The key factors a commercial property lawyer has to consider when acting for Registered Providers who are acquiring land or property for development.
Registered Providers (RPs) (sometimes known as ‘registered social landlords’) are independent, not-for-profit, social businesses which provide affordable housing for rent, and low-cost housing for sale, and are partners in regeneration projects with a social conscience. They aim to deliver affordable homes and welfare services to vulnerable members of society. However, this sector has undergone a period of rapid change since 2008, which has brought with it increased risks and challenges for RPs. In this article, we outline the main factors lawyers must take into account when advising RPs acquiring land or property for development and begin with a brief overview of the RP sector and the underlying pressures it currently faces.
Registered Provider Sector
A steep reduction in grant rates, changes in government policy, a shift in the approach to subsidy, and ongoing changes resulting from welfare reform have created uncertainty and increased risk for RPs, resulting in increased pressure on their business plans and their ability to deliver lowcost housing. There is an increased need to balance reward and risk when assessing the viability of schemes.
RPs acquiring land for development or purchasing off-the-shelf units from private developers have requirements that are specific to their sector. They are regulated by the Homes and Communities Agency (HCA), and in addition to the usual due diligence and contractual negotiations that would be undertaken for any developer client, consideration must be given to affordable housing requirements and to guidance and regulations imposed by the HCA.
Furthermore, reduction in grant subsidy means that RPs increasingly require private finance, whether short-term debt from retail banks or alternatives such as long-term borrowing from the capital markets. When acting for an RP in an acquisition, a legal adviser needs to ensure that the RP only obtains good and marketable title to enable the property to be put into charge in the future, but also maximises the valuation of what it acquires.
For funding purposes, valuers value housing association stock using RICS Valuation – Professional Standards (the ' Red Book’), either on the basis of Existing Use Value Social Housing (EUVSH) or the higher Market Value Subject to Tenancy Valuation (MVSTT). Both valuations based on percentages of open market value. Valuers acting for lenders consider that, if there are restrictions limiting a property’s use by a mortgagee-in-possession to ‘affordable housing’, only the lower EUVSH can be applied. The difference in value between EUVSH and MVSTI can be significant.
We now outline the main factors underpinning an RP sale of property or land that lawyers need to understand and engage with.
An RP acquiring property with capital grant funding from the HCA has to comply with the rules and procedures set out in the Affordable Housing Capital Funding Guide (AHCFG) and its framework delivery agreement with the HCA. The AHCFG covers all aspects of the HCA’s requirements, and knowledge of the relevant sections of the AHCFG is a necessity. Below are some examples of the requirements:
- The HCA’s property purchase requirements mean that, where an RP is acquiring land, the land must have “good title”, that is, the RP must be able to prove its title to such a degree that no party can defeat it. For instance, a title not meeting the HCA’s requirements for good title, but which has a defect that can be dealt with by obtaining indemnity insurance, requires specific authorisation from the HCA. In the event of a claim, the RP must be advised that it will assume the risk if challenged, and it may have to repay the grant if the property can no longer be used for the purpose for which the grant is claimed.
- In order to claim grant, the transaction must be at the right stage – that is, an RP is not permitted to claim:
- if it does not have a secure legal interest in the property;
- in advance of need – that is, when the RP has not entered into the commitment for which the grant is intended, or does not yet have to make payments, even though contractually committed to a scheme;
- before the relevant “payment milestone” as detailed in the AHCFG has been achieved.
The AHCFG contains guidance as to what is meant by “secure legal interest”, which depends on whether the RP is delivering under the 2008-11 Affordable Housing Programme (AHP) or the 2011-15 AHP. The AHCFG requires “a binding contract with the owner of the legal and beneficial interest in the site... to secure a sufficient interest [freehold or leasehold] and that securing that interest is conditional only upon matters that are within the direct and unilateral control of the Registered Provider”.
This approach prevents reliance on contracts conditional upon, for example, obtaining planning consent or the release of a restrictive covenant, where the satisfaction of these conditions is not within the RP’s control and there is a risk that the RP will not be able to complete the purchase and own the land. However, agreements with a local authority to sell land on which houses are to be constructed, subject to completion of the houses to a specified standard, would be acceptable, as satisfaction of the condition is within the RP’s control.
