Southwark Council has waived a payment of £46.6m from developer Delancey in their legal agreement for the redevelopment of the Elephant & Castle shopping centre. The payment would have been made by Delancey in the event of Southwark having to take over the construction of the 116 social rented units in the scheme, but never found its way into the final s106 agreement
Delancey agreed to build the social rented homes in June 2018, after it failed to secure planning permission for the shopping centre's redevelopment at its first attempt, in January. Delancey also agreed that if they had not started building the homes themselves within ten years, they would provide the land and the money for Southwark, or a housing association, to do so instead.
This arrangement first appeared in a note about the 'heads of terms' of the legal s106 agreement', drafted by Delancey's planning consultant DS2, in June 2018 (LINK ADRIAN). The note said that if Southwark took over the work, Delancey would transfer the land 'and pay to the Council or a Registered Provider....'the sum of [£ ] for the purposes of construction and completion of the West Site Social rented Units', leaving the precise amount blank.
'Land and a sum of money'
The planning committee approved Delancey's scheme, including this arrangement, on 3 July 2018. The report said;
'The s106 agreement would therefore stipulate that if the development on the west site has not substantially commenced within 10 years of the east site commencing, the land and a sum of money sufficient for the construction and completion of the social rented units would be transferred to the council, to deliver the social rented units'. (OR364).
Come October 2016 words to this effect duly appeared in an early draft of the s106, saying that Delancey would transfer the land to the Council (or housing association) and '..pay to the Council or Registered Provider ...the sum of £46,636,200 (Forty six million, six hundred and thirty six thousand and two hundred pounds)'.
However, this whole clause was struck through, leaving the s106 without a cash figure for the payment and with Delancey are no longer paying the full construction costs. Instead, it would pay an unspecified amount, *'equal to the Social Rented Construction Costs...less the value of the Social Rented Value of the ...Units' (*ref).
SCREENSHOT OF BOTH VERSIONS HERE?
Further changes to the s106 followed and by December 2018 a simple arrangement, whereby Delancey transferred the land for the social housing and makes a specified cash payment to build it, had been transformed into three options. Option 1 is that Delancey build the units itself, for Southwark or a housing association to take on, the usual course under a s106 agreement. Options 2 and 3, require Southwark to meet upfront costs themselves (recouping these from selling or letting the non residential elements parts of the building) or getting a payment for the net social rent construction costs, the amount to be agreed or 'determined by the Specialist'.
From £46.6m to £1 (one pound)
Of the three options for delivering the social rented housing, Option 3 is of the most concern. This allows Delancey to simply transfer the land with a cash payment of £1 (one pound), with nothing else to be paid. (The logic behind this is that the value of the non-residential parts makes up for any lost payment) (AJ 56)
The situation becomes particularly alarming in the light of the appeal court judgement, which interpreted the phrase the land and a sum of money sufficient for the construction and completion of the social rented units" to mean not just the land in a physical sense, but also to include the value of the land. The judgement says that 'it is wrong to contend that the phrase....connotes a requirement for the council to receive the whole cost of constructing the social rented units, as well as the land'. (AJ 58) Not to include the value of the land would be 'artificial and unjustified' (AJ 60) and would otherwise amount to a 'windfall profit' for Southwark (AJ 58).
The court therefore ruled that it would be 'sufficient', under Option 3, for Southwark to receive just a £1, to build the social rented units, after taking account of the value of the non-residential floorspace. (AJ 59)
In this startling interpretation the court adopted the reasoning, not just of Delancey's barrister, but of Southwark's barrister, who joined his colleague representing the offshore, tax-avoiding property developer, in painting the 'sum of money', needed by a local authority to build social housing, as a windfall (CHECK QUOTE) they simply were not entitled to, under the terms of s106 and according to planning regulations (AJ 58).
Who will pay for the social housing?
This sorry story has a clear trajectory. At the beginning, Southwark were looking at getting over £46m, if it has to build the shopping centre development's social rented units itself. But then in the subsequent negotiations Southwark gave ground to such an extent that, in a worst-case scenario, it now faces getting nothing in cash terms. A simple arrangement, easily understood, with a clearly defined payment has become a complicated arrangement of three options, two of which are replete with arguable costs and values, and provide Delancey with ample opportunity to pass the cost of building the social rent back to Southwark.
This worst-case scenario for Southwark is of course a best-case scenario for Delancey - with clever work by lawyers and consultants it could be relieved of paying tens of millions in costs and given its track record, it can only be expected that this is what will happen. As a recent Sunday Times exposé has shown, Delancey are well versed in how to use the public purse to its own advantage, when it comes to affordable housing.
Even were this not to be the case, the question must be asked how has Southwark got itself into a position where this is even a possibility? S106 contributions, such as affordable housing, are developer contributions and should come at no cost to the borough, but as far as the shopping centre development is concerned, Southwark now looks as if it will be digging into its own pocket.....