Agreements with Registered Providers: 5 Top Tips

For developers bringing forward any residential development, the affordable housing package will be one of the most important elements of ensuring a scheme actually gets consent – particularly in the current political and policy environment. But while it is easy to focus only on those crucial headlines – number of units, tenure, and size – it is important to keep an eye on what comes after planning permission. Most of the time, this will mean doing a deal with a registered provider, which will have its own preferences as to how the deal should be structured and how the units will be managed. Here are our top 5 points for developers to be aware of.

1. Think carefully about section 106 restrictions …

One of the top priorities of the local planning authority will be to ensure that the affordable housing package is adequately secured in a section 106 agreement. While every agreement is different, they all generally contain two key things.

First, a requirement to build the affordable housing units and sell the freehold or a lease (usually at least 125 years) to a registered provider. This will typically be drafted in the form of what is known as a “Grampian” restriction: a requirement to do something (ie build and sell affordable housing units) before you do something else (ie occupy your valuable market housing).

Second, there will be a restriction stating that the units to be provided as affordable housing cannot be occupied for anything other than the tenure set out in the agreement.

How these provisions are drafted is hugely important. An improperly drafted Grampian restriction, or one which doesn’t take into account the circumstances and programme of the scheme, could unreasonably prevent or delay the most valuable parts of the development from being occupied – therefore impacting on sales, funding and, ultimately, viability.

2. … and then make sure you pass them down

If the section 106 agreement obliges you as the developer to do something in relation to affordable housing – eg to maintain the housing in a particular tenure, or to keep the service charge low – you will want to pass this obligation down to the registered provider. The transaction documents should therefore be back to back with the section 106 so nothing falls through the gaps.

This will involve an analysis of whether it is appropriate for you as developer or the registered provider, or both parties, to fulfil the relevant obligations taking account of the respective land interests and rights.

You will need to pay particular attention to what could go wrong to prevent any restriction being lifted on the market homes – like, what would happen if the registered provider you are selling to goes insolvent, or ceases to be recognised as a registered provider? All these issues will need to be thought about and catered for in the transaction documents.

3. Think carefully about where the affordable units sit within the estate management structure

The registered provider’s preference will typically be to take all of the affordable units in a single transfer or a single block lease. A developer may prefer to retain control over the common areas within the block. This will ensure the provision of services and recovery of service charge is consistent across the estate (but see point 4 below). If the registered provider accepts that approach, it may seek greater control over the management company responsible for the block (eg through shares in the management company and voting rights) but whether this is acceptable to a developer will depend on the number of units and their configuration within the block.

4. Test whether the estate service charge works for the affordable units

The registered provider will be very keen to ensure that the service charge for the affordable units is as low as possible – particularly given that some tenures involve rent caps that are inclusive of service charge (there may also be specific covenants regarding service charge within the section 106 agreement). In the service charge provisions in the lease, the registered provider will seek to reduce the developer’s discretion as to which services are provided and will want wide consultation rights. Depending on the nature of the development, the registered provider may want certain non-essential service charge items excluded (for example the costs of concierge services or an on-site gym), but please note that this may cause reputational issues for the developer as highlighted in recent news articles where affordable tenants have not been able to utilise all of the amenities provided at new development sites.

5. Think about utility supplies to affordable units

It is likely that a registered provider will require that its tenants enter into direct supply agreements with the utilities providers rather than have utilities charged through the service charge (which would put the credit risk on the registered provider as the direct tenant of the developer). Again, you will need to think through carefully how utility services are procured and managed for the affordable units and how this ties in with utility arrangements for the wider estate.

In summary there are lots of issues to be thought through when dealing with a registered provider and reaching agreement with a registered provider on the disposal of the affordable units will require careful consideration. As such, we recommend that solicitors are instructed at an early stage to ensure that the transaction documents deal with the requirements of the section 106 agreement and are consistent with the developer’s plans for the remainder of the estate.

