Avoiding voids – how RPs can alter tenures to support their housing goals

The combination of the rising cost of living, inflation and stationery wages has led to higher mortgage rates and ultimately it is proving harder than ever for some families to secure housing. The demand for affordable housing still exists, but access to it is a challenge for many struggling in the current climate. Registered Providers (“RPs”) need innovative solutions to address this issue in order to continue to provide affordable housing for those in need. This brings to light the prevalence and influence that tenure changing restrictions can bring.

Tenure restrictions

RPs often acquire affordable units from a developer via a 10/90 (also known as turnkey or off the shelf) or a golden brick deal. These are quite often designated affordable housing units, pursuant to a Section 106 Agreement. In these circumstances, RPs are typically restricted from altering the tenure – such a restriction can be found in the contract, transfer or lease (as appropriate). The typical tenure is usually social/affordable rent and/or shared ownership. The contract, transfer or lease will contain a clause preventing the RP from altering the tenure without first obtaining the written consent of the developer.

How is the tenure split decided on a new development?

The tenure split is decided by the planning committee – prior to planning being granted. The planning committee will consider the needs of the local area and the local plan, amongst many other considerations before confirming the number of affordable units required for the scheme and an appropriate tenure split for those affordable units.

The RPs view

RPs usually pay a higher premium for the shared ownership units. Depending on the market, RPs may be faced with difficulties in occupying these shared ownership units because the majority of shared ownership buyers will finance their purchase with the assistance of mortgage finance. With increasing interest rates shared ownership buyers will find it ever more difficult to obtain a fair and favourable mortgage offer. In the event a shared ownership unit stands unoccupied for a period of time this creates issues for an RP with a potential void property on their books and the lack of a steady stream of income that the grant of the shared ownership lease would have generated.

To counter this, an RP will want the ability to change the tenure from shared ownership to affordable/social rent. The buyer owns a portion of the home with shared ownership and will have a small amount of equity in the home, which is beneficial for many and allows them onto the property ladder. This is not possible for all, and the benefit of affordable/social rent is that the rent is significantly lower than a tenant would pay in the normal market. This is particularly important to ensure the property does not remain empty and to house those most in need of housing.

The developer’s view

More often than not, the developer’s starting point is to restrict the RP from changing the tenure split as a means to maintain control of the wider site, particularly where this will affect the marketing and occupation of the open market units. It appears that this form of drafting acts as an anti-embarrassment measure especially when the developer has gone to lengths to agree the financials with an RP.

When deciding whether to accept changes to the tenure mix requested by an RP, the developer will consider matters such as the level of product being supplied to the RP. For example, the developer will usually build a shared ownership unit to a higher specification resulting in increased build cost when they could have built smaller units for affordable/social rent and maximised the development by building larger open market units and clawed back additional return. The desirability of the scheme and whether a change in tenure will impact upon open market buyers is also a key factor for developers – these are all legitimate reasons for a developer to refuse a tenure change request.

How can an RP move forward?

1. Engage in early discussions with a developer, ensuring any agreement between the parties is reflected within the heads of terms. The heads of terms are not a binding document but it goes some way to laying the groundwork. Generally, a developer will accept a tenure change as long as there is no breach of the section 106 agreement with the mix detailed in the documentation.
2. Strike out the tenure restriction clause in its entirety, for the reasons mentioned above and stressing the importance for an RP to maintain flexibility over the tenure mix.
3. In the event that the developer does not agree to remove the restriction, ensure the drafting allows all requests to be considered by a developer and consent not to be unreasonably withheld or delayed. This could be, if agreed between the parties, strengthened by a deemed acceptance provision so that the developer’s consent is deemed to be given if they haven’t responded to the RP’s request to vary the tenure mix within a given period of time.

For maximum flexibility to support a changing economic landscape and ensure that RPs have the units they need, they should discuss their requirements with developers at the very outset of a proposed development. Contact our housing development team for further information.