Traditional hierarchy of infrastructure agreements

Section 38 highways agreements rank low in the pecking order of development agreements. Section 106 planning agreements are eagerly negotiated to trigger the release of planning permission.  Section 278 works to the existing highway can be onerous in terms of cost and prerequisite works consents, and accordingly, feature early in developers’ viability planning. Section 38 construction costs are also factored into overall development costs. However, formalising the often ‘standard issue’ dedication and adoption agreement typically lags behind in the development process. It is not uncommon for the first stage of works to be completed before a section 38 agreement is formally entered into.  A common presumption is that once the section 38 works have been carried out, the standard inspection and maintenance period has expired, any necessary remedial works have been carried out, the relevant certificates of practical and final completion have been issued and the works have been adopted as highway maintainable at the public expense, any ongoing liability in respect of those works is extinguished. This presumption is no longer sustainable following  the Court of Appeal’s decision in the Redrow Homes case[1].

Redrow Homes decision

Redrow Homes confirms that a section 38 agreements can provide for the future costs of maintenance, construction or improvement (whether by way of commuted sum or otherwise) after a way or highway has been adopted as a highway maintainable at the public expense.

In Redrow Homes, Knowsley Metropolitan Borough Council as highways authority refused to enter into a section 38 agreement for the adoption of estate roads servicing a 525 home development, unless it contained a provision that Redrow pay a commuted sum of £39,000 towards the estimated costs of future maintenance of street lights on the estate roads. Such a provision was held lawful by both the High Court and the Court of Appeal.

The relevant legislation – Highways Act 1980

Section 38(1) provides that where any person is liable under a special enactment or by reason of tenure, enclosure or prescription to maintain a highway, the relevant Minister or highways authority may agree with that person to undertake the maintenance of that highway, rendering the highway to which the agreement relates, on such date as may be specified in the agreement, a highway maintainable at the public expense and extinguishing the liability of that person to maintain the highway.

Section 38 (3) provides that a local highway authority may agree with any person to undertake the maintenance of a way which that person is willing and has the necessary power to dedicate as a highway, or which is to be constructed by that person, or by a highway authority on his behalf, and which he proposes to dedicate as a highway.

Section 38(6) provides that an agreement under section 38(1) or section 38(3) may contain provisions as to dedication, the bearing of the expenses of the construction, maintenance, or improvement of the relevant highway, and other relevant matters as the authority making the agreement think fit.

Legal construction

Dyson LJ held that as a matter of ordinary language the phrase “highway maintainable at the public expense” connotes that the highway authority will be liable as a matter of public law to maintain the highway, but does not prescribe how the authority is required to discharge that liability.  The authority may carry out the maintenance itself or make an agreement for a developer to carry out the maintenance post adoption. However, if a developer defaults on an obligation, the highway authority remains liable.

The language in section 38(6) is wide and unqualified; it is not expressly limited to an agreement for the construction, maintenance and improvement of a road or way before dedication as a highway maintainable at the public expense. Looking at other provisions in the 1980 Act[2], the Court held that Parliament could not have intended to exclude the possibility of an element of private maintenance or private contribution to the cost of maintaining a highway maintainable at the public expense.

Alternatives to section 38

In arriving at their conclusions, both the High Court and the Court of Appeal considered the alternatives available to developers who do not, for whatever reason, wish to enter into a section 38 agreement. Both Courts considered section 37 of the Highways Act 1980, where a developer can, as of right, establish a way as a highway maintainable at the public expense, by giving notice of its proposed dedication.  In response, the highways authority can either certify that the way has been made up in a satisfactory manner and warrants adoption, subject to a 12 month maintenance period and the road actually being used as a highway during that period, after which period the highway shall become a highway maintainable at the public expense; or the highways authority can  apply to the magistrates court for an order confirming that the road has insufficient “utility to the public” to warrant maintenance at the public expense. If the highways authority refuses to issue a certificate, the developer can appeal to the magistrates’ court for a certificate of like effect.

Imperfect substitute

The Courts acknowledged that a prudent developer would be wary of committing to an open-ended obligation and would only enter into a section 38 agreement if it was in their commercial interests to do so. In practice, the section 37 procedure is an imperfect substitute to a bilateral agreement. For example, would a cul-de-sac pass the public utility test? The risk of a road not satisfying the public utility test is greater, as the section 37 process does not afford developers the opportunity to seek prior approval of the position and specification of estate roads.  The time and cost of the court process can be hard to predict, but will not be insubstantial. The burden of proof is on the developer to show to the magistrates that the s37 tests are met.

Comment

In practice, highways authorities are reluctant to accept amendments to their pro forma agreements and legal negotiations to expressly limit ongoing liability can prove very contentious, especially where standard form agreements leave such liability unspecified (and in effect unlimited). The Court of Appeal may have been a bit too optimistic in its supposition that parties usually “negotiate sensibly”.

In the context of plot sales in particular, incoming occupiers will want certainty that they have no liability in respect of the maintenance of the highway. Post Redrow Homes, section 38 agreements will have to be reviewed with greater caution as part of the usual due diligence process. Contractual safeguards should extend to any current and future liability under section 38 agreements. Thought needs to be given to whether or not management companies should be set up to assume such liability. Cash retentions may become more commonplace.

To date, highways authorities have adopted differing approaches but generally, when commuted sums have been requested, they have tended to be relatively small and specific, normally for non-standard equipment (but for street lights in the Redrow Homes case). In an era of increasing local authority cuts, highways authorities are likely to find the ability to require sums towards future costs of publicly maintainable highway irresistible.  Developers are advised to reprioritise section 38 agreements and investigate the relevant highways authority’s policy on commuted sums early in the development process, so that they can factor in the relevant sums into their viability appraisals.

Chris Tofts is a partner and head of planning at Stephens Scown. He can be contacted on 01872 265100 or planning@stephens-scown.co.uk

 

[1] R (on the application of Redrow Homes Ltd) v Knowsley Metropolitan Borough Council [2014] Court of Appeal decision of 31 October 2014 EWCA Civ 1433 affirming the High Court’s decision of 18 October 2013 [2013] EWHC 3734 (Admin)

[2] Sections 44, 53 and 278.  In brief, section 44 provides that a person liable under a special enactment or by reason of tenure, enclosure or prescription to maintain a highway can agree to maintain publicly maintainable highway. Section 53 provides that a court may make an order extinguishing the liability of a person to maintain the highway. Section 278 provides for agreements for the execution by the highways authority of highway works at the developers’ cost.  Section 278(3) expressly states that such an agreement may provide for payments in respect of the maintenance of the works to which the agreement relates.