On the edge – planning law for insolvency practitioners

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

Restructuring & Insolvency analysis: In the sixth of a series of guides to highlight areas of legislation that may not fall within the everyday work of insolvency practitioners, Martin Evans, partner, and Tim Stansfeld, associate, in the Planning team with assistance from Patricia Godfrey, partner, and Morgan Bowen, senior associate, in the Banking, Finance and Restructuring team at Nabarro LLP, offer guidance on planning law.

What are the main laws and regulations governing this area?

The main legislation controlling the planning system in England and Wales is the Town and Country Planning Act 1990 (TCPA 1990). The TCPA 1990 sets out the regime for most aspects of planning, including:

• the meaning of development and when planning permission is required;
• how planning applications are determined;
• when planning obligations can be entered into; and
• enforcement for breaches of planning law.

Development

The TCPA 1990 provides that planning permission is required for works which constitute "development". Development carried out without planning permission is unlawful and can be subject to enforcement action.

Development means:

• the carrying out of building, engineering, mining or other operations in, on, over or under land; or
• the making of any material change in the use of any buildings or other land.

Building operations commonly involve constructing a new building, structural alterations or additions to an existing building, and other operations normally undertaken by a builder.

Whether a material change of use takes place depends on the nature of the new and previous use, and is often a question of fact and degree. A change of use to another use within the same use class does not normally constitute development.

Planning permission

Planning permission is authorisation to carry out development. In most cases, planning permission is granted by the local planning authority (LPA), either through a committee or through powers delegated to an officer.

A proposed developer can apply to the LPA for planning permission. The LPA then determines the planning application in accordance with local and national planning policies and other material considerations. Planning permission can be granted, granted subject to conditions, or refused.

For large infrastructure projects, known as "nationally significant infrastructure projects" (NSIPs), there is a separate consenting regime, where the proposed developer applies to the Secretary of State for a development consent order.

Permitted development rights

The Town and Country Planning (General Permitted Development) (England) Order 2015, SI 2015/596 sets out types of development which are automatically granted planning permission, which removes the need to apply formally to the LPA for that planning permission. These works are known as permitted development.

Examples of permitted development include (defined up to certain limits) extensions to dwelling houses, roof alterations and other minor operations. Certain changes of use from one use class to another are also permitted development, for example, from use class A3 (food and drink) to use class A1 (shops).

Planning obligations

When determining whether to grant planning permission, an LPA may consider that the proposed development would cause negative effects to the local area. For example, a substantial new residential development may result in an increase in the number of pupils beyond the capacity of local schools, or a new retail development may result in increases in vehicle traffic on local roads.

To offset these potential negative effects, and to make the development acceptable in planning terms, persons with an interest in land can enter into planning obligations agreements pursuant to section 106 of the TCPA 1990 (known as section 106 agreements) to secure the issue of the planning permission. Planning obligations can:

• restrict the development or use of the land in any specified way;
• require specified operations or activities to be carried out in, on, under or over the land;
• require the land to be used in any specified way; or
• require a sum or sums to be paid to the LPA on a specified date or dates or periodically.

For example, a financial contribution could be paid to the LPA towards education, or the LPA may require highways works to be carried out to improve the local road layout.

Community Infrastructure Levy (CIL)

The Community Infrastructure Levy (CIL) is a tax on new development which involves increases in floorspace for particular uses. Each LPA may produce a charging schedule which sets out how much CIL is payable for particular increases in floorspace. The CIL payment is payable when the relevant development commences. The LPA then uses this money towards funding infrastructure improvements in its area.

In London, in addition to CIL charges payable to LPAs, a separate CIL payment is payable to the Mayor of London towards Crossrail.

Compulsory purchase

Local authorities and certain other statutory bodies have powers to acquire land compulsorily for specified purposes. Local authorities have power, subject to authorisation from the Secretary of State, to acquire land in their area:

• if the authority thinks that the acquisition will facilitate the carrying out of development, re-development or improvement on or in relation to the land; or
• which is required for a purpose which it is necessary to achieve in the interests of the proper planning of an area in which the land is situated.

Where land is compulsorily purchased, the landowner or interest holder is entitled to compensation.

Why is it relevant to insolvency practitioners and their staff?

