a freeholder selling part of its estate, i.e. works protecting the authority's retained estate, will not be caught. Works ancillary or incidental to the transfer or lease of land or property will not lead to the contract being subject to the Regulations. Works to be undertaken pursuant to a section 106 agreement or envisaged in any planning permission are unlikely to be relevant but there are some clear dangers here depending on the degree and scope of such works, so much so that OGC has indicated that they are looking at issuing further guidance in this area.

2 – Is there an enforceable obligation (in writing) on a contractor to carry out that work or works?

A contract to carry out the works must be present. Whilst works which do not directly benefit the authority may still be works procured by the authority, there needs to be a clear mechanism for the authority to enforce an obligation on the developer to undertake them, with consequences for failure. Works required to meet a statutory function or purpose of the authority are likely to qualify. The reprovision of public facilities which the authority controls will tend to lead to a conclusion that works are being procured. The degree and method of control (and whether that is achieved as a consequence of a statutory provision or as a matter of contract) will be a factor. The contract can be found in two or more documents (the Principal Development Agreement and the Planning Agreement, say).

3 – Is there some pecuniary interest for carrying out the work (not necessarily a cash payment)?

The existence of payments to be made to or consideration received by the developer for the carrying out of the works will lead to a conclusion that works are being procured by the authority. This will include direct payments as well as contributions to project finance or guarantees. The existence of grant, whether provided by the authority or not, and the extent to which any price to be paid for land is dependent on the success of the development, will continue to make this question a difficult one.

Further background on this can be found in the September update.

Challenges going forward

As transactions become more complex and the EU more inclined to attack procurement regimes, questions about the applicability of the Procurement Regulations will continue to be difficult to answer. Decisions must be made on the facts of a particular situation and the overall purpose of a transaction will need to be examined. The hiving-off of contractual obligations is unlikely to save an arrangement being one which should otherwise be procured in accordance with the rules. As a guide however standard s106 obligations (with nomination arrangements for social housing, and specifications of finishes, layouts and detailed approvals all in the hands of the local authority) start to look suspicious.

Solutions

A number of us at Winckworth Sherwood are looking at arrangements to mitigate the negative effects of the Procurement Regulations and more detailed advice will be provided to clients.

The first and obvious point to make is that a competitive tender process is not made significantly more difficult or time consuming if it is procured in accordance with the Procurement Regulations provided the principles of fair treatment and transparency are observed. A well structured and appropriate procurement process will help authorities to maintain competition during the process and will give bidders comfort that the authority is committed to the outcome, information with which to make a decision about how and whether to bid and certainty that the contract is valid.

Bundling of projects and the use of frameworks may help to simplify and shorten the length of procurements. This can work well for specialist procurements, where there are a limited number of suppliers, or where there is a regular demand for services (in its widest sense). Authorities should be careful though not to over rely on frameworks and to assess whether a need can genuinely best be served by panel suppliers, particularly given the market distorting affects that frameworks can have over time.

Joint procurements and strategic partnerships are likely to feature more in the future provision of public services and facilities. Identifying the "what" rather than the "how" may increasingly become the question on the minds of public bodies. The pooling of resources and skills should lead to a better outcome. Authorities will however need to think carefully about how they maintain control, whilst preserving flexibility and the scope for innovation. A new breed of developer is already emerging that works seamlessly with the public sector and ensures that best procurement practice is achieved throughout the whole of the supply chain.

If it is not already, procurement will be a question on the minds of everyone involved in property development and management, where any part of the output is for the benefit of, or supports a function of, the contracting authority.

For further information on this topic please contact Andrea Squires.
 

Andrea Squires - Partner

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020 7593 5039

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Joint Ventures: Exit Strategies

OGC Guidance on Development Agreements

Community Infrastructure Levy Consultation

CHP and District Heating Systems

On 30 July 2009 the Department for Communities and Local Government published for consultation detailed proposals and draft regulations for the introduction of the Community Infrastructure Levy (CIL). The consultation finished on 23 October 2009.

The proposals and draft regulations set out how CIL will operate in practice. This briefing note summarises the key provisions and looks at how CIL will affect developers.

CIL

CIL will be a new charge that "charging authorities" in England and Wales will be empowered (but not required) to charge on new development in their area. CIL aims to ensure that owners and developers of land will fund infrastructure costs (in whole or in part) to support the development of an area in accordance with the development plan. Those authorities who prepare development plans are generally considered to be charging authorities. In London, the Mayor of London will also be a charging authority.

An up-to-date development plan must be in place before CIL can be charged for a particular area. Charging authorities can elect whether or not to charge CIL. Saved Unitary Development Plan or District Plan policies are not considered to be a satisfactory basis for implementing CIL and authorities with saved policies should complete their core strategy or local development plans.