For further information please contact:

David Evans
David Evans
Senior Associate, Real Estate, London
+44 20 7466 7480
Annika Holden
Annika Holden
Associate (Australia), Planning, London
+44 20 7466 2882

Julian Pollock
Julian Pollock
Partner, Real Estate, London
+44 20 7466 2682
Matthew White
Matthew White
Partner and Head of UK planning practice, London
+44 20 7466 2461

 

Real Estate EP5: The future of planning – Matthew White and Ghislaine Halpenny in conversation

British Property Federation (BPF) director of strategy and external affairs, Ghislaine Halpenny, sits down with Matthew White, partner and head of UK planning, to discuss planning, its ever-changing nature and the direction it is taking.

 

Also published on the BPF soundcloud for the BPF Futures network, a networking and development group for junior professionals working in all areas of UK real estate.

For further information please contact:

Matthew White
Matthew White
Partner and Head of UK planning, London
+44 20 7466 2461

Affordability, viability and clarity – the impact of valuation on supply of affordable housing

Viability is at the heart of the extent to which private developers can be expected to bridge the gap between demand for and supply of affordable housing. In April this year, in a postscript to his judgment in the case of Parkhurst Road Ltd v Secretary of State for Communities and Local Government and another [2018] EWHC 991 (Admin), Mr Justice Holgate said that “uncertainty on how viability assessment should properly be carried out” is leading to “a proliferation of litigation” and called on the Royal Institution of Chartered Surveyors (RICS) to revisit its 2012 Financial Viability in Planning Guidance. Since then, the revised National Planning Policy Framework (NPPF) has been published together with revised Planning Practice Guidance (PPG) on viability, but a review of the RICS guidance is still ongoing. On 5 October, the Deputy Mayor of London and the Executive Member for Housing & Development at Islington Council wrote a joint open letter to the President of the RICS regarding affordable housing and the 2012 RICS Financial Viability in Planning Guidance. Their letter asks RICS to revisit its guidance, as called for by Holgate J. Continue reading

Affordable Housing Back to Basics: What do the new NPPF and Draft London Plan modifications mean for affordable housing?

This blog post explores how the meaning of affordable housing has evolved following the publication of the revised National Planning Policy Framework (“NPPF”) on 24 July 2018 and the Draft New London Plan showing Minor Suggested Changes on 13 August 2018. This is part of our ‘back to basics’ affordable housing series and is intended to supersede entry 1 in the series. Continue reading

EGi: What’s so unlawful about London’s affordable housing policy?

The High Court has declared a key policy in the mayor of London’s planning guidance on affordable housing ‘unlawful’ – but what does that mean in practice? Matthew White, Partner and Head of UK planning, explains the impact of the decision in this article published on EGi on 25 June 2018, in hard copy in Estates Gazette on 30 June 2018.

For more information please contact:

Matthew White
Matthew White
Partner and Head of UK planning practice, London
+44 20 7466 2461

 

Closing the “viability loophole”? A return for the developer must be taken into account when setting local plans

The Government is recommending that viability is assessed in detail by the local authority at the stage of setting its development plan and allocating land for certain uses, and that specific assumptions should be made at that stage regarding land value and what is a reasonable return for a developer – using the ‘existing use value plus’ (EUV+) land valuation method and assuming a return of 20% of gross development value (GDV) for the developer in appropriate circumstances.  It could then be more difficult for a developer to re-open negotiations on viability at a later stage.

The Government’s new Draft Planning Practice Guidance for Viability sets out more detail on the new proposals, as we explain in this post.  This draft guidance is one of a raft of new publications which the Government have released, including new draft National Planning Policy Framework (NPPF) and a consultation on developer contributions including Community Infrastructure Levy (CIL) which are all aiming to increase the supply of housing, provide certainty for developers, capture land value more effectively and improve and speed up the planning process.

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A five step guide to calculating the level of affordable housing the Mayor considers viable

In this blog post, we explain in simple terms how a developer is now expected to set the level of affordable housing which the Mayor of London deems viable for a particular site.  This is part of our ‘back to basics’ affordable housing series.

The Mayor is fed up with developers arguing that it’s not viable for them to deliver policy compliant levels of affordable housing due to the high prices they are paying for sites. In his Supplementary Planning Guidance (SPG) on Affordable Housing and Viability issued last August, Sadiq Khan refers to the ‘circularity’ this causes: land prices are higher than they should be because buyers and sellers are not factoring in delivering much affordable housing.