Insolvency practitioners (IPs) may be appointed over land (either directly, e.g. in the case of a fixed charge receivership or over a company which owns land, e.g. in administration) that is affected by planning law and regulations such as those described above. Land that is burdened by planning issues may create the following issues for an IP:

• the costs of an insolvency process may be increased, for example, in the process of securing planning permissions, meeting planning obligations or paying fines for non-compliance, some of which may be payable as super priority costs out of the estate (see below); and
• the value of the land affected by planning obligations or subject to potential enforcement action or the subject of potential compulsory purchase may be reduced.

The potential for each of these issues to arise within various hypothetical contexts of IPs being appointed over land is considered below.

Examples of the type of insolvency situations where planning issues arise

Planning issues may arise in relation to land over which an IP is appointed in the following situations:

• the land may have been previously developed and is therefore likely to be burdened by planning issues;
• the land may be subject to ongoing development or planning applications, which an IP may choose to continue; or
• an IP may choose to commence development and make a planning application in relation to land where this appears necessary to maximise the realisation of the asset.

The planning issues which must be considered by IPs in each of these situations are set out below.

The priority of fines and costs

By the applicable statutory insolvency provisions, certain penal obligations of the insolvent company are excluded from the category of provable debts in the insolvency procedure. However, these obligations are very unlikely to be relevant in a planning context.

Planning fines incurred by the insolvent company are very likely instead to be classified as expenses of the insolvency procedure payable in priority to the unsecured creditors or to rank as a provable debt payable pari passu with the company's other unsecured creditors. Following the Supreme Court's decision in Nortel/Lehman, whether or not a fine ranks as a provable debt or as an expense will likely depend on whether the circumstances giving rise to the fine arose or were continued by an act or omission taken by or on behalf of the IP. If so, the fine may rank as an expense. By contrast, if the circumstances giving rise to the fine arose prior to the insolvent company's entry into the formal insolvency procedure and were not thereafter continued by the IP, the fine will likely rank as a mere provable debt payable pari passu with the insolvent company's other unsecured creditors.

IPs should note that the costs of litigation claims relating to planning law may also have an impact on the priority of moneys payable out of the insolvency estate. In particular:

• expenses which are properly chargeable or incurred by the IP in the preparation or conduct of any legal proceedings which they have the power to bring or defend in the name of the company (including legal proceedings already commenced by the company prior to its entry into a formal insolvency procedure which proceedings are subsequently adopted by the IP) are payable as expenses of the insolvency procedure. This means that, provided all necessary sanctions have been obtained and the legal costs are properly chargeable, the IP is entitled to have its legal costs paid as an expense out of the company's assets in priority to the unsecured creditors;
• in the ordinary course, in litigation the loser pays the other side's legal costs. Accordingly, in the event that a liquidator brings or defends legal proceedings in the name of the company (including where they adopt legal proceedings commenced prior to the entry into a formal insolvency procedure) and the proceedings are ultimately lost, there is a very substantial risk the company in liquidation will be required to pay the other side's legal costs. Such adverse costs are payable out of the company in liquidation's assets in priority to all other claims against the company, even in priority to the liquidator's own remuneration and expenses. A similar rule very likely applies in administration. However, there has been a recent judgment in the Supreme Court that is helpful to IPs. It holds that, in certain circumstances, the super priority of the adverse costs may only extend to the other side's legal costs incurred after the insolvent company's entry into the formal insolvency procedure. (This case was in fact decided in the context of bankruptcy but it would appear to apply to administration and liquidation by analogy.) (See BPE Solicitors v Gabriel [2015] UKSC 39, [2015] All ER (D) 179 (Jun)); and
• where the insolvent company is the losing party and the IP is not a party to the proceedings, it may nevertheless be possible to make the IP personally liable for costs by means of a non-party costs order. Such orders are rare in practice and would likely only be ordered if the IP has been unreasonable or negligent or otherwise acted improperly.

Land which has been previously developed

Lawfulness of existing development and use

An IP must consider the lawfulness of any previous development. Development carried out without the required planning permission is unlawful. IPs may therefore need to establish whether planning permission was granted for particular construction works or the use taking place at a property over which they are appointed. If operational works or a material change of use took place without the required planning permission, the LPA may take enforcement action to require the unlawful development to be removed or the unlawful use to stop (see below for time limits to this action).

It is also possible to establish that particular works or uses at a property are lawful through certificates granted by the LPA known as certificates of lawfulness of existing use or development. A proposed developer can also apply to the LPA for a certificate establishing that proposed works do not require planning permission to be lawful, in which case the LPA can grant a certificate of lawfulness of proposed use or development. However, an IP should note that there are cost implications in applying for a certificate.

