Negotiating highways agreements

A Court of Appeal ruling has raised the significance of negotiating s. 38 highways agreements, writes Antonia Murillo.

The fine balance between developers, highway authorities and development was tipped in the Court of Appeal on 31 October although it will take some time for the full effect to be felt. The Court considered an issue that has financial implications for all development where a new highway is constructed with the intention it be adopted as highway maintainable at public expense. The findings of both the High Court and Court of Appeal in Redrow Homes Limited v Knowsley Metropolitan Borough Council[1] have implications for deliverability of schemes in terms of timing and finance. 

In the hierarchy of infrastructure agreements, Section 38 Highways Agreements tend not to rate particularly high. They are often in standard format with little to distinguish the versions used by different highway authorities. As regards timing for negotiation and completion, they are far behind the negotiation and completion of Section 106 Planning Agreements; that should now be reviewed by both developers and highways authorities.

In many cases the scenario is that the developer and land owner(s) agree a price for land, an agreement is entered into subject to obtaining satisfactory planning permission. Factored into those negotiations as part of the development costs are the costs of construction of the highway(s) with a view to it being adopted by the highway authority and, at the time of adoption, it is expected and presumed any further costs will be those of the highway authority. The form of a Section 38 Agreement usually provides:

• The developer undertakes Part 1 Works (usually these works are up to base course including drainage, curb stones, lighting, etc);
• The highway authority inspects and grants a Part 1 certificate;
• The developer completes the Part 2 works after which;
• The highway authority inspects the works and issues a Part 2 certificate;
• A maintenance period of usually 12 months then needs to expire, that 12-month period running from the date of the Part 2 certificate, again the highway is inspected and if satisfactory, adoption of the highway takes place;
• Occupation of the development may not take place until the Part 1 certificate has been issued. 

All the while, the development takes shape and plots are sold. It is not unusual for the Part 1 works to be built out before the Section 38 Agreement is negotiated. 

The decision in Redrow Homes confirms that ongoing costs of maintenance (and costs of construction or improvement) after adoption of the highway, can lawfully be included within a Section 38 Highways Agreement. As a result, the issue of highways both in terms of ongoing costs and deciding whether or not to enter into a Section 38 Agreement need to be considered at an earlier stage in the proposed development than is presently the case.

Both the High Court and Court of Appeal considered mechanisms available to landowners, developers and highways authorities for the adoption of highways. The most usual method is by way of Section 38 Highways Agreements; the alternative is using Section 37 of the Highways Act 190 (“the 1980 Act”). New purchasers of the development, be they for residential or commercial use, will usually want the certainty the developer is able and willing to enter into a Section 38 Agreement on the basis that once the highway is adopted as maintainable at public expense, the new owner should have no liability in respect of maintenance of the highway and any possible access problems fall away once the highway is adopted. What if the developer, like Redrow, is unwilling to enter into a Section 38 Agreement on the basis the agreement requires a commuted sum for maintenance after the highway has been adopted. Redrow argued unsuccessfully that such a requirement was ultra vires. So what happens to potential purchasers of, in this case dwellings[2]; what safeguards can they obtain from the developer? 

Both Courts suggested the developer could use the procedure available under Section 37 of the 1980 Act if it chose not to enter into a Section 38 Agreement. The procedure under Section 37 as an alternative is however by no means certain nor straightforward. It does have the advantage of not including a power to require a commuted sum to be paid to the highways authority. The procedure is:

• The developer gives notice it intends to dedicate the road as highway maintainable at public expense;
• The council can object on the basis it considers the proposed highway “will not be of sufficient utility to the public to justify it being maintained at the public expense….”;
• The matter is then considered by the Magistrates Court and higher Courts if an appeal is made. 

Where is the certainty in that procedure? If the road to be adopted is a cul-de-sac for example, an application under Section 37 may well not be successful. That leaves the options of a Section 38 Agreement or the highway remaining private; the former may not be an option the developer wants to pursue but the latter has costs implications for the developer and lack of certainty for the new owners. A management company may be set up to manage/maintain the highway but this again has risks. What happens if an accident happen on the highway as a result of poor maintenance? Who do the potential litigants pursue? A knock on effect could also be mortgagees requiring retentions whilst the highways issue(s) remains unresolved; which would lead to further uncertainty. 

In Redrow, the Master of the Rolls saw no reason to suppose that parties would not usually negotiate sensibly and that Section 38 Agreements would continue to be negotiated[3]. Where highways authorities are subject to cuts as elsewhere in local government, the lure of a yet untapped potential source of finance for highway maintenance may just be too great. This means that developers should investigate early with the highway authority whether or not it is their policy to seek commuted sums in a Section 38 Agreement for highway maintenance purposes after adoption. If those sums are too large it may mean that certain developments may become unviable with possible effects on say the provision of affordable housing. The negotiation of Section 38 Agreements has just gone up the pecking order. 

Antonia Murillo is an associate at Bond Dickinson. She can be contacted on 0845 415 6790 or by email.