Don't let S106 keep you awake

S106
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With the recent upsurge in large-scale developments across the UK, we are often approached by clients who are purchasing recently completed properties (typically residential blocks) built on land subject to Section 106 requirements, where the developer is unable to provide a discharge notice at the time of purchase.


Provided the developer can produce sufficient evidence to satisfy an insurer that they have most likely met the relevant Section 106 requirements (e.g. bank statements evidencing payments, warranties provided to a purchaser etc.), it is usually possible to insure against the S106 not having been settled in full (discharged) and to indemnify the buyer should they become liable for some or all of the financial payments due as a result.

However, with many larger-scale developments now taking place in phases, we are seeing a growing number of enquiries from buyers concerned the developer’s Section 106 liability does not fall due for payment until they complete the later phases; no discharge is available as the payment is not yet due. Once the buyer has purchased the property they could find themselves responsible for the S106 requirements or financial contributions if these are not satisfied by the developer. When payments are not due for two to three years, this can make some buyers apprehensive, particularly when the developer is a Special Purpose Vehicle (SPV), with some buyers being uncomfortable relying on warranties from SPVs.

This can mean developers have difficulty disposing of completed phases where S106 obligations remain outstanding, as buyers will remain cautious over the potential liability that they may incur as a result of their purchase. This in turn prevents the developer from releasing capital for building costs in later phases.

Options available include bank letters of credit or performance bonds which the developer may be able to arrange (subject to their ability to meet minimum requirements, including financial) or the buyer may take comfort from a developer’s warranty. However all of these options are less likely when the developer is an SPV.

Lockton can offer an alternative option to our clients who are purchasing properties in these situations, with an insurance policy which provides cover in the event that the developer does not satisfy these future S106 requirements, and our client is then pursued by the local authority for the outstanding financial contribution.

If you would like to know more about this cover, or to request a quotation, please contact us and we will be happy to help.

Ian Blackadder
Partner
T:            + 44 (0)20 7933 2764
M:          + 44 (0)7795 800494
E:           ian.blackadder@uk.lockton.com