If the buildings or use at the property cannot be established as lawful, this may affect the value of the relevant property and raise the risk of enforcement action.

Enforcement action

An IP may be appointed over land in relation to which a breach of planning control has occurred. A breach of planning control occurs where development is carried out without the required planning permission, or where conditions attached to planning permissions are not complied with. In these circumstances, LPAs have discretion as to whether to take enforcement action.

There are specific time limits within which the LPA can take enforcement action, and which an IP should be mindful of to determine whether previous development of land may be liable to enforcement action. These are:

• carrying out without planning permission building, engineering, mining or other operations in, on, over or under the land, (four years beginning with the date on which the operations were substantially completed);
• change of use of any building to use as a single dwelling house, (four years beginning with the date of the breach); and
• any other breach of planning (including unauthorised material changes of use or breach of planning conditions), (10 years from the date of the breach).

Outside of these time frames, the breach of planning is usually immune from enforcement action. Breaches of planning which are deliberately concealed from the LPA are not subject to these time limits.

Enforcement action can be taken in a variety of different forms, including a breach of condition notice, a stop notice, a temporary stop notice or an injunction. The most common method of enforcement action, however, is the serving of an enforcement notice.

Where the LPA serves an enforcement notice, the notice will specify the alleged breach, the steps required to remedy the breach and the date upon which the notice takes effect (at least 28 days after service).

A planning enforcement notice must be served on:

• the owner of the land (i.e. a person other than a mortgagee not in possession, who, whether in his own right or as a trustee for any other person, is entitled to receive the rack rent of the land or where the land is not let at a rack rent, would be so entitled, if it were so let);
• the occupier of the land; and
• any other person having an interest in the land that is materially affected by the planning enforcement notice, for example a person with the benefit of an easement or restrictive covenant over the land.

The date the planning enforcement notice comes into effect triggers the start of the period for compliance. An offence occurs if the planning enforcement notice is not complied with by the expiry of the compliance period, with the offender liable upon conviction to an unlimited fine. This is the case for all persons served with the enforcement notice.

It is possible to appeal to the Secretary of State against a planning enforcement notice before the notice comes into effect on specified grounds set out in the TCPA 1990. There are also defences that can be claimed against liability where, for example, the offender was not served with the enforcement notice and the notice was not properly registered by the LPA.

Planning obligations

Land that has been developed may be subject to planning obligations in the form of a section 106 agreement.

IPs should note that section 106 agreements do not follow the normal rules on privity of contract, and bind the relevant land rather than the specific parties to the agreement. This means that successors in title to the land are also bound by the planning obligations and the LPA can enforce those obligations against successors in title if they are breached. Successors in title to the land can, therefore, inherit particularly onerous planning obligations including outstanding financial payments, or obligations restricting the use of the land. IPs should investigate what planning obligations affect the relevant land, and consider how this affects the value of the property.

Land that is subject to ongoing planning application or development

Lawfulness of ongoing development

In order to avoid enforcement action, an IP who is appointed over land subject to ongoing development work should ensure that the necessary planning permission was granted in relation to the work and may need to apply for a certificate of lawfulness if this does not appear to be the case (see Lawfulness of existing development and use above for more information).

Ongoing planning applications and appeals

IPs may take control of property which is subject to an ongoing planning application. The planning application can continue to proceed through the determination process with the LPA. Unless specifically stated on the decision notice, planning permissions are not usually personal to any one person or groups of persons. This means that successors in title to land continue to have the benefit of the planning permission, so long as it does not expire before it is implemented.

However, complications may arise during the application process for IPs, including:

• there will be ongoing costs in paying the professional fees of consultants engaged in the appeal or application;
• at appeal there is also the risk of a costs award against the appellant if there has been unreasonable behaviour;
• intellectual property rights in plans and planning application materials may vest in a particular person or company; and
• in most cases, the LPA will require all persons with an interest in the relevant land to enter into any section 106 agreements (see below).

Planning obligations

If there is an ongoing planning application which requires a section 106 agreement, the LPA normally requires all persons with an interest in the land to enter into that agreement. Complicated land ownership arrangements may make this difficult to achieve.

Judicial review

IPs who are appointed over land where there is an ongoing planning application should be aware that third parties who are aggrieved by the grant of a planning permission can bring a judicial review (JR) claim against the LPA within six weeks of the date of the grant of the permission.

