Planning Permission and Development Finance: What Lenders Require

Planning permission is the single most important factor in a development finance application because it determines whether the proposed scheme can legally be built. Without valid planning permission, the development site is valued as land with hope value rather than as a consented development opportunity, and the gross development value that underpins the entire financial structure cannot be reliably calculated. In our experience, the type and status of planning permission directly affects the loan-to-value ratio available, the interest rate charged, and whether a lender will consider the application at all.

Lenders view planning permission as a binary risk reducer. A site with full detailed planning permission for twelve residential units has a known, quantifiable development potential. A site with no planning permission is speculative. Between these two extremes lies a spectrum of planning statuses, including outline permission, reserved matters, resolution to grant, permitted development rights, and planning applications pending determination, each of which carries a different level of risk in the lender's assessment.

The practical impact is significant. A residential development scheme in Surrey with full planning permission might attract development finance at 7.5% per annum with 65% loan-to-GDV. The same scheme with only outline permission might only attract 55% loan-to-GDV at 9.5% per annum, if a lender will consider it at all. Understanding how planning status affects your borrowing terms allows you to make informed decisions about when to apply for finance and how much equity you need to contribute.

Full detailed planning permission is the gold standard for development finance lenders. This means the local planning authority has granted consent for the specific scheme you intend to build, including the number and type of units, the design, layout, access, landscaping, and all other reserved matters. Most mainstream development finance lenders require full planning permission before they will issue a formal facility offer. The permission must be implementable, meaning no pre-commencement conditions remain undischarged that would prevent a lawful start on site.

Outline planning permission establishes the principle of development but reserves detailed matters for subsequent approval. While outline permission provides confidence that the site can be developed, it leaves significant uncertainty about the final scheme. A smaller number of specialist lenders will consider facilities against outline permission, but typically at lower leverage, 50-55% of estimated GDV, and higher rates. The borrower is expected to submit and obtain reserved matters approval during the loan term, which introduces additional planning risk that the lender must price in.

A resolution to grant is a committee decision to approve the application subject to the completion of a Section 106 agreement. This is common for larger residential schemes where affordable housing or infrastructure contributions are required. Some lenders treat a resolution to grant almost as favourably as full permission, particularly if the Section 106 heads of terms are agreed. Others will not lend until the Section 106 is completed and the formal decision notice issued. The time between resolution to grant and formal consent can be anywhere from two to twelve months depending on the complexity of the Section 106 negotiations.

Permitted development rights allow certain types of development without the need for a full planning application, most commonly the conversion of commercial premises to residential use under Class MA or Class O of the General Permitted Development Order. Lenders will consider these schemes provided the developer has obtained prior approval from the local authority confirming that the proposed development falls within the permitted development rights. The prior approval process typically takes eight weeks and is a lighter-touch assessment than a full planning application.

Having full planning permission does not necessarily mean you can start building immediately. Most planning permissions include conditions, and a significant proportion of these are pre-commencement conditions that must be discharged before any work begins on site. Common pre-commencement conditions include approval of external materials and finishes, submission and approval of a construction management plan, archaeological investigation or watching brief, contamination assessment and remediation strategy, detailed drainage and sustainable urban drainage scheme, and ecological mitigation measures.

Development finance lenders universally require that all pre-commencement conditions are discharged before the first drawdown of construction funds. This is not negotiable. The reason is that starting work without discharging pre-commencement conditions can render the entire planning permission invalid, leaving the lender with security over a site where the development cannot lawfully continue. We have seen cases where developers started work without discharging a pre-commencement contamination condition, and the local planning authority issued an enforcement notice requiring all work to cease until the condition was properly discharged.

Discharging conditions takes time. The local planning authority has eight weeks to determine a discharge of condition application, and in practice it often takes longer. Some conditions require the appointment of specialist consultants, such as archaeologists or ecologists, whose reports must be prepared before the application can even be submitted. We always advise developers to begin the condition discharge process immediately after receiving planning permission, even before they apply for development finance. This ensures that the conditions are discharged, or close to being discharged, by the time the lender is ready to complete the facility. For schemes with extensive pre-commencement conditions, this parallel processing can save three to four months on the overall project timeline.

