New planning agreement policy blows away poor practice

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By Aaron Gadiel, Partner

The NSW Government has just released a new practice note for planning agreements. The planning regulations have also just been amended to require local councils to consider the new practice note when pursuing planning agreements.

The new practice note was published last week (on 12 February 2021) and is titled Planning agreements: Practice Note — February 2021.  It replaces the previous practice note issued in 2005.

Local councils are now under a new legal duty to consider the new practice note when negotiating (or entering into) a planning agreement.  Local councils are not required to strictly comply with the new practice note, but if they choose to depart from it the decision should be properly documented and justified.

Overall the new practice note is a positive document for development proponents.  It blows away some of the poor local council practices that have arisen (since planning agreements were first introduced in 2005).

Key changes include the following:

  • Value capture is given the thumbs-down.
  • An ‘acceptability test’ is laid down, but it should not create difficulties for planning agreements of the kind generally sought by property developers.
  • The examples where the use of planning agreements may be used are sensible — and generally align with the circumstances where developers may genuinely want to pursue a planning agreement.
  • Planning agreements can be considered in the context of ‘clause 4.6’ variation requests, but only in relation to the contribution to achieving a development standard’s objectives (not to ‘buy’ extra height or floor space).
  • New guidance is given making it clear that financial security may not be necessary where the agreement already has a clear link between the delivery of an obligation and the issue of a statutory certificate.
  • Planning agreements are not to be used as a general substitute for contributions plans.
  • Some changes are made to the process of negotiating planning agreements.

The balance of this article deals with these key changes in more detail.

Background — what are planning agreements?

Planning agreements are a special kind of agreement reached between developers and landowners (on one hand) and local councils and/or state government agencies (on the other).

Planning agreements are a hybrid legal document — a cross between a development consent and a commercial contract.

Unlike a conventional commercial contract, planning agreements must be considered, where relevant, when development applications are determined.  They are enforceable by third parties in the Land and Environment Court.  If registered on the land title, planning agreements bind future landowners (including mortgagees-in-possession) much like a development consent.

Unlike a development consent, there is no right of appeal to the Land and Environment Court because a local council:

  • refuses to enter into a planning agreement; or
  • is only willing to enter into an agreement in terms that are unacceptable to a developer.

The legislation has always anticipated that planning agreements must be ‘voluntary’.  They are defined in section 7.4 of the Environmental Planning and Assessment Act 1979 (the Act) as being ‘a voluntary agreement or other arrangement…’.

Similarly, the Act says that a planning agreement may only be imposed as a requirement via a condition of development consent ‘if it requires a planning agreement that is in the terms of an offer made by the developer…’ The Act also expressly says that a local council or planning panel cannot refuse to grant development consent because a developer has not offered a planning agreement.

As distinct from development applications, planning proposals (for a change to planning controls or a rezoning) can, in reality, be blocked if a planning agreement is not offered.  There is no appeal to the Land and Environment Court when this happens, although there may be opportunities to seek an ‘rezoning review’ from a regional/district planning panel or the Independent Planning Commission.  (The NSW government has announced an intention to legislate for a rezoning appeal right in the Land and Environment Court.  However, the proposed legislation has not been publicly released and there is no assurance on timing).

Unlike a development consent, the other parties to a planning agreement have an absolute right to veto any proposed modifications to the agreement.  There is no right of appeal to the Land and Environment Court.  This means that once a planning agreement is in place, the only checks-and-balances on the way that a local council or other agency behaves (under the planning agreement) must come from the terms of the planning agreement itself.  This means it is important that the terms of the agreement, as originally negotiated, properly anticipate the key scenarios that may later unfold.

Background —  how have planning agreements been used?

Developers typically will consider entering into planning agreements when:

  • a planning agreement is necessary to overcome some merit issue with a proposed development (eg an inadequate off-site intersection or the provision of an environmental offset);
  • there is no existing contributions plan and there is an unarguable need to supply a range of public infrastructure to accommodate a large development;
  • there is a need to commit to various land dedications (for schools, environmental conservation, roads, etc) in order to secure a rezoning; or
  • the planning/consent authority is saying that a proposed rezoning or development application will not progress (or progress well) unless a planning agreement is offered.

Developer industry groups have been critical of the way in which many local councils have been using (or misusing) planning agreements.  In essence, developer representatives have argued that (in many instances) planning agreements are being used to simply tax perceived profits, rather than overcoming infrastructure or conservation problems.  For example, many developers have found that once an offer is made, the Council may simply ask for more money — for example a 50 per cent share in any perceived increase in land value— and will threaten to otherwise stall or oppose the planning proposal entirely.