Increasingly, RPs are purchasing units from private sector house builders, pursuant to their obligations under section 106 of the Town and Country Planning Act 1990 to provide affordable housing. RPs are also often subject to planning conditions or section 106 obligations on their own developments. Local authorities are in the difficult position of balancing the need to ensure affordable housing stays affordable, with the need to preserve the viability of new developments for local RPs. The ability to negotiate terms differs widely between local authorities.
RPs require expert planning advice and the involvement of their legal advisers in the negotiation of any affordable housing planning obligations as early as possible. The variation of a completed section 106 agreement is a lengthy, expensive and uncertain process. The practical effects and acceptability of affordable housing obligations to an RP is all too often not considered a priority to a house builder pushing a planning application through.
The regulatory position
The AHCFG has particular rules in relation to section 1 06 obligations. If the requirements are not complied with, then the development or acquisition may become ineligible for grant funding. For example, restrictions on the recovery of grant by the HCA, by requiring any sale proceeds to be spent in specified locations or returned to a local authority in contradiction of national government policy or the HCA, is not acceptable. The AHCFG has a non-exhaustive list of requirements, and urges RPs to contact it and to obtain independent legal advice. The HCA’s general position is that, except in exceptional circumstances, grant should not be available where an RP is taking section 1 06 units on a private development, as it is the developer who should be providing the relevant subsidy to ensure the delivery of affordable housing.
Points to consider
- Section 106 agreements containing affordable housing provisions must contain a mortgagee exclusion clause to protect the mortgagee in the event of RP default. If it does not, and the RP wishes to raise finance, a lender will only lend on a EUVSH basis.
- Attempts by local authorities to make the mortgagee exclusion clause conditional on the mortgagee using reasonable endeavours to sell to another RP or conditionality often results in the property being valued at EUVSH. Some lenders will accept an obligation to use reasonable endeavours to sell the property to an RP for a period of three months before sale on the open market, subject to the property being sold at a price sufficient to redeem the mortgage. Given that RPs need to be able to raise private finance, the failure to include an adequate mortgagee exclusion provision creates a significant disadvantage. A key aspect of an acquisition is whether an RP will be able to use the property for the purpose for which it is intended. Further, if the market changes,will the RP have the flexibility to change the tenure of the housing? As an RP's financial models change from a capital to income base, it will need to avoid voids (that is, properties that do not have a current tenancy so the landlord is not receiving a rent) at all costs.
The intended use of the units needs to be considered when negotiating a section 106 agreement, to ensure that there is sufficient flexibility to enable an RP to change tenure to avoid voids. The Affordable Rent model introduced by the government in the 2010 Spending Review enables RPs to offer tenancies at up to 80% of local rent levels, helping them generate more income for reinvestment and a higher revenue stream to borrow against. To benefit from this, RPs have to look more carefully at their demographic, as whilst affordable rent works in more affluent and popular areas, in disadvantaged areas, it often remains unaffordable. The RP must be satisfied that tenures specified in any planning obligation are appropriate to the location of the property and have sufficient flexibility to deal with future.
Careful attention should also be paid to factors such as occupancy controls and nomination rights which restrict the current and future use of affordable housing, and where future property sales are restricted to multiples of local or regional incomes.
Further restrict ions on use can be found in existing title documents, transfers and nomination agreements. When acquiring land at low cost from local authorities, restrictions on the use and tenure of the dwellings and nomination rights are often imposed in transfers or section 106 agreements. Care needs to be taken to ensure mortgagee-in-possession exclusion provisions are included to avoid limiting properties to EUVSH levels.
Nomination rights need to be considered carefully to ensure that terms are not too onerous and to avoid unacceptable delays in disposals and void periods, and that the constraints do not conflict with the RP’s own letting policy or other requirements.
In a heavily regulated sector, where evaluating risk and maximising the valuation of stock for funding purposes is key, the role of a solicitor acting for an RP acquiring land or property is three-fold. They must ensure that the RP client: is acquiring land which it can use to meet the needs of its business; complies with all its regulatory requirements; and is able to maximise the value of the property when raising the private finance it needs to build or acquire more affordable homes.