Housing stock transfers: key issues

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Housing stock transfers key issues 99163650 s 146x219

In partnership with Alan Aisbett of Bryan Cave Leighton Paisner LLP, LexisPSL Public Sector examine the key issues in relation to housing stock transfers.

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Large Scale Voluntary (LVST) v Small Scale Voluntary Transfers (SSVT)

Large scale voluntary transfer (LSVT) is a term used to describe the transfer of the whole or a substantial part of a local housing authority (LHA)’s housing stock to a usually new private registered provider of social housing (RP), who is registered and regulated by the Regulator of Social Housing (RSH).

An LSVT is the transfer of 500 or more tenanted and leasehold properties. An LSVT can include all the stock owned by a LHA or a part of it. The latter is known as a partial stock transfer.

A Small Scale Voluntary Transfer (SSVT) is the transfer of 499 or fewer tenanted and leasehold properties over five years or less. An LHA wishing to carry out an SSVT will be required to follow a similar process to that described for an LSVT. However, there is scope to reduce the application requirements for an LSVT.

The transfer cannot go ahead unless a majority of secure and introductory tenants of the homes in question vote in favour in a ballot organised by the local authority and the consent of the Secretary of State is granted under sections 32–34 of the Housing Act 1985 (HA 1985) and/or HA 1985, s 43.

Before giving that consent, the Secretary of State will wish to be sure of the following when deciding whether to grant consent to the transfer:

  • that the proposal offers value for money
  • accords with government policy
  • has the support of the tenants involved
  • provides them with the protection of a regulated landlord

When stock is transferred the related debt will need to be repaid, and if the value of the transferred stock is insufficient for full repayment, central government will need to cover the shortfall. This is a process known as overhanging debt write-off. Generally government support for overhanging debt is not available for SSVTs.

There is no longer a government enabled annual stock transfer programme and any individual LHA wishing to undertake an LSVT must adhere to certain statutory requirements (particularly relating to tenant consultation) and follow the process set out in the Ministry of Housing, Communities and Local Government (MHCLG): Housing Transfer Manual leading to the grant of consent by the Secretary of State.

LSVTs began in 1988 and since then about half of England’s LHAs have transferred their stock. The three most recent LSVTs completed in March/April 2015 and involved:

  • Durham County Council (transferring its stock to its former ALMO’s Dale Valley Homes and East Durham Homes, and former in house service provider Durham City Homes)
  • Gloucester City Council (transferring its stock to its former ALMO Gloucester City Homes)
  • Salford City Council (transferring its stock to its former ALMO Salix Homes)

LSVT has largely fallen into disuse in recent years due in large part to the introduction of local authority Housing Revenue Account (HRA) self-financing in 2012 which increased local authority housing debt (also there is a perceived lack of certainty of tenant support for transfer in what are largely urban authorities that remain stock owners).

MHCLG is now more reluctant to write-off overhanging debt. However, the government still wishes to encourage stock transfer, especially where this is driven by tenants.

Community led stock transfers

HA 1985, s 34 enables the Secretary of State to make regulations for imposing requirements on a local authority in any case where a tenant group serves written notice on the authority proposing that the authority should dispose of particular housing stock to a relevant RP. The Secretary of State has made the Housing (Right to Transfer from a Local Authority Landlord) (England) Regulations 2013, SI 2013/2898. Statutory guidance has also been published as permitted by SI 2013/2898, reg 3 which must be complied with.

The LHAs must co-operate with a group of its tenants who wish to explore the benefits of a change of landlord. Where a transfer proves to be the favoured and viable option the LHA must commence the process of transferring ownership of those homes to a private RP. Any such transfer proposal is still subject to existing legislation on stock transfers, namely that the transfer cannot go ahead unless a majority of secure and introductory tenants of the homes in question vote in favour in a ballot organised by the LHA and the Secretary of State has granted consent.

The Regulations also allow the LHA to, at any time, to submit a request to the Secretary of State to halt the proposal if it would have a significant detrimental effect on the authority's ability to deliver its housing services or regeneration within the local area.

Where a tenant group brings forward transfer proposals under SI 2013/2898, then the process set out in the MHCLG: Housing Transfer Manual applies in the same way depending on whether the community led stock transfer is an SSVT or LSVT. There are a number of ways in which tenants can play a role in the management of the RP to which the stock is transferred including co-operatives, tenant and staff mutuals, tenant majority boards and Community Gateways. Tenant groups may also seek to transfer their homes to a new standalone RP but the recommendation in the MHCLG: Housing Transfer Manual is for tenant groups to instead seek an existing RP as a partner.

The new landlord

Government policy requires the new landlord to be an RP. Although the RP may either be not-for-profit or for-profit, in practice, it is highly unlikely to be a for profit provider.

Until the Housing Act 1996 (HA 1996) came into force, all LSVTs involved housing associations in the traditional form (which at that time were Industrial and Provident Societies and now Community Benefit Societies registered under the Co-operative and Community Benefit Societies Act 2014 (CCBSA 2014)). In all but one of these transfers, the housing association was also registered with the Housing Corporation (then regulator of social housing).

