It is doubtful you will hear Jay-Z trying to shoehorn the above statement into one of his songs, but ask any residential development lawyer and it is a recurring grumble. So often it is the way that a section 106 agreement is negotiated before a registered provider is on board. Often before the developer itself is on board. Yet the section 106 agreement sets in stone the affordable housing provisions at the time it is entered.
Frequently, we see issues in the drafting of the affordable housing provisions of section 106 agreements which require deeds of variation (which can be time consuming and costly) or even cause transactions to abort.
Private developers don’t want complications or delay added to their affordable housing sales, and registered providers don’t want to put stumbling blocks in the way. The purpose of this article is to set out a brief summary of some of the typical defects, to help you spot potential problems in advance, and avoid issues further down the line.
The Crux of the Problem
Section 106 of the Town and Country Planning Act 1990 states that – unless there is a specific exception set out in the agreement itself – the obligations contained in a section 106 agreement will bind successors in title to the land.
The obligations to use certain dwellings on a scheme as affordable housing, will therefore bind all those who own and occupy the affordable housing dwellings in future. On one level, that sounds reasonable. A registered provider will be purchasing the dwellings for that very purpose. However, there are three classes of owner and/or occupier who need the protection of an exclusion:-
Fully staircased shared owners
If any of the affordable dwellings are permitted to be sold as shared ownership, then when a leaseholder has purchased all of the equity in their dwelling (known as ‘full staircasing’) they will then own the dwelling outright and the dwelling will have left the social housing sector. If the dwelling is still bound by the restriction to use it as affordable housing, the fully staircased owner will not be able to occupy or sell their dwelling on the open market. In reality this means they will not buy it in the first place.
Right to buy and acquire
Similarly, once a tenant exercises a right to buy or right to acquire, the dwelling will have left the social housing sector. The buyer needs to be able to occupy and sell their dwelling free of the affordable housing provisions of the section 106 agreement.
This is perhaps the most common issue in the affordable housing provisions of section 106 agreements. Registered providers rely heavily on borrowing against their assets to invest in running and growing their businesses. As the Government recently announced cuts in rental incomes, the reliance on private funding becomes greater still.
But what would happen if a mortgagee did enforce its security and repossess the affordable dwellings? If they would be bound by the affordable housing provisions, then they will only lend at a value reflecting what the properties are worth for social housing – known as ‘existing use value for social housing’ or “EUV-SH”. Therefore, the mortgagee needs to know that they, or any receiver they appoint, will be excluded from the affordable housing provisions – typically known as a ‘mortgagee exclusion’ or ‘mortgagee in possession’ clause. The devil is always in the detail of any drafting, but mortgagee exclusion clauses usually fall into 3 categories:-
The clause gives a lender an absolute exclusion, allowing them to quickly sell the affordable housing dwellings free from all planning restrictions. This will enable a registered provider to borrow against a much better valuation, known as ‘market value subject to tenancies’, or “MV-STT”. Councils do not like the risk of potentially losing affordable homes but it can equally be argues that the more a registered provider can borrow against their assets, the more affordable homes they can produce.
The mortgagee exclusion clause is conditional. This is the most common type, and a procedure is imposed on the lender to try and sell the dwellings to another registered provider to preserve the use as affordable housing. If the procedure is clear, and the time limits allow a sale within 3 months, then although there will be an effect on value, registered providers can usually live with this.
A section 106 with affordable housing provisions and no mortgagee exclusion clause, or a clause which is conditional but with a lengthy or complicated procedure, is defective. It will either have a large impact on value or may put off lenders altogether.
What you should do
All Councils adopt different approaches and the drafting in section 106 agreements varies wildly. Winckworth Sherwood are a member of the Securitisation Working Group which produced a standard mortgagee exclusion clause earlier this year. The Group is working to promote the standard form of wording, but a harmonious approach is some way off.
If you are looking at a scheme subject to a section 106 agreement, or are looking at finalising the section 106 agreement before a registered provider is on board, it is well worth seeking some early advice on the affordable housing provisions to check you are not unwittingly storing up problems which come home to roost in the future.