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.

Click here to read on

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

 

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

Impact of revised National Planning Policy Framework

The revised National Planning Policy Framework (NPPF) was published on 24 July 2018. This post considers what difference it will make – in terms of the impact on developers, whether the government’s aims will be achieved and how soon its effects might be seen.

Impact on developers

On the whole, policies in the revised NPPF are more restrictive. Tighter controls over design standards, green belt boundaries, developer contributions and viability appraisals, stronger protection for the environment and the introduction of the “agent of change” principle to new development all provide little incentive to bring forward development.

A welcome change, however, is that LPAs should now take a more flexible approach to daylight and sunlight issues.

The new standardised methodology for calculating housing need, which takes effect immediately, represents a significant change for residential development. It will provide more certainty on housing requirements in each LPA’s area, generally with an increase in housing targets. Local authorities’ success in delivering against these targets will be assessed by the new Housing Delivery Test. From November 2018 local plans will be deemed out of date if the LPA fails to deliver 25% of its housing target as assessed by the new standardised methodology; this threshold will increase in subsequent years to 45% of the target from November 2019 and 75% of the target from November 2020. If local plans are deemed out of date the presumption in favour of sustainable development will be brought into play, increasing the likelihood that planning permission will be granted. Continue reading

Reasons to be cheerful

It is good practice for a local planning authority to give reasons for the grant of planning permission. Failure to give adequate reasons may be serious enough to justify quashing the permission.

There is a statutory duty to give reasons for the grant of permission for EIA development.  However, even if it is not EIA development, reasons will need to be given where the grant of permission does not follow the planning officer’s recommendation; where the development would not comply with planning policy; and where there is significant public interest in the proposals. The law on the duty to give reasons was summarised and confirmed recently in a Supreme Court case, Dover District Council v CPRE Kent (2017) UKSC 79.

1. Background

2. Supreme Court

3. Comment

 

1. Background

The Dover case related to a planning application for a large residential development in an area of outstanding natural beauty (AONB). Before the local authority granted permission, the planning officer’s report had made several recommendations, including reducing the number of residential units, to reduce the harm caused to the AONB. The report stated that this would preserve scheme viability and retain the economic benefits of the development, which helped to provide the finely balanced exceptional justification needed for causing harm to the AONB. The officer’s report also recommended implementation as a ‘single comprehensive scheme’ to secure those economic benefits (including a hotel and conference centre) and conditions or planning obligations to achieve this.

Planning permission was granted by the local authority without following these recommendations. No reasons were given by the local authority for this departure from the officer’s report.

2. Supreme Court

Continue reading