What is a Section 106 agreement?
A Section 106 agreement (S106) is a legally binding agreement between a developer and the local planning authority, made under Section 106 of the Town and Country Planning Act 1990. It requires the developer to provide certain benefits or contributions as a condition of receiving planning permission. S106 agreements are sometimes called "planning obligations" or "developer contributions."
Common S106 obligations
- Affordable housing — the most significant obligation for residential developers. Local plan policies typically require 15–50% of units to be affordable, depending on the area and scheme size.
- Education contributions — payments towards local school capacity to accommodate additional children from new homes.
- Healthcare contributions — payments towards GP surgeries or other healthcare facilities.
- Highway improvements — funding for junction improvements, pedestrian crossings, or cycle infrastructure.
- Public open space — provision of on-site open space or contributions to off-site parks and recreation.
- Employment and training — commitments to use local labour or provide apprenticeships during construction.
How S106 affects development finance
S106 obligations directly impact the financial viability of a development scheme. Affordable housing obligations reduce GDV (affordable units are typically sold at 40–70% of market value). Financial contributions add to total project costs. Both must be accurately reflected in the development appraisal — lenders will check.
A scheme with a heavy S106 burden may have thinner margins than the headline GDV suggests. Lenders assess the net GDV (after affordable housing) and total costs (including all S106 contributions) when calculating ratios.
Viability testing
If S106 obligations render a scheme unviable, the developer can submit a financial viability assessment (FVA) to the local authority, arguing that the required contributions should be reduced. This is a negotiation — the local authority will often appoint their own viability assessor. The process can take months and outcomes are uncertain, so factor this into your programme.
Tips for managing S106
- Research the local plan policy before purchasing the site — know what obligations are likely.
- Factor all S106 costs into your acquisition price, not as an afterthought.
- Engage with the local authority early on the S106 heads of terms.
- Consider phasing triggers — some obligations can be deferred to later phases.
- If submitting a viability assessment, use a recognised methodology (e.g., RICS guidance) and be transparent about your assumptions.