Drop The Pilot: Community Land Auctions

Hey let’s get Joan Armatrading on the Walkman. We’re going back – way back…

The Levelling-up and Regeneration Bill had its first reading in the House of Commons over a year ago on 11 May 2022. It’s not just intervening political chaos which has caused this slow-moving caravan of disparate policy notions to lurch from side to side with occasional abrupt halts Along the way additional bright notions have been loaded onto it, impeding progress still further. 

One of those notions is the old chestnut of community land auctions. Clauses 127 to 137 were added to the Bill in November 2022 without prior consultation, once Michael Gove became Secretary of State, so as to allow community land auctions to be piloted for ten years. 

Many of you will remember economist Tim Leunig promoting the idea back in the early days of the Coalition Government. See for instance Tim Leunig’s blog post Housing is expensive in Britain. This is because we have built too few houses for the number of new households – land auctions will help give us the homes we need (LSE, 23 March 2011). In fact some of you may even have been at an event I hosted back then where we had a discussion around a swanky breakfast table at the firm I was then at, with property and planning people quizzing him as to how it would actually work. Leunig is now Gove’s senior policy advisor at DLUHC. 

CLAs are of course catnip to many political types and economists, for instance supported by Policy Exchange (see eg Alex Morton’s 2013 paper A Right To Build) and the YIMBY Alliance, as part of the wider thinking on land value capture (see eg my 20 May 2017 blog post Money For Nothing? CPO Compensation Reform, Land Value Capture). My conclusion remains that the introduction of community land auctions would inevitably be harmful to the principled operation of the planning system – it’s just too darned complicated – and to the delivery of development in the right places – for instance it introduces a huge conflict of interest for the local planning authority as between whether to plan for the best places or the best returns. In my view primary legislation to allow for a pilot is premature. If there are excess unearned gains for the state (in addition to what is already extracted via the planning system), why not just openly tax them rather than embark on this three cup trick?

The current concept is set out in pages 125 to 133 of the Explanatory Notes to the Bill

Clause 127 (3) of the Bill:

A “community land auction arrangement” means an arrangement provided for in CLA regulations under which

(a) a local planning authority is to invite anyone who has a freehold or leasehold interest in land in the authority’s area to offer to grant a CLA option over the land, with a view to the land being allocated for development in the next local plan for the authority’s area,

(b) any CLA option granted under the arrangement ceases to have effect if the land subject to the option is not so allocated when that plan is adopted or approved (unless the option has already been exercised or been withdrawn or otherwise ceased to have effect), and

(c) the local planning authority may—

(i) exercise the CLA option and dispose of the interest in the land to a person who proposes to develop the land, 

(ii) exercise the CLA option with a view to developing the land itself, or

(iii) dispose of the CLA option to a person who proposes to exercise it and then develop the land.”

Clause 128: “Power to permit community land auction arrangements

(1) This section applies where—

(a) the Secretary of State directs that a local planning authority which is to prepare a local plan may put in place a community land auction arrangement in relation to that plan, 

(b) the local planning authority resolves to do so (and that resolution has not been rescinded), and

(c) the community land auction arrangement has not come to an end.

(2) The local plan may only allocate land in the authority’s area for development—

(a) if the land is subject to a CLA option or a CLA option has already been exercised in relation to it, or

(b) in circumstances which are prescribed by CLA regulations.

(3) Any financial benefit that the local planning authority has derived, or will or could derive, from a CLA option may be taken into account—

(a) in deciding whether to allocate land which is subject to the option, or in relation to which the option has been exercised, for development in the local plan;

(b) in deciding whether the local plan is sound in an examination under Part 2 of PCPA 2004.

(4) CLA regulations may make provision about how, or to what extent, any financial benefit may be taken into account under subsection (3) (including provision about how any financial benefit is to be weighed against any other considerations which may be relevant to whether the land should be allocated for development in the local plan or to whether the plan is sound).”

Receipts are to be used to support development in an area by funding infrastructure and paying for the administration of the community land auctions process. 