The Mayor wants to stop this by ’embedding’ delivery of policy compliant levels of affordable housing into land prices. To do this, he is going to have no regard to the price developers actually paid for a site. The maximum he will let developers factor in to viability calculations is the value a site has in its existing use plus a margin of 10-30% where appropriate (what he refers to as the “benchmark land value”).

Please read on for the five step guide to calculating the level of affordable housing the Mayor considers viable.

Herbert Smith Freehills is running workshops which talk through an example calculation to show how this approach to viability assessment works in practice. In the workshop we also run through calculations showing how early and late viability reviews work  (post-planning) under the Mayor’s SPG. This will be the subject of future blog entries.  Please contact us for more information.

Step 1: Gross Development Value

Step 2: Residual Land Value

Step 3: Benchmark Land Value

Step 4: Comparing Residual Land Value and Benchmark Land Value

Step 5: How much affordable housing can the developer afford to deliver on this site, factoring in the benchmark land value?

Comment

 

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Affordable Housing: Back to Basics

This post has been superseded by a new post assessing affordable housing under the revised National Planning Policy Framework published in July 2018 and the draft New London Plan showing Minor Suggested Changes published in August 2018. See here for the new post.

“Affordable housing” – two words that those working in the property and planning world can hardly move without seeing flashed about everywhere. There is a wealth of information available on the subject. However, much of it is technical, highly detailed and assumes an existing level of knowledge that can make it hard for those who are new to the industry or who haven’t previously come across affordable housing to really get to grips with the subject.  This blog is the first in a series of blogs that we will be publishing over the coming weeks that will go back to basics to explain what is affordable housing in England, what are the different types, who is eligible for it, how is it implemented and what it means for private developers.

1. Where is affordable housing defined?

2. What are the different types of affordable housing?

3. The London Plan

 

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Affordable housing viability calculations: Herbert Smith Freehills workshops on Mayor’s new guidance

Herbert Smith Freehills are running workshops for property developers on housing and viability, with a focus on London and interpreting the Mayor’s recently adopted guidance on viability and affordable housing.  In our workshops we run through a case study with actual calculations showing how viability reviews work under the Mayor’s new formulae. Please contact us for more information on the workshops.

Background: proposals on a national and London-wide scale to address the housing crisis

Following the Government’s Housing White Paper (in February 2017), several recent publications by the Government and the Mayor of London set out proposed changes to planning legislation and policy, designed to address the housing crisis:

– The Mayor of London adopted his Affordable Housing and Viability Supplementary Planning Guidance (SPG) in August 2017. This SPG aims to improve transparency and trust in the planning process, with a focus on viability information, and aims to increase the expectation of actual delivery of affordable housing to at least 35% (and 50% on public land) for each new development scheme which proposes 10 or more new homes, with an overall long-term strategic aim of at least half of all new homes in London being affordable.  The method and explanations in the Mayor’s SPG are more detailed and rigorous than those in the Government’s national consultation (see below), and there have been industry calls for the Mayor’s methodology to be used nation-wide. Continue reading

What impact do overseas investors have on housing supply?

Planning Resource has published an on-line article by Matthew White, Head of Planning, London, discussing the conclusions of the May 2017 report by the London School of Economics concerning the impact of overseas buyers on housing supply. For the Planning Resource article, please see here or contact us.

The LSE report finds that London attracts a significant amount of institutional investment from lenders and business globally, bringing forward development on major development sites faster and with more homes than would otherwise have been the case. Despite a perception that new homes bought by overseas investors are kept empty, the LSE found that in fact this is generally not the case. The LSE report says:

Developers estimated occupancy rates for individual schemes were generally up to 95%. There was almost no evidence of units being left entirely empty – certainly less than 1%. Units bought to be let out appear to have very high occupancy rates and indeed some are ‘over-occupied’ eg by students. However for those units bought as second homes, occupancy could be as little as a few weeks a year. Many such second home sales are to UK residents, not overseas buyers.

This will be of interest to developers who rely on overseas buyers to de-risk their projects. The issue is likely to remain contentious in some areas of London, but this research will be useful evidence in response to such concerns.

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