Lending against social housing - how to future-proof your developments

10 November 2020

One of the topics we explored in our recent Social Housing webinar was how to future-proof and prepare sites developed for social housing as security to lend money against.

The usual position when developing a site for housing is that it is bought and developed with mortgage finance. Social housing is unusual in that it is bought with grant funding or, more recently, trading capital and then charged or mortgaged once the units are built. In simple terms, the money then lent against the units is used to fund more social housing and the process repeated.

As explained in the talk, given the delay between acquiring the site and then lending against it there is an element of crystal ball gazing as to what a lender will require, and this can cause issues for Housing Associations.

Apart from persuading the lender that the site represents good security (i.e. that it has all the rights, consents etc. that it requires and there is nothing preventing its consented use), there is a particular problem that faces Housing Associations and that is securing the maximum value or drawdown against a property. To do this, the lender must be able to sell the tenanted dwellings on the open market free of any restriction to use the dwelling as social housing to achieve MV-T or Market Value subject to tenancies. For the majority of the country this is on a par with open market value and significantly more than EU-SHV or Existing Use Social Housing Value which is the value given to social housing which must be used as social housing in perpetuity.

The main way in which social housing is restricted in use is through the planning process and, in particular, s106 Agreements. These can set out restrictions on tenure, nominations to the dwellings and local connection criteria, all (some would argue rightly so) restricting its use to social housing. We explored in detail how to exempt lenders from these requirements through the use of a Mortgagee Protection Clause (also known as a Mortgagee in Possession or Mortgagee Exclusion Clause). This is not an absolute exemption for lenders, but rather allows them to sell free of the social housing restriction if they have first offered the dwellings to the local council (or their housing association nominee). We looked at the industry standard clause drafted by the Joint Finance Working Group to establish some key points that any clause should include to be lender compliant, these are:

  • the mortgagee should not need to take possession of a dwelling to realise its security, i.e. it (and the sector) wishes to have the ability to sell with the tenants in place
  • the clause should include all persons and all methods of administration, i.e. all types of receiver and administrator
  • the clause should include anyone who derives title from them, i.e. buyers from the mortgagee
  • the mortgagee should only have to use reasonable endeavours to sell the units to the council or their nominee
  • the sale price should be set at a level so as the mortgagee does not make a loss
  • the council or nominee should only have three months to complete a sale from the date of the notice
  • if the sale is not completed within that period then the mortgagee should have the ability to sell free

If these provisions are included then, whilst we cannot predict with absolute certainty that any future lender would be happy with the s106 agreement, we believe that this is the best approach to avoid any time-consuming renegotiation and variation of the agreement.

This article expands on topics covered in our recent social housing webinar. This can be watched in full on Birketts’ YouTube page.

If you would like to discuss any of the matters covered above in further detail, please contact Emily Groom or another member of the Social Housing team.

Birketts’ upcoming webinars can be found on our Events pages.

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 November 2020.