What is the problem?
Planning authorities sometimes use pre-conditions which prevent people moving into new homes until some step has been undertaken. Anecdotally, these conditions are known as Grampian provisions. The name derives from a case where they were considered: Grampian Regional Council v City of Aberdeen.
One of the regular uses of such restrictions is to ensure that affordable housing required as part of a planning permission is provided and let to occupants in suitable housing need.
Evidence gathered at various build to rent (BTR) events indicates that in the context of BTR occupation restrictions can cause difficulties where the BTR scheme is part of a wider traditional housing scheme that includes affordable housing.
Issues often arise where the restrictions prevent the occupation of the BTR homes until after the affordable housing has been constructed and/ or occupied (occupation restrictions). BTR investors are likely to become concerned that their investment could be materially impacted by an event which is outside of their control if they are not constructing the affordable housing themselves. Where occupation of BTR is linked to delivery of affordable housing that is not controlled by the BTR investor, it is important for robust contractual protections to be put in place as between the BTR investor and the developer of the wider site. However, some investors take the view that such contractual arrangements with the developer do not provide sufficient protection.
Planning policy for BTR could be the answer
The National Planning Policy Framework recognises that it is commercially difficult for BTR investors to have parts of their assets owned and managed by a registered provider (RP), and as such allows entities who are not RPs to own and manage affordable units as part of the BTR scheme. In this circumstance the problem outlined above does not arise because the BTR investor remains in control of all parts of the scheme.
There is a wider issue in that some LPAs are not familiar with applying the policy in relation to BTR schemes and often have not adopted their own specific BTR policies. It remains the case that BTR developers will sometimes rely on residential planning permissions that are not tailored to BTR. Such schemes would normally require traditional forms of affordable housing to be let and managed by RPs and would contain a planning obligation restricting occupation of a number of the units until the affordable housing has been provided. Where BTR is contemplated variations to existing planning conditions or obligations may be necessary.
This suggests that one approach to solving the problems caused for BTR schemes via occupation restrictions would be to review the BTR planning policy to establish and deal with whatever disincentives that it contains to using it, rather than developers proceeding by way of normal residential applications.
Could LPAs adopt other approaches to restrictions on occupation?
LPAs could consider the use of less onerous approaches to negative restrictions which would ease the difficulties for BTR investors whilst still providing a reasonable degree of certainty to the LPA in relation to affordable housing.
A negative restriction which prevents occupation of completed BTR homes until the affordable housing has been completed and/ or occupied puts the BTR investor in a situation where it must seek contractual routes to protect itself against that eventuality. Such contractual routes do exist. For instance the BTR investor could contractually retain to itself the ability to step-in and procure the completion of the affordable housing in the event that the RP is not able to perform.
Using such contractual routes is not welcome to BTR investors who to do so would need to become the developer of the affordable housing and therefore expose themselves to associated development risks. They would need to obtain additional and unplanned for finance. Completing the construction would not be where the issue would end. The BTR investor would need some mechanism to recover the costs that it incurs in procuring the completion of the affordable build. Again, whilst contractual routes can be found to achieve that like allowing the BTR investor the option to call for a sale of the completed affordable housing to another RP, there is no guarantee that all the costs incurred would be recovered.
Those are not risks which a BTR investor would expect or be willing to expose its investors to, meaning that whilst contractual solutions can be created, they are not commercially viable to the organisation on the project providing the capital.
LPAs are justified in using the mechanisms available to them to ensure the delivery of affordable housing, but they should seek to avoid elements which harm the delivery of both new BTR homes and affordable housing.
An alternative approach to the Occupation Restrictions could be to require either:
- an unconditional development agreement for the purchase of completed affordable units by an RP; or
- a building contract in relation to the construction of the affordable housing on land already owned by an RP
be entered into before an appropriate deadline (to be set dependent on the nature of the design). The existence of such a contract with a RP makes it very likely that the affordable housing will be delivered.
The main risks to that delivery would be that either the developer or the RP itself should become insolvent. That is always a risk which residential development is subject to.
From the point of view of the BTR investor this alternative approach would mean that it could set up its own arrangements so that it was not required to proceed with substantial spend on the construction of BTR until it knew that the Occupation Restriction in relation to affordable housing had already been satisfied.
Other approaches
For both BTR investors and LPAs there are other approaches that could be considered depending on the nature of the particular scheme.
BTR investors could set up their own for profit registered provider. Whilst this possibility became a statutory possibility some time ago it is relatively recently that its use has become more prevalent because of investor interest in the affordable market.It would enable BTR providers to rely on non-BTR planning permissions without having to make them BTR specific.
The barriers to entry are not insignificant with registration alone taking around a year typically. But we are seeing a number of BTR investors exploring the option as it provides them with a situation where they can retain overall group control of a mixed BTR and affordable housing asset, but without the concerns and difficulties arising from having to dispose of the affordable to a third party RP.
LPAs may be open to alternative structures in relation to the provision of the affordable housing which may provide additional flexibility and lessen the impact of strict occupation restrictions. Possibilities could include off site provision or cash in lieu of delivery. Building on ideas which have long been prevalent in the affordable market, the affordable provision on a BTR scheme could be made subject to a mechanism which allows it to change to different tenures in the event of insolvency of the land owner. Whilst opening the door to less affordable tenures, it would increase the chances of delivery of some housing in an insolvency situation. Which in the context of the current supply of new homes in the UK may be justified.
Conclusions and request for comments
We hope participants in the market will find it useful for the situation to be laid out in one place for consideration.
We do not want this just to be an opinion piece for the sake of it, we would like to see movement in the market as a result enabling more residential development.
Please do provide your comments by completing our mini survey, located in the 'request for comments box' on this page, which can be completed in under five minutes. The survey will close on Friday 1 November.
We will collate them and report back in due course.