The provisions were debated in House of Lords Committee on 18 May 2023 (the relevant part of the debate starts from amendment 364B) and it might put some flesh on the bones to see how a Government minister, Earl Howe, explains how it is all intended to work:

“Community land auctions are an innovative process of identifying land for allocation for development in a local planning authority’s area in a way that seeks to optimise land value capture. Their aim is to introduce transparency and certainty by allowing local planning authorities to know the exact price at which a landowner is willing to sell their land. The crux of our approach is to encourage landowners to compete against each other to secure allocation of their land for development in the local plan by granting a legally binding option over their land to the local planning authority.

The competitive nature of community land auction arrangements incentivises landowners to reveal the true price at which they would willingly part with their land. If the land is allocated in the local plan upon its adoption, the local planning authority can sell the CLA option, keeping the amount that the successful bidder has paid and capturing the value that has accrued to the land as a result of the allocation. The successful bidder must then pay the price set out by the original landowner in the option agreement to purchase the land. The detailed design of community land auction arrangements will be set out in regulations that will be subject to the affirmative procedure.”

“…sustainable development remains at the heart of our approach. Piloting authorities will decide which land to allocate in their emerging local plans by considering a range of factors, which the Government will set out in guidance. Unlike conventional local plans, when allocating sites, local planning authorities will be able to consider the financial benefits that they are likely to accrue from each site. How, and the extent to which, financial benefits may be taken into account will be determined in regulations. Importantly, the existing requirement to prepare local plans, with the objective of contributing to the achievement of sustainable development under Section 39 of the Planning and Compulsory Purchase Act 2004, will remain.

We are not altering the existing local plan consultation and examination process. Piloting authorities will still be required to consult on the proposed land allocations in their draft local plans, before they are submitted and independently examined in public in accordance with the local plan preparation procedures, as modified by Schedule 7 to the Bill.

… the Secretary of State is required to lay a report before each House of Parliament on the effectiveness of the pilot within the timeframe set out in Clause 134(2). There is a requirement to publish this report, which means that it will be publicly accessible and available to any combined authority that was involved in the pilot.

The noble Baroness, Lady Taylor, asked about whether there had been prior consultations. We will consult on community land auctions shortly, and taking part in the pilot will be voluntary for local authorities. We need the powers in the Bill to enable the pilot to happen.

I appreciate the thought behind my noble friend’s Amendment 366. However, as community land auctions are a new and innovative process for identifying land for allocation for development, our view is that it is right that the Bill makes provision for them to be piloted on a strictly time-limited basis.

If community land auction arrangements are deemed successful, and if there is ambition to extend the approach, further primary legislation would be required to implement them on a permanent basis. As we do not have the evidence about their effectiveness yet, we think it right that the Bill does not include provisions that could make CLAs a permanent fixture. Instead, the Government will take a decision at the relevant point in the future, based on the evidence.”

“The simplest way I can describe this is that community land auctions will be a process of price discovery. In the current system, local planning authorities have to make assumptions about the premium required by a reasonable landowner to release their land for development. For Section 106 agreements, this manifests itself through viability negotiations between the local planning authority and a developer. As these can be negotiated, there is a higher risk that, in effect, higher land prices lead to reduced developer contributions, rather than contributions being fully priced by developers into the amount that they pay for land.

For the community infrastructure levy and the proposed infrastructure levy, a levy rate is set for all development within certain parameters. When setting rates, the local planning authority has to calculate how much value uplift will occur on average, and has to make assumptions about landowner premiums and set a levy rate on that basis. The actual premium required by individual landowners will not be available to local planning authorities and will vary depending on individual circumstances. If the local planning authority makes an inaccurate assumption about landowner premiums, they may either make a lot of sites unviable by setting too high a levy rate, or else they will collect much less than they might have done otherwise by setting too low a levy rate.

