The development of a hotel often requires a S.106 agreement as a condition for planning permission. S.106 agreements are used by Local Authorities to obtain contributions towards local infrastructure and facilities, examples being extra CCTV in the area, improvements to the waste disposal infrastructure, the implementation of a residents’ parking scheme or extra facilities for public art. However, such requirements have been criticised as being inconsistent and not always transparent.
As a result the Community Infrastructure Levy (CIL) was introduced in 2010, requiring a developer to make a non-negotiable, fixed level of contribution, where Local Authorities choose to make the charge on new developments. Whilst not mandatory, it is anticipated that most Local Authorities will introduce CIL by 2014.
CIL should be a faster and fairer process and will apply to almost all new hotel developments.
CIL would certainly be a positive measure if it replaces S.106 agreements, as these can take time to negotiate and often delay the grant of planning permission. However, S.106 agreements can continue to be used in parallel with CILs and the fear is that CILs will end up being an additional charge or a “stealth tax” on development.
Calculation of CIL
In order to introduce CIL, a charging authority (i.e. the Local Council) must produce a charging schedule following a consultation and approval process. The charge set in the charging schedule is based on the infrastructure and development needs of the local community, and will therefore vary from one area of the country to the next.
Some areas may decide on a tiered charge depending on the type of development, e.g. residential, leisure or retail. Once agreed the schedule will set out a rate of CIL which is charged per sq metre of development and will be index-linked. CIL is only chargeable on the net increase in floor space resulting from the development. So the levy is not payable where floor space remains the same.
It is worth noting that in certain circumstances the charging authority may accept a transfer of land as an alternative to cash payment of the CIL.
Enforcement
Liability for CIL can be contractually allocated and assumed by an individual or organisation. If no one assumes liability this falls to the landowner and CIL is due immediately on commencement of the development. A CIL Stop Notice can be issued if the charge is not paid, requiring the development to cease and it is a criminal offence for a developer to fail to comply.
Things that operators need to be aware of
Where new hotels are being developed, operators may be entering into a conditional agreement with a developer where they will take a lease of a hotel site once planning has been obtained and the hotel constructed. Alternatively, operators may enter into conditional agreements to purchase and develop the hotel site themselves, once the planning hurdle has been successfully negotiated. In either of these scenarios, the parties will need to make it clear in the contractual documents where CIL liability rests (i.e. whether with the developer, tenant, land owner or purchaser) and obtain adequate indemnities. Not having appropriate legal protection to avoid costs, which are assumed to fall upon another party, could be very expensive.
It is important to note that CIL liability applies when planning permission is actually granted. So when the initial due diligence is done, contracts exchanged and a planning application subsequently made, the development might actually be in an area which does not yet have a CIL charge. However, if the Local Authority introduces a CIL charge prior to planning permission being granted, the development would attract a CIL charge. Bearing in mind planning permission for hotels can typically take 6 -12 months from the date of application to come through, there is a real possibility that the responsible party could find onerous costs added to the project. In such circumstances the responsible party will need to ensure that the contractual documents provide it with a get out i.e. the CIL charge will be considered an onerous planning condition.
To safeguard your position it is important to take expert advice so that you are not hit with unexpected additional costs and have sufficient indemnities and/or an escape from contractual obligations if necessary.
