TL;DR
- A Section 106 agreement (a "planning obligation") is a legal agreement under section 106 of the Town and Country Planning Act 1990 that makes a development acceptable in planning terms by securing things like affordable housing, contributions, or works. (GOV.UK planning obligations)
- It can be a bilateral agreement between the landowner and the local planning authority, or a unilateral undertaking given by the landowner alone. Either way the obligation runs with the land, so it binds future owners, not just you.
- A planning obligation must meet three legal tests under Regulation 122 of the Community Infrastructure Levy Regulations 2010: it must be necessary, directly related to the development, and fairly and reasonably related in scale and kind. (GOV.UK)
- It is not the same as the Community Infrastructure Levy (CIL): S106 is negotiated and site-specific, CIL is a fixed per-square-metre charge set by the council.
- For an appraisal, treat S106 as a real, often substantial, statutory cost line, and as a programme risk because it is negotiated and can hold up a consent. The figures below are illustrative, not market rates.
If you have ever looked at a site with outline consent and seen the words "subject to a Section 106 agreement", that line can be the difference between a viable scheme and a dead one. A Section 106 obligation is one of the main ways the planning system makes a developer pay for the impact of their scheme, and it lands directly on your appraisal. Here is what it actually is, the law behind it, and how to treat it in your numbers.
This is general information, not legal, planning or investment advice. Every figure below is an illustrative example chosen to show the mechanics, and planning obligations are negotiated case by case, so take site-specific advice before you rely on anything here.
What a Section 106 agreement is
A planning obligation under section 106 of the Town and Country Planning Act 1990 is a legal commitment, attached to a planning permission, that is used to mitigate the impacts of a development so the council can grant consent. GOV.UK describes it as "a legal obligation entered into to mitigate the impacts of a development proposal", which can be either an agreement between the landowner and the local planning authority or a unilateral undertaking by the landowner alone. (GOV.UK) Crucially, the obligation runs with the land and is legally binding and enforceable, so it survives a sale and binds whoever owns the site next.
What a Section 106 can require
Planning obligations are flexible by design, and what they secure depends on the scheme and the local plan. Common requirements include:
- Affordable housing: a proportion of the homes provided at a reduced cost, or a commuted payment in lieu.
- Financial contributions: towards education, open space, transport, healthcare or other local infrastructure the development adds pressure to.
- On-site works or land: a play area, public open space, highway improvements, or land transferred for a specific use.
- Restrictions and management: tenure mix, phasing, or arrangements for maintaining shared spaces.
Whether your scheme attracts a heavy S106 burden is a function of its size and the local plan policy, which is exactly why it is a feasibility question, not a post-consent surprise.
The three legal tests every obligation must pass
A council cannot simply ask for whatever it likes. To be taken into account when deciding an application, a planning obligation must meet three statutory tests set out in Regulation 122 of the Community Infrastructure Levy Regulations 2010. GOV.UK states the obligation must be:
- "Necessary to make the development acceptable in planning terms"
- "Directly related to the development"
- "Fairly and reasonably related in scale and kind to the development"
(GOV.UK planning obligations) These tests are your check on whether a requested contribution is reasonable. If an ask fails one of them, it is grounds to push back through your planning consultant.
Section 106 versus CIL: not the same thing
Developers often blur the two, but they work very differently:
| Section 106 obligation | Community Infrastructure Levy (CIL) | |
|---|---|---|
| How it is set | Negotiated, site-specific | Fixed rate per square metre of new floorspace, set in the council's charging schedule |
| What it covers | Mitigation tied to that scheme (e.g. affordable housing) | General infrastructure across the area |
| Certainty | Less certain until agreed | More predictable once the rate is known |
A site can attract both. CIL rates vary by local authority, so you cannot assume a national figure: check the relevant council's charging schedule. We cover where these statutory costs sit in the wider model in our feasibility appraisal guide.
How Section 106 hits your appraisal
In a residual land value appraisal, S106 sits in the statutory and planning costs line, and on some schemes it is one of the largest single deductions. Two things make it dangerous to under-model:
- It comes off the residual land value, not your profit. Because profit is usually a fixed input (often expressed as a margin on GDV), a bigger-than-expected S106 bill reduces what you can afford to pay for the land, or kills the deal at the asking price. Illustrative example: if a scheme's residual land value is £220,000 and a late S106 ask adds £60,000 of contributions you had not modelled, the land you can pay for drops to about £160,000, before you have negotiated a thing.
- It is a programme risk. Because the agreement is negotiated and drafted by lawyers, it can delay the issue of a consent. Every month of delay on a site carrying finance is a real cost.
There is a viability dimension too: national policy allows a developer to argue that the full policy-compliant level of contributions would make a scheme unviable, supported by an open-book appraisal. That is a specialist negotiation, not a number you assume your way out of, so treat any "we will negotiate it down" assumption with caution.
FAQ
What law creates a Section 106 agreement?
Section 106 of the Town and Country Planning Act 1990. The obligation can be a bilateral agreement with the local planning authority or a unilateral undertaking by the landowner, and it runs with the land. (GOV.UK)
What are the three tests for a planning obligation?
Under Regulation 122 of the Community Infrastructure Levy Regulations 2010, an obligation must be necessary to make the development acceptable in planning terms, directly related to the development, and fairly and reasonably related in scale and kind to it. (GOV.UK)
Is Section 106 the same as CIL?
No. S106 is a negotiated, scheme-specific obligation; CIL is a fixed per-square-metre charge on new floorspace set by the local authority. A site can be liable for both, so model them separately.
Can a Section 106 obligation be changed later?
Obligations can be modified or discharged in certain circumstances, and there are statutory routes for renegotiating affordable housing contributions on viability grounds, but this is a formal, evidence-based process. Take planning advice rather than assuming an obligation will be relaxed.
Before you bid on a site
A Section 106 agreement is not red tape bolted on at the end; it is a cost and a risk you should price before you offer on a site. Find out the local plan's affordable housing and contributions policy, check whether the council charges CIL, and put a realistic S106 figure into the statutory costs line of your appraisal. Sanity-check the planning picture early with the planning check, and model where contributions land in the full scheme using the site feasibility tool and the feasibility wizard.