Planning risk encompasses any uncertainty about whether the proposed development can be built as planned. The most obvious planning risk is the absence of planning permission, but there are more subtle forms. An extant planning permission with a looming expiry date presents risk because the permission lapses if a material start is not made before the deadline. A permission subject to a legal challenge or judicial review is uncertain even though it has been formally granted. A scheme that requires a non-material amendment to the existing permission to accommodate design changes may face refusal.

Lenders price planning risk through three mechanisms. First, they reduce the loan-to-value ratio, requiring the developer to contribute more equity, which provides a larger buffer if the scheme cannot proceed as planned. Second, they increase the interest rate to compensate for the additional risk. Third, they may impose specific conditions in the facility agreement, such as requiring the developer to obtain reserved matters approval within a specified timeframe or to commence development before the planning permission expires.

In our experience, the premium for planning risk is substantial. We recently arranged a facility for a site in Hampshire with full planning permission at 7.8% and 65% LTGDV. An equivalent site with outline permission only attracted 10.2% and 50% LTGDV. The additional cost of planning risk on a £2,000,000 facility over twelve months was approximately £48,000 in additional interest plus £300,000 in additional equity required. This demonstrates why we always recommend that developers secure the most advanced planning consent possible before applying for development finance. Submit your deal with full planning in place and you will access the best terms available.

Section 106 agreements are legally binding obligations negotiated between the developer and the local planning authority as a condition of planning permission. They typically require the developer to provide affordable housing units, make financial contributions towards local infrastructure such as schools, healthcare facilities, or transport improvements, deliver public open space or play areas within the development, or undertake off-site highway works. The financial value of Section 106 obligations can be substantial, ranging from £10,000 per unit for minor contributions to over £100,000 per unit in high-value London boroughs.

Development finance lenders treat Section 106 obligations as project costs that must be factored into the development appraisal. If the appraisal does not adequately account for Section 106 costs, the lender will either reduce the facility amount or require the developer to demonstrate how these obligations will be funded. Affordable housing obligations are particularly significant because they require the developer to sell or transfer a proportion of the completed units at below-market prices, directly reducing the scheme's gross development value.

The timing of Section 106 payments also affects cash flow planning. Some obligations are triggered at the commencement of development, others at specific milestones such as occupation of a certain number of units, and others before marketing of the final units. Understanding when Section 106 payments fall due is essential for structuring the development finance facility to ensure that sufficient funds are available at each trigger point. We have arranged facilities where the Section 106 cash flow was not properly modelled, resulting in the developer needing to inject additional equity midway through the build to meet an obligation that should have been anticipated from the outset.

The strongest planning position for a development finance application is full detailed planning permission with all pre-commencement conditions discharged. Achieving this before you submit your finance application puts you in the best possible position for terms. Start the planning process early, engage with the local authority through pre-application discussions, and use the pre-application feedback to inform your scheme design before submitting the formal application.

If you are purchasing a site with existing planning permission, conduct thorough due diligence on the permission itself. Check the expiry date, review all conditions and identify which are pre-commencement, verify that no legal challenges are pending, confirm that the Section 106 agreement has been completed, and ensure that the permission has not been partially implemented in a way that could cause complications. Your solicitor should review the planning permission as part of the legal due diligence process, but it helps to be aware of potential issues before you even instruct them.

For developers considering sites without planning permission, consider the sequence carefully. It is almost always more cost-effective to secure planning permission before purchasing the site, using an option agreement or conditional contract to control the site while the planning application is determined. This avoids the need for expensive short-term finance to hold a speculative site while planning is uncertain. If you must purchase before planning, a bridging loan is typically the most appropriate funding mechanism, with a refinance into development finance once planning is secured. We can structure both stages of this process to ensure a smooth transition between products.