S106 planning obligations – lessons from the NHS contribution cases

The legal tests for planning obligations in section 106 agreements have been recently examined in two similar court cases. These concerned challenges by NHS Trusts to decisions of local authorities to grant planning permission without an NHS contribution.

The lessons from these cases are important not only when considering the reasonableness of any requested NHS contribution, but also all planning obligations that may be sought by local authorities, statutory consultees, and interested parties.

The facts of the NHS contribution cases    

The two High Court decisions were The University Hospitals of Leicester NHS Trust, R (On the Application Of) v Harborough District Council [2023] EWHC 263 (Admin) (“the Leicester NHS Trust”) and Worcestershire Acute Hospitals NHS Trust, R (On the Application Of) v Malvern Hills District Council & Ors [2023] EWHC 1995 (Admin) (“the Worcestershire NHS Trust”).

Both cases concerned outline planning permissions on allocated sites consisting of:

• A mixed-use development of over 2,000 dwellings
• Business and industrial uses
• Primary schools
• Health facilities
• Open space and associated infrastructure.

Under the legislation governing the National Health Service, NHS Trusts are responsible for providing acute services to their commissioning bodies, who at the time were the Clinical Commissioning Groups.

The concern of the NHS Trusts in both cases related solely to the first financial year in which a “new resident” begins to occupy a dwelling and is treated by the respective Trust. The issue being that there is a ‘funding gap’ for the NHS Trusts in the first year because any treatment it provides for new residents in the first year is not accounted for in the funding mechanism, which is determined in advance every year.

The Leicester NHS Trust had sought a contribution of £914,000. The Worcestershire NHS Trust had sought a contribution of £3,357,949 which was later revised to £1,839,839. In both cases the relevant councils decided neither of the contributions were required when granting the respective outline planning permissions. In both cases the courts found that the decisions of the councils not to secure NHS contributions were not unlawful and dismissed the judicial reviews.

Legal test for S106 planning obligations

Section 38(6) of the Planning and Compulsory Purchase Act 2004 says that the planning authority must determine the application in accordance with the development plan, unless material considerations indicate otherwise. A matter is a material consideration if:

(a) It serves a planning purpose, that is one which relates to the character or use of land

(b) It fairly and reasonably relates to the development.

There are three categories of planning consideration:

• Those expressly or impliedly identified by the legislation as mandatory, for example the development plan
• Those considerations which the legislation identifies as irrelevant
• Those considerations which are relevant and which the decision maker may take into account in the exercise of his judgment.

A S106 planning obligation falls within the last category, and its consideration and the weight of such consideration can only be challenged if it is irrational.

To be a material consideration the S106 planning obligation must also satisfy the legal tests of section 106(1) of the Town and Country Planning Act 1990. Namely, it must be an obligation:

(a) Restricting the development or use of the land in any specified way

(b) Requiring specified operations or activities to be carried out in, on, under or over the land

(c) Requiring the land to be used in any specific way

(d) Requiring a sum or sums to be paid to the authority on a specified date or dates or periodically.

Finally, the S106 planning obligation must likewise satisfy the legal tests in regulation 122(2) of the Community Infrastructure Levy Regulations 2010 which provides that obligations must be:

• Necessary to make the development acceptable in planning terms
• Directly related to the development
• Fairly and reasonably related in scale and kind to the development.

These tests in effect largely mirror in legislation the case law on what is a considered a material consideration, mentioned above.

The problem with the NHS contributions   

The reasons for the councils’ decision helpfully illustrate the issues that should be considered when assessing the merits of not only NHS contributions but any S106 planning obligation.

The ability of statutory bodies to self-mitigate harm from a development is relevant 

The Leicester NHS Trust argued that in determining if a proposed contribution met the legal tests, it was legally irrelevant whether it could “mitigate” harm resulting from the development. It asserted that if the availability of alternative funding arrangements were to be material, a body with tax raising or borrowing powers would be unable to obtain a S106 contribution from a developer.

The court rejected this argument, stating that the justification for NHS contributions need to be seen in the context of the statutory framework for the provision of secondary health care services. The contribution would relate to people who are new to the area, but those people are entitled to such services wherever they may live in the country.

The obligation to provide, and financial responsibility for, those services lies with the NHS. The court found that the council was right to query whether the ‘funding gap’ could be mitigated as part of the mechanism of NHS funding.

This was distinguishable from a typical S106 obligation, for example where a developer is required to mitigate a reduction in the performance of a local highway network that would be caused by a new development. There, the highway authority is not under a statutory duty to fund improvements to the network, let alone to provide for highway facilities made necessary by a specific development.

The S106 obligation must be directly related to the development

To obtain a S106 contribution there must be a localised harm directly related to the development. As such, what if there is a first year ‘funding gap’? In the Leicester NHS Trust case the court noted even if it could be shown in a particular area that there is a funding gap to deal with “new” residents, the council could raise the possibility that this is a systemic problem in the way national funding is distributed, as opposed to being directly related to the development (or alternatively, fair and reasonably related in scale and kind to the development).

Likewise, whether there is a lack of funding for an NHS Trust to cope with the effects of a substantial new development is likely to depend on wider issues raised by the population projections used as one of the inputs to determine its funding.

The court highlighted that new residents may be entitled to social welfare benefits, which, like the need for secondary healthcare, arises irrespective of where that person lives, noting that no one would suggest that the developer should make a contribution to funding those benefits.

The S106 obligation must be necessary to make the development acceptable in planning terms

In both cases the courts found that the councils were entitled to consider whether there was a funding gap for the NHS Trusts in relation to those costs. They were also entitled to ask the NHS Trusts to provide information to see whether it was satisfied about the existence of such a gap and, if so, its size.

The members were advised by officers, and they are to be taken as having agreed, in each case, that the NHS Trusts failed to provide sufficient information to show that there was any funding gap. Accordingly, in both cases the courts found that due to the insufficient information, neither council made an error. Those were matters of judgment for councils, and decisions which the court in the Leicester NHS case noted was perfectly rational and unsurprising, given the Leicester NHS Trust continued to assert that there was a funding gap without demonstrating that there was.

Where next for NHS contributions both old and new?

These two cases cast significant doubt on whether an NHS contribution could satisfy the legal tests for the grant of planning permission.

An NHS Trust would need to provide sufficient information to satisfy a council of a ‘funding gap’ which both Leicester NHS Trust and Worcestershire NHS Trust failed to do in the opinion of the courts. However, even if a funding gap could be provided, it appears still arguable that such a gap arose from a failure of the national mechanism of NHS funding as opposed to a localised impact directly related to the development.

Where NHS contributions have been secured in the past under a S106 agreement, and remain unpaid, developers may have success in applying under S106A of the 1990 Act to the local planning authority for a release of such obligation on the grounds it serves no usual purpose – i.e., there being no funding gap.