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

 

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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LANDOWNERS AND DEVELOPERS – BEWARE THE RIGHT OF FIRST REFUSAL

Are you a landlord or developer of property which includes residential flats?  Are you going to dispose of your interest in that property?  If so, you may be obliged to offer your residential tenants a right of first refusal before selling to anyone else. If you don’t, you could face serious consequences including criminal sanctions.

In this blog we go back to basics to explain when the statutory right of first refusal applies, what the consequences are when it does and how it is relevant in the context of mixed-use developments.

The Landlord and Tenant Act 1987 gives tenants this statutory right, however, the legislation was rushed through parliament in the run-up to the 1987 general election by a Conservative government who were under pressure to redress the balance of power between landlords and tenants in the residential sector. The result was a complex and defective piece of legislation which has been heavily criticised by the courts over the years.

1. When does the right of first refusal apply?

2. What are the consequences when the right of first refusal applies?

3. How is the right relevant to mixed-use developments?

 

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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

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Budget: Tax implications for real estate

Apart from a couple of pieces of good news, the Autumn Budget materials published earlier today contain a number of definite and potential changes to UK tax on real estate which could impact on pricing going forward.

The good news in the residential sector is undoubtedly the headline-grabbing reduction in SDLT for first-time buyers. The net effect of the proposal is that any first-time buyer will either have no SDLT to pay on purchases up to £300k, and less SDLT to pay on purchases up to £500k. This is worth up to £5k.

In the commercial sector, the good news is that the so-called ‘staircase tax’ is effectively being overridden by allowing businesses to ask the Valuation Office Agency to recalculate valuations by reinstating its previous practice in multi-occupancy buildings that applied for business rates purposes before the decision in Woolway (VO) v. Mazars (2015) UKSC 53. Also, no increases in SDLT rates were announced.

However, in the direct tax world, a number of changes are proposed (including changes that are the subject of a consultation announced today) that could have a significant impact, particularly as regards commercial property:

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Q1 Healthcheck / Q2 Predictions: Brexit, Mayor, PRS, Housing and Planning Bill, airport expansion

Author: Matthew White, Partner and Head of Planning, Real Estate, London

In the week before Christmas, the daffodils were blooming, the birds were chirping and it was warm enough to cycle to work in shorts. In the week before Easter … well, nothing much has changed. And that pretty much sums up the ‎development market in Q1. Transactions held over from December were duly completed, but the dealflow since then has been been falteringly slow.

MIPIM, always a good barometer of market sentiment, was summed up by the weather too – it was not nearly as ‎balmy as expected and left you feeling let down and a bit foolish that you'd brought your sunglasses.

Much of this is being driven by Brexit. Whilst I don't think the vote will make a big difference to development in the UK ‎either way, it is the uncertainty of whether we will end up in or out that is causing stasis. Like Schrodinger's cat being alive and dead at the same time until the box is opened and the quantum waveforms collapse, investment decisions ‎are quite reasonably being held back until the outcome of the referendum is known.

In London, we also have a Mayoral election to contend with. Ken Livingstone and Boris Johnson may have been at opposite ends of the political spectrum, but both were firmly pro-development. Looking at Sadiq Khan and Zac Goldsmith on the hustings, I am not convinced that the next four years ‎will be quite so developer-friendly.

Development has always been a Q2/Q4 business of course, so a slow winter is not that unusual. This feels like a pause for reflection rather than a sign of deeper retrenchment. To lift a metaphor off the back of England's Grand Slam victory, we're just waiting for the referee to call "set" before the front row engages again.

So, here are my predictions for Q2:

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How to solve a housing crisis: commercial viability, land value and affordable housing

Author: Martyn Jarvis, Associate, Planning, Real Estate, London

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The UK is facing a housing crisis, most pronounced in London, and this is set to be a key factor in the forthcoming Mayoral elections.  Meanwhile, commercial viability is the talk of the town.  How “viable” a scheme is will influence how much affordable housing can be provided.   Requiring disclosure of viability information across London, standardising land value calculations, standardising viability methodology and fixing affordable housing targets are amongst recent recommendations made to the Government and to the Mayor.

Transparent viability information is already required in Islington, and with Greenwich and Southwark following suit where schemes are not policy compliant, the London Assembly are now urging the Mayor to adopt this approach across London.  Over the past few weeks the London Assembly Planning Committee and London First have both presented papers aimed at steering a policy shift once the new Mayor takes office.

 

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