When the grass is greener – Biodiversity Net Gain – implications for developers and lenders
22 May 2023
We have been talking to our clients and contacts in the landowning and development worlds about Biodiversity Net Gain (BNG) for quite some time now as it will soon have widespread implications for many people and businesses. Lenders and investors will also be significantly impacted.
What is Biodiversity Net Gain (BNG)?
BNG is part of an approach to development that aims to leave the natural environment in a better state after the development than before.
Provisions in the Environment Act 2021 require that most developments needing planning permission and are granted consent after November 2023 (April 2024 for smaller sites) must deliver at least 10% BNG.
How will it work?
Broadly speaking, the biodiversity value of the site will be assessed before development, and the developer must ensure that, once the development has been completed, there has been an increase of 10% in biodiversity. This can be achieved by both on-site and off-site measures or by buying biodiversity credits from the Government as a last resort. These statutory credits will be priced to make them a financially unattractive option. Any BNG provided will have to be maintained for 30 years following completion of the development.
The ability to provide BNG off-site means that there is already a market developing for landowners and farmers to generate biodiversity gain and to sell this gain to developers. ’Habitat banks’ are operating in that market, as well as a number of individual landowners and consortia who are generating this gain on a large scale.
The owners of off-site gain land will be expected to enter into a planning agreement with the local planning authority or a conservation covenant with a responsible body to deliver the habitat for a minimum 30-year term.
Lending to developers
Developers should be considering the incoming BNG requirements for future developments now. When selecting a site, developers should evaluate the possible on-site solutions with the aid of the Government’s biodiversity metric tool and consider whether they need offsite solutions.
Conversely, if more biodiversity is created on-site than is necessary for that development, developers have the benefit of being able to sell the surplus as BNG units on the off-site market (which is expected to be worth between £135m to £274m annually). Alternatively, they can hold the units for use in future developments.
Developers should provide their lenders with plans to address the BNG requirement as part of their business plan, and lenders should consider the cost implications when formulating their views on whether to lend.
The initial views formulated by land agents and valuers suggest that land which is subject to a biodiversity agreement or part of a habitat creation scheme will potentially be of less value, impacted by the reduced capital income of the property. The use of the land will have to remain the same for a period of time (most likely 30 years), so when valuing the land that will also need be considered. It is not clear what will happen to the land at the end of the 30-year period. Presumably, it will be rich in biodiversity and therefore potentially vulnerable to designation. It is likely to be of reduced immediate agricultural value, even if there is no designation.
Lenders, however, will need to consider the potential depreciative effect of habitat creation on the value of their security in the land and will need to take this into account when granting consent to a landowner to enter such a scheme or taking new security over land subject to a scheme.
This is an extremely new area of law, but we are currently working with lenders to ascertain how best to take security over BNG units and/or the land upon which they sit and likewise considering how landowners and developers will be able to utilise BNG units as a bankable asset. The primary issue lies with the valuation of BNG units, which will be subject to market fluctuations and could be easily affected by general land management decisions or external environmental factors. Lenders may also look to define the Natural Capital value of land as a separate slice of value in itself, encompassing a broader asset, and landowners and developers must make sure that they get proper tax advice upon the sale or purchase of BNG credits.
Birketts is at the forefront of advising lenders, landowners, developers and local authorities with expertise in planning and environmental law, banking, finance, commercial contracts and land law. Please do not hesitate to contact Alex Schaafsma, Deborah Sharples or Sophia Key for further information.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at May 2023.