Regeneration in the Midlands - a spider's web of legal issues

Regeneration in the Midlands – A Spider's Web of Legal Issues

An urban renaissance is taking place in the West Midlands but the regeneration work is raising some complex legal issues. In this article Tom Johnson, Partner, and Sian Porton, Associate at law firm Pinsent Masons highlight some of the issues that typically arise.

Regeneration of town and city centres throughout the West Midlands is fundamental to sustaining and encouraging economic growth in the region. In Birmingham city centre, the transformation effected by schemes such as Brindleyplace, the Bull Ring and the Mailbox continues with the exchange of contracts between Birmingham City Council and developers Quintain and Countryside in December 2005 for the development of City Park Gate – a £200m mixed use development comprising residential apartments, retail and office space which continues the opening up of Eastside that began in 2004 with the Masshouse Circus project. Across the region, ambitious and forward thinking projects such as these are part of an urban renaissance which is changing the environment in which we live, work and play.

From a legal perspective, projects such as these are complex matters, requiring expertise across several practice areas, including:

• Property Investment and Development;
• Planning and Compulsory Purchase;
• Tax;
• Construction.

This article highlights some of the issues that typically arise in these areas. In addition, consideration may need to be given to issues of procurement and state aid, legal structures and funding and housing law.

Property Investment and Development

The interests of the private and public sectors need to be balanced to achieve long term public sector objectives whilst maintaining the financial viability of a project and the returns required by the developer and investors. For example, local authorities and developers may co-operate to piece together sites which will generate the required developer's profit and appeal to end users and investors, whilst including land which produces no financial return but is key to the regeneration of the town or city centre (e.g. public open space or infrastructure). How the completed development will be managed in the long term needs to be considered, as this will influence the approach taken by the local authority to ownership of title to the development site. In particular, whether to dispose of the site freehold or, as is more common, to grant a long lease of the site to the developer. Long term management objectives are a significant feature of prominent town and city centre schemes, such as the core retail expansion at New Summer Row in Wolverhampton city centre (a £250 million development comprising 600,000 sq ft of retail and leisure, 140 residential apartments and an 800-space car park).

Planning and Compulsory Purchase

The Chancellor, in his last budget, introduced the concept of a planning gains tax, supposedly to reduce the need for ever-more complicated section 106 agreements and with the intention that the revenue from the new tax (expected to be introduced in 2008) will be collected and then distributed by HMRC to local authorities to provide public services and infrastructure. At present, a section 106 agreement (which can take months, if not years, to negotiate) is the principal means by which a local authority can secure the changes to such services and infrastructure required to support large scale regeneration. As the grant of planning permission will be dependent on such an agreement being put in place, there is often a long lead in to development whilst the terms and conditions of the agreement are thrashed out.

Whilst the imposition of this new tax may be some way off, for developers and local authorities contemplating contracts for long term projects, it is an issue to consider now.

Regeneration often involves areas that are derelict and under-utilised. The owners of properties in such areas may be defunct companies or simply cannot afford to maintain them. This, combined with the myriad of ownerships, roadways and public rights of way in town and city centres often means that local authorities must exercise compulsory purchase powers (with the cost that entails) to assist the developer in assembling the site.

Tax

In putting the site together, structuring land acquisitions and disposals by the local authority and/or the developer so as to minimise tax (particularly Stamp Duty Land Tax) liability will be critical. This may make the difference between a scheme which is financially viable and one that is not. Local authorities contributing land to a scheme will often seek a share ("overage") in the uplift in the development value of the site and there may therefore be a common interest in the developer keeping the tax bill to a minimum.

Construction

Regeneration projects increasingly involve the provision of residential apartments above retail or leisure space to encourage city dwelling. The practicalities of constructing a mixed use scheme such as this will influence the way in which the construction contracts are drawn up. For example, separate contracts for the initial core construction work and subsequently the fit-out of both the residential and the retail / leisure space may be entered into; in high quality residential schemes the interior design can be critical to securing investor buy-in and the leisure and retail sectors increasingly require specialist fit-out contractors. There needs to be sufficient flexibility in the different contracts to avoid fit-out works being unnecessarily delayed, whilst core works are finalised, so that the development as a whole can be opened, occupied and income-producing as soon as possible, with as few, if any, disputes as possible.

Today's regeneration projects are therefore key to ensuring the economic health of our towns and cities in the years to come and each involves a spider's web of legal issues that needs to be carefully considered and woven into place.