Birketts has held the latest in its highly regarded series of webinars, this time on the topic of social housing. Pete Goddard hosted the session with contributions from Jonathan Hulley, Emily Groom, Sarah Fish, Jonathan Parker and Ian Rattenbury.
The team discussed the key social housing topics of the moment, including best practice on negotiating development deals, the need for forward planning for charging exercises, Planning White Paper, analysing the Building Safety Bill from a public landlord’s perspective and also providing a social housing case law update.
Development deals from hell – Sarah Fish
Affordable Housing deals are often delayed due to issues which could have been resolved at the outset of the transaction. Sarah Fish highlighted the importance of reviewing the Heads of Terms closely as soon as possible to avoid delay and provide clarity in respect of timescales, cash flow and build requirements.
Sarah said: “For the majority of clients, a hellish deal would be one which massively overruns in terms of timescales and affects professional relationships. A good set of Heads of Terms can address the main points at the outset by flushing out any issues or providing the parties with a more realistic idea of timescales.”
Sarah highlighted key areas to focus on including the structure of the transaction, payment provisions, warranties and restrictions.
With regards to structure, Sarah said that developers are often keen to transfer the land to a Housing Association (HA) before the units have reached practical completion, releasing payments to the developer at the earliest stage as well as ensuring that the land is registered to the HA in readiness for any shared ownership sales. She commented that whether or not a client can take transfer of the land at day one depends on whether the developer has opted to tax the land. If so, in a nutshell , although the supply of buildings is usually zero rated HMRC do not do deem there to be a dwelling until foundation level, also known as golden brick. So it is very important to discuss the VAT implications at the heads of terms stage.
Next, Sarah moved on to payment provisions. Although Heads of Terms often refer to stage payments, they provide little detail of the stages or percentage costs. If a contract does provide for monthly payments, the payments should always refer back to the CSA (Contract Sum Analysis) agreed between the parties, with any split of the build (enabling costs for preparing drawings, complying with planning permissions etc.) spread out rather than included in the first payment.
Sarah then moved on to warranties. She stated that developers should ensure that what they offer is in line with what their provider covers, checking that any cover includes contractors’ insolvency and an adequate year term. Developers should check that their provider meets lender requirements using The Council of Mortgage Lenders Handbook, which lists the warranty providers that are most likely to be accepted, such as NHBC, LABC and Premier Guarantee, amongst others.
Charging ahead – Emily Groom
Emily Groom opened the next section of the webinar on preparing development sites for charging and offering advice on how to streamline this complex process.
Emily stated that: “The usual position when developing a site 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…. So given the delay in-between acquiring the site and mortgaging it, there can be an element of crystal ball gazing as to what the lender will require and this can cause us some issues.”
Emily continued that social housing loans differ from ordinary financing as the value is largely dictated by who is buying and how they can use it. To achieve the maximum value, a lender needs to be able to sell the units on the open market, free from any social housing restrictions.
Social housing is valued in two ways. Firstly, market value subject to tenancies (MV-T) – open market value which assumes no restriction on use as social housing. The second method is existing use social housing value (EU-SHV), which assumes no restriction on use as social housing in perpetuity and is based on a calculation of rents typically received over a 30 year period. Overwhelmingly, existing use social housing value is far below market value.
To allow charging at MV-T a lender must be exempt from the restrictions on use and to achieve this a mortgagee protection clause in favour of the local authority is required. Although the sector through the Joint Finance Working Party has agreed a clause that allows charging at MV-T, this doesn’t mean that other forms of the clause are not acceptable to a lender, as long as the following key points are covered:
- 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
Emily reminded delegates that lenders do not like absolute restrictions on title and that if consents are required, it is important to signpost the lender to the relevant transfer or lease with details of the restriction. Lenders also do not like providing Deed of Covenants, which can become complicated when the property changes hands, nor do they like rent charges, which can allow management companies to take possession of the property to settle any debts. Lenders will only accept leases of over 100 years with regard to development sites and consider forfeiture without notice unacceptable.
