Simple ways to smooth negotiations of an affordable housing contract

22 August 2018

To meet affordable housing requirements in planning or development agreements with local authorities, developers turn to housing associations. In this article we set out some key points for developers to consider when contracting with housing associations.



One of the biggest challenges facing the government is increasing the supply of housing, particularly affordable housing. House price rises may have slowed since the Brexit referendum but housing continues to be unaffordable to a significant proportion of the population. All the major political parties have identified housing as one of the key concerns of voters. The prospect of another general election soon after Brexit means that housing policy will stay on the top of the UK agenda.

What is affordable housing?

Affordable housing is housing which is provided to people who are struggling with housing costs and whose needs are not met by the market. It can take different forms:

  • social rented housing
  • affordable rented housing
  • intermediate housing.

Whatever form it takes, it is always provided at a price below market rate by either local planning authorities (LPAs) or approved registered providers (RPs). Some affordable housing is funded by the government through its development agency. However, a large proportion is delivered through the planning system by private developers.

Affordable housing contracts - streamlining the process

Developers seeking planning permission for new developments are used to permission being granted conditional on the provision of affordable housing. However, few developers give enough thought to the practicalities of this at an early stage in the transaction. Thinking about the following matters at heads of terms stage may smooth progression of the transaction in the long run.

Type of contract

  • An early decision about whether the arrangement with the housing association (HA) will be a turn key or golden brick one is helpful. In a turn key project, legal ownership will be transferred to the HA when construction has been completed. A golden brick development is one where a HA takes legal completion of properties that are in the process of being constructed but which are beyond foundation level.
  • Golden brick contracts have the advantage of improving the developer's cash flow during the project. They also provide more comfort for the HA who can sign off work at various stages during the project, minimising the scope for dispute on handover. They have become increasingly popular in the market.

VAT

  • A developer will usually have elected to charge VAT on the sale of the land in order to reclaim VAT it has paid. Both turn-key and golden brick contracts have a satisfactory VAT position - while a VATable supply is made, it is zero rated leaving neither party out of pocket.
  • It is becoming increasingly common for developers to seek advanced land or works payments whereby the HA makes an up-front payment. The biggest danger of this is that it can jeopardise the VAT position by making the supply a standard rated one. This will mean that the HA is liable for VAT but the contract will almost certainly stipulate that the price is VAT inclusive. This will leave the developer out of pocket. Tax advice should always be sought in this situation.

Notices and inspections

  • Paying attention to details such as property inspections and notice timescales at the start of the transaction will save time later on. Careful thought should be given to who serves notices and on whom they should be served. Provisions should also be included to deal with what happens if there is a dispute. A commonly neglected item is the list of what documents will be handed over on completion - the HA may have a list of what it routinely expects to receive and the developer should be comfortable that it can deliver these. These sorts of practicalities are often overshadowed during negotiations by "bigger" issues but they are often a headache later on if they are not realistic.

Payment structure

  • Consideration should be given as to whether the developer is expecting payments under the contract to be made with reference to fixed milestones or if there will be interim works valuations. Pre-agreed payments linked to milestones are simpler and less contentious. One of the dangers of interim valuations is that they may unintentionally import statutory protections under the Housing Grants, Construction and Regeneration Act 1996. Before agreeing to this, taking specialist construction advice is advisable.

Discharging planning conditions

  • Developers should not agree to deliver formal sign offs in relation to the discharge of planning conditions as this can lead to significant delays in the process. However, developers should be happy to agree to demonstrate compliance with pre-commencement and pre-occupation conditions.

Extras

  • The sale contract will often include provisions for agreeing extras during the course of the build. Ensure that the price for any of these items is expressed as being VAT exclusive where relevant. Also, in relation to any pre-agreed extras, make sure to check the terms of the acquisition to ensure that overage will not be triggered.

Advertisements

  • It is worth the developer thinking about whether it will allow the HA to display advertisements on the site. The HA may well want to display "For Sale" or "To Let" boards but the developer will want to consider whether this will affect the open market sales taking place. If signs are to be allowed, the contract should stipulate the process for agreeing where they may be erected, for how long and who will pay for them.

Show homes

  • HAs may expect to have a show home on site or request use of the developer's own show home. Contractual provisions will be needed to deal with access to the units before they are handed over and to address any health and safety concerns.

Service charge

  • Thought should be given early in the transaction about whether the HA will be obliged to contribute to the cost of site-wide management after completion. Although service charge caps may be an attractive compromise, it may be sensible to limit them to a few years only and also include provisions to increase them in line with inflation. Advice should be sought from any managing agent involved in the scheme.

If you have any queries on this or related topics, please contact Jack Kelly or Daniel Leather.


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