Why no disposition restrictions are not needed if selling to a registered provider

A no disposition restriction in a transfer between a developer and a registered provider (“RP”) can cause delays, extra costs and empty units – all completely unnecessary issues if a little flexibility was more forthcoming.

What is a no disposition restriction?

The restriction is particular wording in the transfer deed and is included to ensure that the freeholder of the unit is bound and obligated to pay and settle the service charges that are properly due to the management company. However, when a RP acquires units it is responsible for payment of the service charge as the freeholder of the unit which is then subsequently collected by the RP from the tenant. The RP will continue to settle these charges up to the date a shared ownership tenant staircases and ultimately acquires the freehold.

It is at this point only that the shared ownership tenant should enter into a deed of covenant with the management company and take responsibility of settling the service charge payments as they become due.

What is actually happening?

An understanding and appreciation needs to be had by developers on the difference of when dealing with an open market sale to a plot buyer against the disposal of affordable housing to an RP along with an understanding of the intention of the restriction and what the restriction is ultimately trying to achieve. Developers are using the same restriction in transfers to a RP and insisting that shared ownership tenants enter into and sign a deed of covenant, as a private buyer would, even though they are not the freeholder of the property, the RP is.

A no disposition restriction causes a RP issues. The no disposition restriction slows down the onwards sale of the affordable housing, leaves the units empty that could house a family in need, eliminates the rental income for a RP and the additional cost implications of complying with a no disposition restriction.

Time and time again developer’s solicitors push back and do not entertain any amendments to the wording of this pretty standard restriction. Their argument being that the units form part of their wider development and therefore the wording needs to remain consistent throughout.

The no disposition restriction is all capturing of any disposition including the granting of shared ownership leases unless the wording of the restriction makes clear that a shared ownership lease is an excluded disposition. Nine times out of ten this will not be drafted into the Transfer deed and RP’s are having to accept a no disposition restriction.

Keeping the wording as no disposition requires shared ownership buyers to obtain a consent letter and also enter into a deed of covenant. A shared ownership buyer entering into a deed of covenant at this point is meaningless as the RP will continue to settle the service charge payments as the freeholder of the units.

There are cost implications of obtaining these documents, the shared ownership buyer will need to contact the management company who are usually represented by a firm of solicitors. The firm of solicitors representing a management company will charge for their services per unit. This goes against the spirit of social housing and the need for developers to assist RPs and to provide social housing on each scheme via a section 106 agreement when funds are being clawed.

How can this be situation be rectified?

A simple but vital change. Ideally, what is required is a restriction that refers to a ‘no transfer’ rather than no disposition. This will allow a RP to grant shared ownership leases and only oblige the shared ownership buyer to enter into a deed of covenant with the management company once they have stair cased to 100% on acquisition of the freehold interest.

A note to developers – RP’s are different to a private buyer and therefore need a different restriction. One simple but important word change can ensure that delays and costs are minimised for in need shared ownership buyers.