Setting CIL

A charging authority must prepare a charging schedule which should allocate the proposed amount to be raised from CIL to each main class of development as set out in the development plan. Charging authorities will be able to set differential rates based on either the zone in which the development is situated or the intended use of development. When setting CIL, a charging authority must consider that part of the actual and expected estimated total cost of infrastructure required to support the development of the areas which it wishes to fund from CIL, taking into account other actual and expected sources of funding, and the potential effects of CIL on the economic viability of development in the area. Charging authorities will be required to consult on their charging schedules which will be examined by a CIL examiner in a hearing. A charging authority is not required to adopt the charging schedule but can submit new proposals for examination.

Application of CIL

CIL will be applied to fund infrastructure as defined in Section 216(2) of the Planning Act 2008. Infrastructure includes roads and transport, schools, medical facilities, sporting and recreational facilities, open spaces and affordable housing although the Government have made it clear that there is no intention to permit CIL to be used for affordable housing. In relation to London, transport infrastructure includes Crossrail. A charging authority may use CIL to reimburse expenditure already incurred on infrastructure.

How Liability will Crystallise

Liability to pay CIL arises when planning permission "first permits" the development. In the case of full planning permission, this is the date when permission is granted (or if subject to conditions requiring further approval the development is first permitted on the day of final approval of the conditions) and for outline permission, it is the date of final approval of the last reserved matters (or if the development is permitted in phases upon final approval of each reserved matters phase). Planning permissions granted under sections 70, 73, 73A, 77, 78 and 177 or a modification of planning permissions made under section 97, 100, 102 or 104 of the Town and Country Planning Act 1990 and a number of other regimes which grant permission for development will be liable for CIL. These include Local Development Orders, Enterprise Zones and Simplified Planning Zones and deemed permission secured through section 90 of the Town and Country Planning Act 1990 for Transport and Works Act development. Development consents under the Infrastructure Planning Commission process are also included.

Calculation and Payment of CIL

The amount of the CIL charge will be calculated upon grant of permission and at that point developers will be advised of the CIL liability. Charges will be calculated as pounds per square metre of gross internal floorspace. The Government chose this metric because it offers uniformity across all classes of development. Buildings and extensions will be exempt from CIL up to 100 square metres of gross internal floor space although the threshold will not apply in relation to one or more new dwellings. After 100 square metres, the whole development will be liable for CIL. CIL will also be charged on changes of use which require planning permission and some permitted development may incur CIL liability. The regulations set out a formula for calculating CIL as set out below:

Payment of CIL will be required within a fixed time of commencement and the Government is considering a 28 day payment window and the possibility of payment by instalments. For phased developments, each phase would pay CIL separately. In respect of liability, in the first instance it will be left for the person who wishes to assume liability to pay CIL to notify the charging authority (or any other appointed collecting authority) of their assumption prior to commencement. If no-one comes forward to assume liability it will default to the owners of the land.

Implementation of CIL

CIL is expected to come into force on 6 April 2010 but each charging authority will be able to decide for itself when and if it will introduce it. 

Enforcement of CIL

The Government proposes to register CIL liability as a Local Land Charge to ensure that future purchasers of the developed site are aware of outstanding liability. Charging authorities will also have powers to add interest and surcharges to CIL for late payment. CIL Stop Notices are also proposed as a means of enforcement.

Planning Obligations

The Government proposes to restrict the use of planning obligations to their original intention of mitigating the direct impact of development and, in particular, to secure delivery of affordable housing.

Winckworth Sherwood's View: Advice for Developers

• When acquiring sites for development, consider whether the site falls within an area where CIL is operative and whether there are any outstanding CIL charges.
• How will CIL affect the economic viability of the development?
• If a CIL charging schedule has not been adopted yet, investigate whether the Local Planning Authority intend to adopt one (and its intended timeframe) and seek legal advice on whether to secure planning permission before adoption
• Developers may need to think twice before implementing schemes to keep planning permissions alive just before expiry as this could trigger CIL liability

For further information on this topic please contact Sara Hanrahan.

Sara Hanrahan - Partner

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020 7593 5144

www.wslaw.co.uk

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Joint Ventures: Exit Strategies

OGC Guidance on Development Agreements

Community Infrastructure Levy Consultation

CHP and District Heating Systems

District heating and Combined Heat and Power ("CHP") schemes are rapidly becoming a staple feature in new developments. This briefing looks at some legal and practical headaches that these schemes can cause.

District heating is a system for distributing heat generated in a centralised boiler. A CHP scheme combines the generation of heat and power (usually in the form of electricity), by recycling the heat produced in the production of electricity and using it for heat and hot water. 

The driver behind these schemes is the potential for environmental gains, based on the principle that energy generated centrally on an estate is more efficient than a boiler in every home.