A planning agreement that is motivated by a desire to capture developer or landowner profits is informally called a ‘value capture’ deal.  Not all planning agreements have to be about ‘value capture’.  In fact, when they were first introduced almost all planning agreements were not about ‘value capture’.  Planning agreements were (originally) mostly about ensuring that adverse impacts from proposed development were appropriately controlled and mitigated.

The best succinct analysis of the problems with ‘value capture’ arrangements were set out in the Federal Government’s independent Henry Tax Review in 2010.  Some of the review’s findings were as follows:

  • In general, infrastructure charges will operate more effectively if they are set to reflect the cost of infrastructure, not to tax the profit of development.
  • Applying infrastructure charges through simple flat levies can sometimes reduce housing supply. Where the charge exceeds the cost of providing infrastructure, it acts like a tax and can discourage development. This is more likely to occur where the size of the charge is set relative to the developer’s capacity to pay (rather than the cost of infrastructure).
  • To operate effectively, value capture taxes need to isolate the increase in value attributable to the zoning decision or the new infrastructure (as opposed to general land price increases at the local level). This is often difficult since the value of land will move in anticipation of a change in rezoning. Sometimes this can occur many years before the rezoning.
  • A value capture scheme may encourage the public sector to generate revenue through additional zoning restrictions or delays in land release.
  • Where rezoning is linked to ‘value capture’, it is likely to stop land being developed to its most productive use — at least in the short run.

Value capture now officially given the thumbs-down

The new practice note includes the following fundamental principles:

  • ‘Planning authorities should always consider a development proposal on its merits, not on the basis of a planning agreement’.
  • ‘Planning agreements should not be used as a means of general revenue raising or to overcome revenue shortfalls’.
  • ‘Planning agreements must not include public benefits wholly unrelated to the particular development’.
  • ‘Value capture should not be the primary purpose of a planning agreement.’

The practice note explains what can happen if ‘probity and public interest are not considered’.  It says that ‘undesirable outcomes’ include the following:

  • ‘A planning authority seeks inappropriate benefits through a planning agreement because of opportunism or to overcome revenue-raising or spending limitations that exist elsewhere.’
  • ‘A planning authority takes advantage of an imbalance of bargaining power between the planning authority and developer, for example by improperly relying on its statutory position in order to extract unreasonable public benefits under a planning agreement.’

The new practice note explains that: ‘the use of planning agreements for the primary purpose of value capture is not supported as it leads to the perception that planning decisions can be bought and sold and that planning authorities may leverage their bargaining position based on their statutory powers’.

The practice note offers an example that a planning agreement ‘should not be used to capture land value uplift resulting from rezoning or variations to planning controls’.

Agreements propose contributions as either:

  • a monetary contribution per square metre of increased floor area; or
  • as a percentage of the increased value of the land,

are now officially frowned-upon.

Acceptability test

The practice note sets down an ‘acceptability test’ for new planning agreements.  The acceptability test requires that planning agreements:

  • ‘Are directed towards legitimate planning purposes, which can be identified in the statutory planning controls and other adopted planning strategies and policies applying to development’.
  • ‘Provide for the delivery of infrastructure or public benefits not wholly unrelated to the development’.
  • ‘Produce outcomes that meet the general values and expectations of the public and protect the overall public interest’.
  • ‘Provide for a reasonable means of achieving the desired outcomes and securing the benefits’.
  • ‘Protect the community against adverse planning decisions’.

This test does not, in our view, create difficulties for planning agreements of the kind generally sought by property developers.

Endorsement of use

The practice note specifically identifies a range of common situations where the use of planning agreements is endorsed:

  • In major development sites or precincts that are owned by a single landowner or a consortium of landowners.
  • Where the developer has a direct incentive, such as bringing forward potential development, to be involved in the delivery of community infrastructure.
  • Where the developer wants to provide community infrastructure in addition to, or at a higher standard than, what has been specified under the contributions plan.
  • Where a council and the developer negotiate a different and better or more innovative outcome than can be achieved through imposing direct or indirect contributions.
  • Where a proposed development has not been anticipated by local council and thus works and facilities to cater for this development have not been identified. A planning agreement can be prepared to specifically target the needs of the development.

Clause 4.6 requests

‘Clause 4.6’ is a mechanism that sometimes allows the variation of planning requirements as part of a development application process.  In very brief terms, clause 4.6 can be used to vary a development standard when its application would be unreasonable or unnecessary in a particular case.