Finally, Emily warned that delegates could not always rely on a good working relationship with developers or contractors so it is vital to be explicit with requirements as to documentation required for due diligence. As the lender will need access to an extensive range of documents it is never too early to start thinking about collating title and planning documentation.
The Planning White Paper: planning for the future or strangling affordable delivery? – Pete Goddard
Pete stated that he would be discussing three main publications that relate to affordable housing delivery. The first two, ‘Planning for the future – the White Paper’, and ‘Changes to the current planning system – Consultation on changes to Planning Policy and Regulations,’ were published in August 2020, with the latter proposing a number of interim changes to the existing planning system until the White Paper legislation is finalised. Finally, there would be reference to a third document, the ‘Capital Funding Guide /Affordable Housing Programme 2021-2026,’ which relates to changes in shared ownership published earlier this year and is likely to affect development appraisals.
Planning for the future – the White Paper
Pete stated that the White Paper shows a clear move towards further home ownership, with an emphasis on supply.
The paper is divided into three pillars, each featuring consultation questions.
- Planning for Development – measures to simplify and speed up the planning process.
- Planning for Beautiful and Sustainable Places – measures for design improvements.
- Planning for Infrastructure and Connected Places – provisions for social housing.
Local Plans will now be subject to a single sustainable development test which will require the local authority to ensure that they balance environmental, social and economic targets. It is also important to note that Section 106 agreements are not set to be abolished, but will possibly reappear in a different format.
Changes to the current planning system
Pete summarised the Changes to the Current Planning System document, commenting that the new standard method for assessment of local housing need will be linked to national targets rather than local targets. Based on the current demand, 300,000 units a year will be divided up amongst local authorities and Permissions in Principle will be extended to major developments. The consultation makes it very clear that 25% of all onsite affordable housing will be required to be sold as First Homes by the developer. Furthermore, the intermediate consultation temporarily enhances the threshold for the requirement for provision of on-site affordable housing to 40 to 50 units for an initial period of 18 months before review.
Threats to delivery
Whilst the White Paper commits to delivering more affordable housing by allowing local authorities to drive up the provision of affordable homes, the concern is that the removal of Section 106 obligations will reduce the main source of new affordable housing to registered providers (RPs).
Pillar three of the White Paper sets out in Proposal 21 the principle that the Infrastructure Levy itself will be used to deliver affordable housing provision. However, as the Levy will technically be the only vehicle to provide any new affordable housing, it is likely that local authorities will have to ring-fence Levy sums to protect the supply.
The biggest threat in terms of affordable supply is the proposed increase in the affordable housing threshold requirement. With no requirement for affordable housing on sites of up to 50 units, total supply will be reduced, particularly through RPs who would usually take smaller, all-affordable developments. Smaller rural schemes will also be impacted. The White Paper also recognises the possibility that the larger house builders will take advantage of the changes by breaking up sites into smaller packages of 40 or 50 units, and the fact that there will need to be preventative measures introduced – but it remains to be seen whether those measures will succeed.
Are there any upsides? Yes. For RPs, it will speed up delivery, lower administrative costs, shorten the process of getting schemes through and speed up the cross subsidy of open market sales. As the temporary increase in the affordable threshold will see sites of up to 50 units freed from the provision of affordable housing, paradoxically this could lead to more cross subsidy by RPs for affordable provision elsewhere.
The consultation changes to the current planning system will pass much quicker than any legislation from the White Paper with the First Homes Initiative coming in to force on the 16th November, whilst the threshold increase up to 50 units will be announced in the autumn. Legislation from the White Paper could arrive as late as the second half of 2024, – if at all – and an Election is due in 2024… so watch this space.
The Building Safety Bill – Jonathan Hulley and Jonathan Parker
Jonathan Hulley stated that from a public landlord’s perspective, the team expected the Bill to usher in important changes around building safety which would have a significant financial and practical impact on the sector.