Under the CLA process, landowners bid to have their land selected for allocation in an emerging local plan, as I have described, by stating the price at which they would willingly sell their land to the LPA for development. The offer from the landowner, once an option agreement is in place with the LPA, becomes legally binding. The LPA can either exercise it themselves, thereby purchasing the land, or auction it to developers. The competitive nature of CLAs incentivises landowners to reveal the true price at which they would willingly part with their land. If they choose to offer a higher price, they risk another piece of land being allocated for development, in which case they will not secure any value uplift at all.”

But if you’re regularly involved in local plan making and/or the promotion of land for development, obvious points arise, none of which are addressed in the above – or anywhere as far as I can see:

  • the nature, terms and timing of these “options”. They would need to be investment-grade binding commitments on the owner (or owners – many potential allocations are a patchwork of interests knotted together by land promoters) and the owner’s successors in title, with all those with relevant interests (eg mortgagees, tenants) having consented, legally binding for a very long period of time, until drawdown which would be way past local plan adoption, with no get out if any owner changes its plans.
  • The above means heavy-duty conveyancing input on the part of the owner but also on the part of the local authority, all within the necessary local plan preparation window. Given the number of sites proposed in any local authority’s “call for sites” this is a truly massive amount of work to be resourced by the authority, even with terms as standardised as possible.
  • The proposed option price by the land owner is going to be influenced by whether best values are to be achieved (1) blind via this route, (2) by in some way bringing forward a scheme outside the process (if this is ruled out the system is utter nationalisation and state control of development – if that’s what you voted for, fine, but I suspect it’s not) or (3), as has happened with other forms of development land tax, by just waiting it out for a less restrictive regime. 
  • Say two pieces of land are put forward as alternative locations for the expansion of a town, one less sustainable than the other (eg it may be greenfield rather than brownfield, remote from public transport connections). The owner of the less sustainable site may offer to make its land available for a lower price. To what extent can or should the authority take into account the additional monies to be extracted from on-sale of the less sustainable site in deciding which to allocate? My early years as a planning lawyer were in the out of town supermarket wars, where the common situation was the local authority seeking to promote a supermarket on its own, worse, site in opposition to better proposals by others, for obvious reasons that at the time of course had to remain unspoken because having regard to the authority’s potential financial returns was obviously verboten. Just think how this would play out under what is proposed – and with much of the decision making inevitably taking place behind closed doors due to inevitable commercial confidentiality. 
  • How is commercial and mixed used development to be approached and dealt with in valuation terms? Is this how we are going to allocate land for major logistics or industry? It’s a cookie cutter approach as presented: housing, housing, housing. 
  • The local authority is envisaged to be the ring master and banker of the whole processes. Whilst this may be welcome in some ways, capacity building would be required on a huge scale. 
  • In any event, the current system already minimises land values, and will increasingly do that if relatively recent changes to the viability process are allowed to bed down. Every time development comes forward with less affordable housing than required by policy, that is because the authority, or inspector on appeal, has been satisfied, on the basis of valuation advice, that no more affordable housing could be extracted and the scheme still proceed, based on an appraisal that doesn’t feed in the price the developer may actually have paid for the land but, usually, just existing use value with a premium set at the minimum that the valuers agree would have been necessary to persuade the owner to sell. I would like to see an explanation of why the option price offered by a land owner would be likely to be lower than EUV+. 
  • Oh and there’s nothing “community” about it.

That’s just the outcome 15 minutes’ thought at the kitchen table on a Saturday morning with Joan Armatrading on in the background. 

Some people seem to think that the planning system can be used as a sandbox for trying out these over-complicated, theoretical constructs. I set out my brief thoughts on the infrastructure levy last week and see also the “no hope value” thinking. We’re barking up the wrong tree folks. Drop the pilot. We don’t have the time. Get the existing system to work, now, with more resources and less complexity, better guidance and – perish the thought – some political consistency. Use the local plans system for planning and the tax system for taxation rather than creating something which sounds more like a complicated board game. In my humble opinion. 

Simon Ricketts, 19 May 2023

Personal views, et cetera

The phrase to “drop the pilot” means to abandon a trustworthy adviser. This 1890 Punch cartoon depicts the dismissal of Otto von Bismarck from the Chancellorship of the German Empire by Wilhelm II.