Particular issues may beset a sale of land between developer and Registered Provider but, by forecasting ahead, costs and delays can be avoided.
As the demand for housing increases, so too will expected proportions of affordable housing provided as part of any development. Often the easiest way to provide on-site affordable housing is by bringing a Registered Provider (RP) on board. The RP might buy ready built plots or the land itself on which it will build.
Where an RP acquires land, there are a number of factors that it will need to consider that do not affect a private developer. Because of this, deals can come unstuck further down the line, causing unforeseen delays and increasing costs. So, what should a private developer have in mind when selling land to an RP? How can these pitfalls be avoided?
- Is there, or will there be, a Section 106 agreement? If a Section 106 includes a requirement for the provision of onsite affordable housing this will prevent an RP from obtaining grant funding from Homes England. It is our recent experience that local authorities, knowing an RP is on board, are willing to impose a planning condition requiring affordable housing instead of including that requirement in a section 106. Knowing the RP is on board provides comfort that affordable housing will be delivered. If a Section 106 is already in place that should be disclosed to an RP at the outset of a transaction so the RP can consider funding options before the deal progresses.
- Is there a mortgagee exclusion clause in the Section 106 agreement? Often Section 106 agreements do not include a mortgagee exclusion clause (MEC), meaning that any mortgagee will be bound by a planning obligation relating to affordable housing. An MEC would protect mortgagees and charges from the effect of such obligations. The absence of such a clause impacts an RP looking to secure loans against its assets because the property could only be sold as affordable housing (EUV-SH) and not at market value, subject to tenancies (MV-STT) – a discount of approximately 60%. If affordable housing value is all that can be achieved, this can have a significant impact on viability as it restricts the amount an RP can borrow. Accordingly, as a deal progresses and this comes to light, an RP will often need to ask for a variation of the 106 agreement to ensure it can obtain market value in any borrowing against the land. This can cause delays to the transaction and add unexpected costs on all sides.
- Is the land opted to tax? RPs cannot recover VAT so if the land is opted to tax this can have a significant impact on viability and the price they are willing to pay. RPs do have the ability to disapply an option to tax when acquiring land for development but that can then leave a developer being unable to recover VAT it may have incurred on its initial purchase of the land. Or, it could impact a seller’s ability to recover VAT where the developer has not yet completed its own purchase. Critically, there are ways to structure transactions to an RP that enable the whole sale to be zero-rated, avoiding any VAT recoverability issues and, here, specialist tax advice is key.
- Is the property located in a DPA? If the property is located in a designated protection area (DPA), then there will be restrictions on staircasing. This will need to be considered and reflected in the value and the price agreed with an RP as the properties will need to remain affordable in perpetuity and staircasing to 100% ownership will not be allowed.
- Considered the Future Homes Standard? 2025 is fast approaching and, by that point, a developer will need to be delivering zero-carbon ready homes. RP’s are already considering this requirement and reviewing and amending their specifications in preparation. Any developer is recommended to consider with an RP how it intends to approach the new standards and open dialogue early to ensure that the specification proposed will meet these requirements. This is the case, especially, where the anticipated delivery of the homes falls close to the 2025 deadline.
If all these points are considered by a developer at the outset of a deal with an RP, there is a good chance that delays and issues further down the line may be avoided. Thus, all parties can move to a smooth and efficient delivery of the affordable housing.