Jonathan noted that the draft legislation provides for a far more stringent regulatory regime, focussing on three key stages: the design stage, the construction stage and the management of the building post construction.
Another key change is the establishment of a building safety regulator (BSR) with strict powers of enforcement. There is also going to be a focus on the safety of higher risk buildings including those 18 meters or higher (or six storeys or higher), whichever threshold is reached first (“Higher-Risk Buildings”).
Jonathan Parker stated that the BSR will ensure that those involved in the building of residential buildings have the requisite competence to fulfil their role by assigning them specific duties (e.g. Client, Principal Designer, Principal Contractor etc.) and will give industry bodies the power to punish those who are not up to scratch. There are additional changes that are going to be brought in to apply to Higher-Risk Buildings.
Jonathan said: “The Bill will also increase the time limits for the BST to bring about full enforcement power, where there has been evidence of non-compliance with building regulations” and also highlighted that “enforcement will extend to individual directors who, if found to have consented to non-compliant work, can face two years imprisonment and/or an unlimited fine”.
The BSR will also have the power to control materials and construction products marketed in the UK, withdrawing those they believe are not up to standard and placing the onus on manufacturers to ensure that the products they supply are safe.
Specific to Higher Risk Buildings is the concept of the three gateways, strategically placed at key points of the construction cycle: in short, you will not be able to progress from one gateway to another without providing evidence that you have met the demands of the previous gateway. It is worth noting that residential care homes, hotels and prisons are currently excluded from this higher risk category.
The first gateway will focus on working with stakeholders to assess matters such as fire safety, access for emergency fire vehicles and adequate water supply, before planning is granted.
The second gateway will focus on the construction process and require the ‘Client’ to submit information to the BSR that demonstrates that they have complied with building regulations relating to the construction of the building and to confirm that they are satisfied that the ‘Principal Designer and the ‘Principal Contractor can and have discharged their responsibilities effectively.
The final gateway will require the Client to submit to the BSR, the ‘as built’ building information, including updated plans, and an updated fire and emergency file relating to anything safety related.
Next up were details of the accountable person (AP) – the individual legally responsible for building safety as a whole. The AP has to be established before occupation and will be responsible for registering a Higher Risk building and applying for a building insurance certificate, Building Assurance Certificate. As the AP is most likely to be either the freeholder, long leaseholder or even a management company with multiple assets, the bill has acknowledged that a Building Safety Manager (an individual or organization) is required to assist on a building-by-building basis.
Jonathan Hulley then turned to the topic of resident engagement, He noted that developing a resident engagement strategy will be a key requirement of the landlord prior to the property becoming available for occupation. The Bill makes clear that this should be a cooperative regime, with the landlord developing an annual building safety report in consultation with the residents, who will have influence over both decision making and policy making.
On the topic of charging and fees, the bill will also introduce into every long lease (21 years or more) a requirement for leaseholders to pay towards the costs of building safety work that might be required. It also proposes an amendment to the Landlord and Tenant Act 1985 whereby the landlord and leaseholders agree on repair works, who will carry them out and how to split the cost.
This Bill also introduces a new building safety charge, allowing the landlord to charge a separate building safety fee to pass on costs associated with drafting the building safety report, employing a Building Safety Manager or compliance linked to satisfying the regulator, to leaseholders. This will include penalties. Controversially, although landlords cannot demand this new charge in intervals of less than three months, lease clauses regarding payment within 28 days may be compulsory under the new legislation.
Jonathan concluded by stating the sluggishness of Parliamentary procedure, along with the scrutiny of the relevant select committee, means it is unlikely that we will see legislation reach the light of day before the end of 2021.
To watch the webinar in full, please visit Birketts’ YouTube page.
If you have queries on any of these topics or would like to know more about the services we offer, please contact our Social Housing team.
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