While the JR claim is made against the relevant LPA, the proposed developer is normally included in the JR process as an interested party.

That interested party may need to incur costs in assisting the LPA defend the JR claim, through instructing lawyers and consultants.

In exceptional circumstances, interested parties to JR proceedings can also be liable for other parties' costs. As already elaborated above, where a liquidator has adopted the JR proceedings and the company in liquidation is ultimately found liable to pay the other side's legal costs of the proceedings, in the ordinary course these adverse costs will be payable out of the assets of the company in liquidation as a super priority to all other costs and expenses of the insolvency procedure. A similar rule is likely to apply in administration. For planning JRs involving environmental issues, there is a costs cap regime that may limit the amount of costs that can be recovered if the JR is successfully defended.

Land that an IP chooses to develop or in relation to which they make a planning application

IPs who opt to initiate development of a site over which they are appointed must consider the planning law and regulations outlined above (see "Development" above) to ensure that any development is lawful and does not result in costly enforcement action or result in the reduction of the value of the land. In particular, IPs should be aware that:

• a planning application to the LPA to grant necessary planning permission may be required;
• the granting of planning permission may require that a section 106 agreement is entered into;
• third parties who are aggrieved by the grant of planning permission may bring a JR claim against the LPA within six weeks of the date of the grant of the permission; and
• a developer may be liable for a CIL payment. If a CIL payment is unpaid, collecting authorities have a discretion to take enforcement action against persons liable to pay the CIL charge, which can include:

Breach of a CIL stop notice is a criminal offence and a person convicted can be subject to an unlimited fine. The collecting authority can also apply to the court for an injunction if it considers it necessary or expedient for the breach of a CIL stop notice to be restrained.

Individuals who wilfully refuse or culpably neglect to pay the CIL payment as a debt can ultimately be committed to prison.

How can IPs and their staff spot a planning issue and what searches might be carried out to discover planning issues?

Due diligence

A planning due diligence exercise carried out by planning consultants or lawyers should reveal the planning issues affecting a property.

This normally involves reviewing the planning documents and information held by the relevant company or persons, and other documents and information publicly available from the LPA.

In most cases, before the LPA takes enforcement or other action, they will write to the relevant persons to inform them of the issue. IPs should look out for any correspondence from LPAs and consider whether to obtain specialist planning advice.

Local authority search

A local authority search will reveal information about the planning history of the relevant land, including details of historic planning permissions and agreements. Actual enforcement action or compulsory purchases affecting the property are also normally revealed by this search. However, proposed enforcement action or compulsory purchase of land which have not yet taken place are not always revealed by this search.

Planning documents

Key documents to look out for are planning permissions (which take the form of decision notices from the LPA), certificates of lawfulness, section 106 agreements, discharge of planning condition notices, confirmations of discharge of planning obligations (often confirmed by letter or email from the LPA), any highways agreements or licences, and any correspondence from the LPA about the planning position of the property.

Most LPAs provide copies of recent planning permissions and application documents on their website, so these can be obtained relatively quickly.

If documents are not available on the LPA's website, these can sometimes be obtained by asking the LPA to provide copies, although this process can take several days or weeks.

LPAs

Where there is any doubt about the planning position or discharge of planning obligations at the property, the IP could approach the LPA to ask for clarification. Doing this, however, risks bringing the LPA's attention to a planning issue or outstanding obligation which they may otherwise not become aware of. IPs should carefully consider whether it is appropriate to contact the LPA about planning issues and should consider seeking specialist planning advice.

What steps can IPs take to protect themselves from liability?

In order to protect themselves from liability, IPs should take steps to investigate fully the potential for planning issues to affect the site over which they have been appointed. This can be done by following the steps outlined above: carrying out thorough due diligence of any sites, reviewing any planning documents related to the site and making careful enquiries of the local authority. Once possessed of this information, an IP will be in a position to make informed decisions about the extent of potential liability in relation to planning issues.

IPs can protect themselves from personal liability by ensuring that sales contracts and other documentation drafted in relation to the land over which they are appointed contain the following protective provisions:

• the buyer assumes all liabilities in connection with the land;
• the seller gives no title guarantee;
• the seller gives no representations or warranties, for example as to quiet enjoyment, satisfactory quality, fitness of purpose and description; and
• if possible, the buyer provides an indemnity against all third party losses and any claims that are brought against the insolvent company.