The practice note recognises a role for planning agreements in the context of a clause 4.6 request.  The role is not to ‘buy’ extra floor space or height (see above).  The role can be to deliver a ‘benefit…[that works to] achieving the planning objective of the development standard’.  The planning agreement may help justify that the strict application of clause 4.6 might be unreasonable or unnecessary in the circumstances of the particular case.

The practice note explains that ‘it is appropriate that applications for more intensive development also consider opportunities for public benefit associated with development’.

It goes onto to say that planning agreements can be a vehicle to ensure that ‘adequate infrastructure is available to support the development’, but the local council ‘is not improperly relying on its statutory role to extract unreasonable contributions’.

In our view, for example, if a planning agreement is to be used to justify a variation in (say) a floor space ratio control, the planning agreement might need to address an infrastructure constraint that had led to the imposition of the existing floor space ratio maximum.  It should not need to do more than that.

Financial security

A key issue in many planning agreements is whether a financial security should be required.  In our experience, local councils often demand security (bank guarantees, bonds, etc) when it is unnecessary — as the delivery of planning obligations is commonly linked to the issue of statutory certificates (such as a constriction certification, subdivision works certificate, subdivision certificate or occupation certificate).  If the obligation is not delivered, the certificate cannot be issued.

Refreshingly, the practice note specifically deals with this issue.  It says that tying ‘the performance of the developer’s obligations to the issuing of construction, subdivision or occupation certificates may provide a suitable means of enforcing planning agreement obligations in some cases. ….  Where adopting this approach, consideration should be given to including provisions to allow a developer to provide a financial security, such as a bond or bank guarantee, if they subsequently seek release of a certificate before completing the required obligations (bold added).’

The key implication here is that financial securities may only be necessary when the link between the delivery of an obligation and the issue of a statutory certificate is broken.

No substitute for contributions plans

The new practice note says that planning agreements should not be used as de facto substitutes for contributions plans.

It says that where ‘there is need for public infrastructure across a development area with a range of landowners, a contributions plan is likely to be more appropriate because it simplifies transactions and is underpinned by clear strategic planning’.

This gives the thumbs-down to the practice of some local councils of deliberately refraining from making contributions plans (with a view to shoe-horning developers into standard form planning agreements).

Repetition of development consent matters

Refreshingly, the new practice note discourages the use of planning agreements ‘to require compliance with or restate obligations imposed by conditions of development consent’.

This directly criticises a not uncommon practice by some local councils.

More guidance as to the contents of ‘offer’ letters

The new practice note sets out what is expected in any letter of offer for a planning agreement.  (An offer letter sets out a developer’s initial position and is typically used by a local council to evaluate whether it wants to open negotiations).

In brief terms an offer should:

  • be in writing;
  • be addressed to the local council;
  • be signed by or on behalf of all parties to the proposed planning agreement other than the local council;
  • outline in ‘sufficient detail’ the mandatory matters required to be included in a planning agreement under the Act;
  • address in ‘sufficient detail’ any relevant matters required to be included in an offer as specified in any applicable planning agreements policy published by the local council; and
  • outline in ‘sufficient detail’ all other ‘key’ terms and conditions proposed to be contained in the planning agreement.

Many letters of offer have (in the past) not ticked all the above boxes.  Developers may find it desirable to ensure that their letters going forward do comply with the practice note in this regard.  (Mills Oakley is able to advise on, and prepare, letters of offer for its clients).

Registration on title

There may be some more paperwork, with the new practice note recommending that the developer should get the written agreement to the registration from each person with an ‘estate or interest in the land’ as a precondition to the execution of the planning agreement.

This is not generally required (at that stage) at present.  It will mean getting some formal authority from, say, secured financiers much earlier than previously required.  At present, many secured financiers will be reluctant to even look at a planning agreement until after it has been executed.

Transitional arrangements

The new practice note is not intended to affect proposed planning agreements that have already been substantially negotiated and publicly notified (before 1 July 2021).

Mills Oakley

Planning agreements generally require the skills of specialist planning and environment lawyers, given that:

  • third parties can enforce them in the Land and Environment Court;
  • planning agreements can impose obligations on non-parties when the agreement is registered on the title of the land;
  • a planning agreement that does not comply with planning law requirements may be struck down in the courts (sometimes to the disadvantage of a developer); and
  • planning agreements have to contemplate a range of potential statutory planning outcomes and appropriately manage those risks at a commercially acceptable level.

Mills Oakley’s Sydney planning and environment team advises many developers and landowners on planning agreements on a daily basis.   Please feel free to contact us if you think we can help.

For further information, please do not hesitate to contact us.

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