What does it mean for affordable housing?
Retentions, what are they?
As many registered providers of affordable housing or anyone engaged in development acquisitions may be aware, retention clauses are often used within land acquisition deals where registered providers enter into build contracts and development agreements with construction obligations. The mechanism for a registered provider to hold back a certain percentage of payment for the construction works until any defects/outstanding works are complete is common. It is something which is often agreed amicably between the parties at the Heads of Terms stage in a development acquisition.
What is the Bill and when could it come into force if passed?
The Construction (Retentions Abolition) Bill was introduced by Lord Aberdare in the House of Lords on 25 October 2021. The proposed Bill seeks to amend the Housing Grants, Construction and Regeneration Act 1996 by inserting a new section dealing with retentions or rather the abolition of retentions. This is not the first time such a proposal has been introduced and many before Lord Aberdare have failed to change the legislation surrounding the practice of cash retention in England and Wales. Developers often find that retention money is withheld unreasonably for minor defects and outstanding construction work which is not detrimental to the use and enjoyment of the property. Not only does this cause cash flow problems for developers, but many smaller developers are also at a greater risk of becoming insolvent before the retention money is released to them.
If the Bill becomes an Act of Parliament, then in summary we can expect to see the following:
- Any construction contract or an agreement with construction obligations, which contains a clause enabling an employer to withhold retention monies will be defective from 25 January 2025;
- Any retentions still withheld on or after that date must be repaid in full within seven days.
What does this mean for development acquisitions and affordable housing?
When negotiating land acquisition deals and entering build contracts, most registered providers seek comfort in the additional security that comes with an agreed retention clause. Development acquisitions to provide affordable housing can be quite complex, costly, and crucial for the registered provider who may be relying on GLA/ HCA funding. The inclusion of a carefully drafted retention clause provides security if construction works are not fully completed or if there are defects. Without the provision of a retention, affordable homes may not be constructed and completed to a standard which complies with the registered provider's requirements. The impact could result in registered providers seeking to delay certifying practical completion based on minor snagging items or defects, increase their handover requirements, be more risk aversive when embarking on new schemes and dealing with existing ones. In the absence of a retention, registered providers may find themselves negotiating Latest Defects Guarantees and Warrantees as an alternative; not only will this be expensive but agreeing who will bear the cost may also be difficult.
An alternative way forward
At present, the proposed Bill is waiting a second hearing in Parliament. If the Bill is passed, registered providers and developers may need to work collectively to agree a sensible alternative, which works for both parties. The registered provider and the developer could take a pragmatic approach and include a retention but ensure that the retention funds are held in a designated account. This approach may be adopted in the coming years and may have more of a chance of finding its way through to the Housing Grants, Construction and Regeneration Act 1996.