Our insights - Henry Davis York

Planning reforms may limit local council windfalls through VPAs

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11 November 2016

Proposed reforms by the NSW Minister for Planning are poised to prevent local councils from gaining funding windfalls through the negotiation of Voluntary Planning Agreements (VPAs).

Background

A new concept - value capture or value uplift - has emerged in recent years in the negotiation of VPAs by local councils.

The idea is that in re-zoning a property for a higher and better use, or granting development consent in excess of existing controls, the developer was gaining a windfall of a higher unimproved land value, over and above normal profit margins.

Councils, by employing value capture in VPAs, sought to share in what they see as the portion of 'unearned' windfall gains, for the benefit of their communities. This concept has rapidly been implemented by way of a number of council VPA policies, and by other councils in ad hoc VPA negotiations.

What's changed

However, on 4 November 2016, the Minister announced proposed reforms to the VPA process, to be implemented by way of a new Practice Note for Planning Agreements (Practice Note) and a Circular to Councils, together with a Ministerial direction requiring councils to have regard to the Practice Note in negotiating VPAs. These three documents are currently on public exhibition in draft form until 27 January 2017.

While the Practice Note will provide a welcome update to the bare-bones 2005 Practice Note, the changes may be seen as unwelcome from some, particularly councils.

  • While not explicitly forbidding the practice of value capture, it comes close, stating that planning authorities should ensure that VPAs "are not used as a mechanism to capture windfall gain". It also includes stronger principles that Councils must abide by, which aim to bring VPAs back to the fundamental idea of addressing demand created by developments. It indicates planning authorities should not: use planning agreements as a means of revenue raising;
  • seek public benefits that are unrelated to the development; and
  • improperly rely on their statutory position in order to extract unreasonable public benefits from developers under VPAs.

If there is any doubt that the changes to the Practice Note are directed at the idea of value capture the draft Circular puts that to rest, stating: "It is not acceptable for planning authorities to refuse to consider or refuse to forward a planning proposal for Draft Planning Circular for Consultation gateway determination because, regardless of its merit, a VPA related to land value uplift has not been entered or offered to be entered into."

It goes on to state: "VPAs associated with a planning proposal need to provide a public benefit that has a clear link to the development and should not be wholly unrelated (concept of de minimis)."

The Minister has clearly formed a view that value capture is not an appropriate means of calculating appropriate contributions under a VPA, unless there is a direct nexus with the demand generated by the planning proposal or proposed development.

  • There are two questions emerging from this: When, if ever, will there be an appropriate nexus between value capture and a development?
  • If councils continue to require value capture in VPAs before planning proposals progress, will the Minister use his powers to step in to progress those planning proposals on planning merit alone (and in the absence of a VPA)?

What to do next

The future of VPAs and appropriate contributions under VPAs are important issues for councils, developers, and others with a stake in the planning system.

HDY encourages its clients, whether developer or council, to review the proposed Practice Note closely, and lodge a submission to ensure that they have a voice in shaping the future of VPAs.

Feel free to contact HDY if you have any queries, or would like assistance in understanding the reforms and drafting a submission.

Nicholas Brunton

Partner

61 408 669 831

61 2 9947 6330

nicholas.brunton@hdy.com.au

Gavin Shapiro

Senior Associate

61 2 9947 6797

gavin.shapiro@hdy.com.au