Residential Leasehold up for grabs – change is coming, get ready!

The report of the Parliamentary committee on residential leasehold reform has been published containing strong recommendations, many of them radical, and some where it is not at all clear how they could work in practice.  Nevertheless, this is likely to be the future and a good commercial conclusion may be to assume that this will be the direction of things, and then to “adapt and survive”, and, preferably, prosper.

Mixed use and pure residential schemes may be affected by reform, in terms of investment value of existing portfolios, the ability to finance development or acquisition, and indeed the very legal basis upon which residential flat owners will hold their properties.  The motivation of Parliament is to right the anomalous way in which residential homes, particularly flats, are owned and managed.  This, despite the fact that there have been rafts of legislation, enacted over the last 50 years, that were meant to give leasehold house and flat owners far stronger rights and control over the properties they owned.  Other countries around the world have a “condominium” land holding system for flats, viewed as much less problematic than the UK system where a landlord keeps a role as property owner even when all the flats in a building are sold.  This motivated the creation of the law of Commonhold here, which although already on the statute books has had little or no impact on the way in which homes are owned.  The Parliamentary committee asked itself the valid question as to where things currently are.

A no-choice Commonhold revival?  Banishment of Ground Rents, potentially without proper compensation to landlords? In this “deep dive” article by head of Real Estate Dispute Resolution at HSF, Matthew Bonye sets out how the laws are currently framed, what is thought to be wrong with them, what Parliament wants to do, and then he tells you what he really thinks about it all.

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Author: Matthew Bonye, Partner and head of real estate dispute resolution, London

For more information please contact:

Matthew Bonye
Matthew Bonye
Partner and head of real estate dispute resolution, London
+44 20 7466 2162

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

 

Changes confirmed to permitted development rights and use classes

In our blog post of 10 December 2018 (see here), we discussed the potential impact on developers and landlords of changes to permitted development (PD) rights and Use Class A which were being consulted on by the government. Despite widespread criticism, and counter to some calls for a greater role for local authorities in securing the futures of their town centres through holistic town planning, in a Written Statement on 13 March 2019 James Brokenshire announced that the government is implementing the majority of the proposals. Some of the changes to PD rights are to be made later this spring; other changes, such as upward extensions for residential use, will be dealt with in further regulations in the autumn. We were also told that we can expect an Accelerated Planning Green Paper later this year. Whilst the changes are intended to “[simplify and speed up] the planning system, to support the high street, make effective use of land and deliver more homes”, whether this can be achieved by these changes remains to be seen. This post discusses what the changes are, and what their impact could be within the context of wider change. Continue reading

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

Back to Basics: Housing Need and Delivery

 

From 25 January 2019 (although see here for our commentary on the ambiguity surrounding the actual date), local planning authorities must use the new standard methodology for assessing housing need set out in the National Planning Policy Framework published in July 2018 (“NPPF”). As part of our ‘back to basics’ blog series, this blog post explores:

Continue reading

Deadline for examination of plans under the old NPPF – 24 or 25 January 2019?

This Thursday is 24 January 2019, a hotly anticipated date in the planning world because this is the date referred to in the revised National Planning Policy Framework (“NPPF”) as the date after which the policies in the revised NPPF will apply for the purposes of examining local plans. Paragraph 214 of the NPPF states that the policies in the old 2012 NPPF will continue to apply to the examination of plans submitted “on or before 24 January 2019“.

However, a technical consultation (‘Technical consultation on updates to national planning policy and guidance’) published by the government in October 2018 states at paragraph 20 that:

… The use of the standard method applies to plan-making for plans submitted on or after the 24 January 2019 [our emphasis]. Any period specified for using the 2014-based projections would use this as the start date.

Paragraph 21 of the technical consultation goes on to say that:

… there are approximately 50 plans that will be submitted for examination in 2019. Any of these plans that are submitted on or after the 25 January 2019 [our emphasis] will be required to use the standard method to inform strategic housing policy.

Our view is that the adopted NPPF must take precedence over a consultation document, even one published after the NPPF, and therefore it is clear that the policies in the old 2012 NPPF will continue to apply to the examination of plans submitted on 24 January 2019, notwithstanding the inconsistency in the dates referred to in the technical consultation. However, local authorities who want to be absolutely sure should submit their plans for examination before Thursday if possible, ie tomorrow. Continue reading

Proposed changes to permitted development rights and use classes – impact on developers and landlords

Two key themes of the Budget on 29 October 2018 were increasing the supply of housing and improving the health of high streets and town centres. Published with the Budget was the consultation ‘Planning reform: supporting the high street and increasing the delivery of new homes’. Also announced was the government’s ‘Open Doors’ project, aiming to help improve the vitality of town centres by facilitating meanwhile use of vacant units. The ‘Planning reform’ consultation closes on 14 January 2019. A call for applications from landlords who wish to pilot the Open Doors project closes on 31 December 2018. We have prepared a briefing for clients, summarising key proposals that will be of interest to retail landlords, developers and advisers and assessing how these might impact new or existing developments and the lettings of these assets.

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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

Revised National Planning Policy Framework—will it fix the housing market?

This article was first published on Lexis®PSL Planning on 9 August 2018.

Will the government’s new planning rulebook deliver on its promises? Robert Walton, barrister at Landmark Chambers, says the new National Planning Policy Framework (NPPF) is a step in the right direction and should result in more houses. Matthew White, partner and head of the planning team in Herbert Smith Freehills LLP’s London office, predicts that, by itself, the revised NPPF will not streamline the planning process, nor close the gap between planning permissions and housing delivery. Continue reading