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

 

MCIL2 update – in force 1 April 2019

Last week, we published a post (see here) noting that the Mayoral Community Infrastructure Levy 2 (‘MCIL2’) was due to come into force on 1 April 2019, setting out details of the new charges, which developments would be affected and the implications for developers. By a letter dated 28 February 2019, the Greater London Authority (‘GLA’) has now confirmed that the Mayor of London has formally adopted the MCIL2 Charging Schedule and that it will indeed be brought into effect on 1 April. Two modifications have been made to the final version of the Charging Schedule, the most important of which is that the Elephant and Castle Opportunity Area is not part of the Central London Charging Area for office, retail and hotel development; the second modification clarifies the definitions of hotel, office and retail uses. The GLA has also confirmed that MCIL2 will be used to fund both Crossrail 1 (the Elizabeth Line) and Crossrail 2, and that the MCIL2 Charging Schedule will supersede both the 2012 Mayoral CIL Charging Schedule (‘MCIL1’) and the 2016 Section 106 Crossrail Funding from Planning Obligations Supplementary Planning Guidance (referred to in our previous post as the ‘s106 Crossrail Charge’). Continue reading

In force soon – Mayoral Community Infrastructure Levy 2 (MCIL2)

The Mayoral Community Infrastructure Levy 2, or ‘MCIL2’, is a new charging schedule for the Mayor’s Community Infrastructure Levy (CIL) charge. It sets new (higher) rates for Mayoral CIL and is due to take effect on 1 April 2019. (It is technically possible that the Mayor may change his mind about MCIL2 before 1 April 2019, but it should be assumed that he will not.)

This post explains what MCIL2 is, what it means for developments in London and what action developers may wish to take before MCIL2 comes into force.

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Landlords’ motives for redevelopment – good, bad or irrelevant?

Today the Supreme Court will hear the case of S. Franses Ltd v The Cavendish Hotel (London) Limited, a case which property litigators have been following closely since last year. The case concerns a landlord’s ability to oppose a lease renewal under the Landlord and Tenant Act 1954 (the “Act”) using ground (f) (redevelopment). If the tenant is successful in today’s hearing, the evidential burden on landlords contemplating redevelopment could increase dramatically. Continue reading

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

Equitable easements – a trap for the unwary developer

When purchasing a development site, it is important to make sure that the site can be used for the purpose for which it is acquired. When it comes to easements, in theory a purchaser should not get any nasty surprises. However, overriding equitable easements can be hard to detect but can have costly consequences. What are they, what is their impact and how can the risk they present be minimised? Continue reading

Are you GDPR ready?

It is unlikely to have gone unnoticed from the volume of emails asking individuals to “opt in” to future company mailing lists that tomorrow (Friday 25 May), the EU General Data Protection Regulation (GDPR) comes into effect in all EU countries and in the UK it will be supplemented by the Data Protection Act 2018. The stakes are high – if your company does not comply, it could be fined up to 4% of worldwide turnover or 20 million Euros, whichever is higher.  As the information being held by landlords and developers is likely to be varied and complex (and not just employee data), such industries are in a vulnerable position with regards to compliance.

So what do companies operating in the real estate sector need to do?

  • Read the rest of this blog post for a reminder of the types of personal data which you might be holding on your databases which will need to be GDPR compliant;
  • Check our HSF hub page on GDPR here; and
  • Contact us at HSF with any queries or for further information.

GDPR will affect anyone using, collecting, processing and storing personal data. Personal data covers the type of information which you would expect, for example contact name and details, but could also include information collected by landlords and developers on building management systems and databases (for example when an individual enters and exits a building, and see more examples below).

The property development industry appeared to be lagging behind other sectors in its preparation for GDPR so we have put together a brief reminder of the types of personal data which you might be holding on your company databases which will be subject to GDPR requirements. This could include:

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The Potential Pitfalls of Overage

Overage provisions can be complicated, and the recent case of Sparks v Biden [2017] EWHC 1994 (Ch), offers some useful reminders of the potential pitfalls that can arise when drafting overage agreements and the scope of the Court’s ability to imply terms into a contract.  In this article we examine the issues that can arise and suggest some practical points for consideration when negotiating an overage agreement.

In this case, the drafting did not expressly oblige the buyer to market newly built houses for sale once the development was completed, nor was there any mechanism for the payment of overage if the houses failed to sell within an appropriate time. The parties’ intentions were assumed – including that the buyer would want to sell the houses as soon as they were completed in order to realise his investment as quickly as possible.  However, this did not happen, and the agreement did not provide for such a turn of events, leaving the seller at a disadvantage.

  1. Facts of the case
  2. Decision of the court
  3. Points for practice

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Connected and Autonomous Vehicles – the future?

The BBC and others are today reporting the Department for Transport’s news that the Government has announced funding for a “platooning” feasibility study. This will allow up to three heavy goods vehicles to travel in convoy on motorways with their acceleration, braking and steering kept in sync through wireless technology, although all lorries in the platoon will have a driver ready to take control at any time. The press release notes that the trial will be carried out in three phases, with the first focusing on the potential for platooning on the UK’s major roads on which trials are expected by the end of 2018. Similar trials have already been successfully carried out in Europe and the United States.

Vehicle automation has the potential to change not just the way that we transport goods but also ourselves.  It is anticipated that, ultimately, it will change the face of our towns and cities.  Conversations about the potential impact of this new technology are already taking place. On 18 July 2017, the Herbert Smith Freehills Connected and Autonomous Vehicles Group held a half-day client-facing conference at our London office discussing these very issues through a series of panel discussions on topics including the global regulatory and commercial landscape for CAV technology; product liability and class action risks; challenges and opportunities for the insurance industry; cybersecurity and data protection issues; smart cities; and the potential impact on infrastructure. Matthew White, Head of Planning, London was one of the panellists. Continue reading