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The true cost of section 38 agreements

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Posted by Claire Waring on 27 April 2015

Claire Waring - Development and Securitisation Lawyer
Claire Waring Partner

Until the recent court of appeal decision in the case of R (on the application of Redrow Homes Ltd) v Knowsley Metropolitan Borough Council (Redrow), it was generally accepted that section 38 of The Highways Act 1980 was not a lawful basis on which a highway authority could require a developer to pay commuted maintenance contributions for highways constructed by the developer and adopted for maintenance at the public expense.

However, in a decision which is clearly not good news for developers, Redrow confirms that such commuted maintenance contributions can be validly included in a section 38 agreement.

The facts

Redrow obtained outline planning permission to carry out a development of 525 dwellings on land at Huyton near Liverpool. The first phase of the development included estate roads constructed by Redrow.

Redrow entered into negotiations with Knowsley Metropolitan Borough Council (Knowsley) with regard to a section 38 agreement to secure the adoption of such estate roads as highways maintainable at the public expense. However, Knowsley refused to enter into the agreement unless it contained an obligation on Redrow to pay to Knowsley, on entry into the agreement, the sum of £39,000 (thirty nine thousand pounds) as a commuted maintenance contribution in respect of the street lighting.

Redrow argued that such a provision could not lawfully be included in a section 38 agreement. Knowsley countered that such a provision was lawful by reason of the word "maintenance" in section 38(6) and “that maintenance refers to and includes future maintenance of the road following its adoption”.

The High Court, in a decision which was later upheld by the Court of Appeal, agreed that Knowsley’s interpretation of section 38 was correct and declared that:

“on the correct interpretation of section 38(6) of the Highways Act 1980, a section 38 agreement, including when made under section 38(3), can in law contain provision for the party other than the highway authority to pay a sum (whether a commuted sum or otherwise) referable to the expenses of a highways maintenance after the date on which it becomes maintainable at public expense."

The practical implications

Lord Dyson in his judgement did not accept that “section 38 will become a dead letter. The benefits of section 38 agreements are well understood. They are of advantage to both developers and highway authorities. I see no reason to suppose that parties will not usually negotiate sensibly and that section 38 agreements will continue to be made.”

However, following Redrow we may see an increased use by developers of the alternative adoption procedure set out under section 37 The Highways Act 1980. The section 37 procedure requires a developer to serve notice on the highway authority stating that it "desires the highway to be maintainable at the public expense". Critically, section 37 contains no provision for the highway authority to call for any commuted maintenance contributions to be paid by the developer.

The disadvantages of section 37 are that the developer cannot serve the requisite notice on the highway authority until the road has actually been constructed and the procedure can be challenged in the Magistrate's Court on the grounds that the proposed highway will not be of sufficient utility to the public to justify maintenance at the public expense. Few plot purchasers (and their mortgagees) will want to buy a plot in the absence of a section 38 agreement or other alternative absolute guarantee of highway adoption. Therefore, if a developer elects use the section 37 route, then in order to satisfy plot purchasers, it may need to put on risk an indemnity insurance policy up to the point of adoption to cover the risk of non-adoption of the highways.

Tags: Real estate

About the author

Claire specialises in residential development and social housing portfolio securitisation. Claire’s clients include developers, promoters, land owners and Registered Providers.

Claire Waring

Claire specialises in residential development and social housing portfolio securitisation. Claire’s clients include developers, promoters, land owners and Registered Providers.

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