The origin of a district heating or CHP scheme usually lies in a planning obligation imposed by a Local Planning Authority on a developer. The knock-on effect is that if the developer has to install a central system, the provision of heating (and also power in the case of a CHP) becomes a function and obligation of the landlord or management company, depending on the management regime in place. As with any obligation on the landlord to provide services, the developer will be keen to ensure that obligations are imposed on leaseholders to pay for the supply of those services.

Covenants to take a supply

The premise of a district heating or CHP system is that it is dependent on a captive market. If the residents on the estate shop around for their supply, the scheme will not work.

In the case of a CHP, it is not possible for a landlord to oblige a leaseholder to purchase the electricity element from one source. A CHP scheme would ordinarily be linked to the National Grid and consumers have a right to choose who supplies their electricity. Therefore on a CHP scheme, the heating and electricity elements will have to be separated out.

The landlord will want to insert a tenants covenant into their leases which would prevent the leaseholders from taking a supply of heating and hot water other than from the central supply. This is slightly different from a positive obligation on leaseholders to purchase heating from the central supply, because you might always have a leaseholder who chooses not to heat their home and to wash in cold water. Alternatively, they could choose to heat their home with electric heaters.

Service Charge regimes

Providing heat and/or power through the service charge regime leads to a number of potential issues:-

(i)   Under s.20 Landlord and Tenant Act 1985 ("s.20"), where the landlord proposes to carry out any work of repair, maintenance or improvement which would cost an individual service charge payer more than £250, the landlord must formally consult with all those expected to contribute to the cost. The plant in a district heating or CHP scheme is invariably expensive and any repairs or alterations might well be caught by the statutory obligation to consult.

(ii)   Another effect of s.20 is that it interferes with the landlord's ability to enter into a long term contract with a third party to manage the scheme on its behalf, without also being caught by the statutory obligation to formally consult. Only contracts entered into for less than 5 years at a point when no leaseholders are occupying the building are exempt from the s.20 rules.

(iii)   Landlords are only entitled to collect service charges that are reasonable. The guiding principle of district heating and CHP systems is that they give greater efficiency, which should lead to favourable prices compared with buying energy on the open market. However, as these schemes are in their infancy, only time will judge whether this is the case, particularly given that there may be high capital costs involved in maintaining or replacing plant. If a leaseholder successfully challenges the reasonableness of costs, the landlord will subsequently not be able to recover them.

A solution to avoiding the above issues is to take the scheme outside of the service charge regime, by creating a separate contractual relationship to cover the supply of heating and power. An obligation can be placed on leaseholders (via a tenant's covenant in the lease) only to purchase their heating by entering a contract with a third party for the supply. That third party could even be the landlord, until such time as it sold the benefit of the contracts to another third party. Developers will want to ensure that their leases are drafted so that leaseholders are not able to sell their homes without ensuring that the new buyer also enters into a direct contract with the heating supplier.

Buyers concerns

Another issue stems from any concerns a buyer might have about being committed to purchasing heating from one source and therefore not being able to shop around. What if the scheme is not as efficient as the landlord had hoped?

A solution to this is to introduce a mechanism of pricing comparables. The landlord can commit to providing the supply within a price range that is linked to a basket of other market prices for an equivalent market supply. As an example, the landlord may commit to not charging a price which is higher than an average of the three leading domestic energy suppliers. The landlord should ensure that the comparable costs do not simply reflect the usage of power, but also includes the costs the leaseholders would have encountered, had they have had to service and renew their own equipment, such as boilers.

If the provision of energy has been delivered through the service charge regime, this approach should also overcome any issues of the reasonableness of the service charge. However, the downside to doing this is that if the landlord is unable to actually deliver the service within their commitment, it may not be able to recover the excess costs.

Housing Associations

Another set of buyers that may have concerns are Housing Associations. Where an Association takes a lease of a number of units at a development, for example under the terms of a s.106 Agreement, it might be uncomfortable with an obligation in the lease to pay for heating through the service charge or to enter into a separate contract with a third party. Whilst the Association can pass this obligation on to its own leaseholders and tenants, it leaves the Association taking the credit risk in the event that its own leaseholders and tenants do not pay. This will be an unattractive proposition to a number of Associations.

Where the supply of heating and power has been taken out of the service charge regime, a solution to overcoming such concerns would be for the Association not to take a direct responsibility for paying for the energy supply, but to accept an obligation that it would oblige its own leaseholders and tenants to enter into a contract direct with the third party supplier.  

For further information please contact William Rutter

William Rutter - Solicitor

Email William >>

020 7593 5256

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Home Page

Joint Ventures: Exit Strategies

OGC Guidance on Development Agreements

Community Infrastructure Levy Consultation

CHP and District Heating Systems