Negotiating development deals - reviewing Heads of Terms

03 November 2020

The provision of Affordable Housing plays an important role in moving towards solving the housing crisis, however, a number of deals are often delayed due to issues which could have been resolved on the outset of the transaction. A detailed set of Heads of Terms can address these issues at the earliest opportunity, avoiding delay and giving the parties a realistic timescale to work towards, whilst also providing clarity in respect of build requirements and cash flow.

In our recent social housing webinar, Sarah Fish considered a set of Heads of Terms based on a sale from a Developer to a Housing Association. Whilst some of the points are generic for property transactions, Housing Associations have specific requirements which differ to those an individual would have buying a plot next door. Sarah highlights some of these specific requirements particularly in respect of structure, payment provisions, warranties and restrictions.

  • Structure – it is not uncommon for Developers to transfer the land to a Housing Association before the units have reached practical completion. This not only provides the Developer with payments prior to practical completion but also ensures that the land is registered to the Housing Association in readiness for any shared ownership sales. The most common structures in this respect are “land at day 1” and “golden brick”. Whether a Housing Association can take a transfer of “land at day 1” will depend on the VAT implications and therefore it is important that this is discussed at Heads of Terms stage.
  • Payment provisions – it’s all in the detail. The Heads of Terms may refer to "stage payments" or "milestone payments" but consideration needs to be given to the specific stages and the percentage of the contract sum due to be paid at each stage. Where the payment structure is monthly payments these should refer back to any Contract Sum Analysis to ensure that any monthly payment is capped in line with it. As a final point, any split of the build sum needs to incorporate any enabling costs such as costs in connection with drawings and compliance with planning conditions. Ideally the cost for these should be spread across a number of payments.
  • Warranties – make sure as a Developer that what you are offering is in line with the product offered by your provider, in terms of years and contractor’s insolvency cover in particular. Housing Associations often require a Social Housing Warranty as this specifically covers properties used as affordable housing.

    The provider itself is also of high importance as the final product is likely to require a mortgage at some point and lender requirements are forever changing. The UK Finance Handbook lists the providers which are generally accepted by lenders.
  • Restrictions – common restrictions tend to be those which restrict the use of the land or the number, size and tenure of the units. Whilst these may be acceptable to a Housing Association on the outset, consideration needs to be made as to the implications of any restrictions in the long term. The wording of such restrictions can influence whether the Housing Association could charge the units as well as impact any sales of shared ownership units.

    There should be flexibility for Housing Associations to adapt in line with the sector and the need for specific tenures of housing, whilst also ensuring grant can be obtained where possible and that there is flexibility in terms of funding options. Therefore, any restrictions need to include provision for them to be varied as well as provide for carve outs for not only individual owners of the affordable units but also any lenders.

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 Sarah Fish 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.