Following the enactment of the HA 1996, a housing association (then a registered social landlord if registered with the then Housing Corporation) including a LSVT housing association could comprise of:

  • an industrial and provident society (IPS), ie a traditional housing association
  • a company limited by shares
  • a company limited by guarantee

The current possible legal forms of housing association (including a LSVT association) which can now be registered with the RSH (and when registered as an RP) remain largely the same as set out in sections 79 and 112 of the Housing and Regeneration Act 2008 (HRA 2008).

HRA 2008, s 112 provides that the applicant for registration must be an English Body as defined in HRA 2008, s 79 and includes:

  • a society registered under CCBSA 2014 (a Community Benefit Society (CBS)) with a registered office in England
  • a registered company (either a company limited by shares or guarantee) with a registered office in England

An English Body also includes a registered charity in England, a community land trust with land in England and any other person (whether or not a registered body corporate) which has or intends to make available accommodation in England although these forms are most unlikely to be relevant for an LSVT association.

A few LSVTs have involved existing RPs. These generally occur where the transfer is a partial transfer of stock involving one or more estates. However, most transfer are to newly created landlords.

An RP may either be charitable or non-charitable. There are corporation tax advantages associated with charitable status, although the activities of charitable organisations are by definition more limited than those of non-charities.

Historically, companies offered a greater degree of constitutional flexibility. Of the two company options, companies limited by guarantee were invariably chosen in order to make plain the new landlord’s not-for-profit status. However, IPS (now CBSs),as defined above, have become more flexible in their membership arrangements, as they are no longer constrained by the 'one member, one vote' principle.

Most LSVT associations are now CBSs as such are exempt from registration with the Charity Commission. This will be reinforced by the abolition of RSH disposal consent requirements by the Housing and Planning Act 2016, as an association in which a company and a registered charity will require a consent for disposals from the charity commissioners.

Once the corporate structure of the new landlord has been decided, the LHA and its tenants will determine the composition of its board and membership.

The board is responsible for directing the RP (with day-to-day management undertaken by paid officers). The board’s functions include:

  • setting and monitoring policy
  • business planning/budget approval
  • receiving RSH reports
  • approving entry into important legal agreements
  • agreeing staff structure and salaries

The members of an RP either are shareholders (in the case of a CBS) or like shareholders (in the case of a company limited by guarantee). They exercise ultimate control over the RP in accordance with the RP’s constitution. Normally, members only meet once a year to deal with:

  • receiving the RP’s accounts
  • appointing the auditor
  • electing some or all of the board

LHA’s balance interests between various stakeholders in the RP, ie the LHA itself, prospective tenants of the RP and other persons with an interest in housing who can contribute the additional skills required to run such a business.

Most new RPs give each stakeholder group an equal influence (although there have been some new landlords who have had different community, tenant and employee based constitutions—this will particularly be the case in community led stock transfers). This means that a board of 15 will have four or five LHA representatives, four or five tenant representatives and four or five independent (or community) representatives. Arrangements will be made to ensure that each group has a third of the votes cast (as members) at the annual meetings.

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Tenant consultation

As mentioned at the outset, all LSVTs require the consent of the Secretary of State. However the Secretary of State will not consider granting consent unless the LHA can demonstrate that it has properly consulted tenants who are affected by the proposal as required by HA 1985, Sch 3A and also that, following this consultation, a majority of the tenants affected are not opposed to the proposed transfer.

HA 1985 Sch 3A, para 5A requires the Secretary of State to issue this guidance to local authorities about compliance. The current guidance was published in July 2009 and entitled: ‘The Housing Act 1985: Schedule 3A—consultation before disposal to private sector landlord Statutory guidance—paragraph 3: requirements as to consultation’ (consultation guidance).The holding of a ballot is a statutory requirement of the consultation process.

The principle behind these provisions is that tenants should be fully involved in any plans and decision-making over the future ownership of their homes. The LHA must provide all affected tenants with sufficient information for each to express a fully informed opinion about the proposal in a statutory ballot. In practice, the Secretary of State expects the formal consultation covered by HA 1985, Sch 3A, para 3 to be the conclusion of a longer process; ie it should follow an informal period of consultation when the authority introduces and explains its proposals. Therefore local authorities will also carry out informal consultation with their tenants; this includes holding tenant meetings, issuing newsletters and setting up a tenants’ helpline.

The statutory guidance requires the appointment of an Independent Tenant Advisor (ITA) to support the LHA’s tenants in relation to the transfer proposals. As with informal consultation by the LHA, the ITA will normally hold tenants’ meetings, issue newsletters and run the tenants’ helpline.

The formal consultation process has three key stages.

There are no statutory requirements for consulting long leaseholders (ie people who have exercised their right to buy on a long leasehold basis or have bought from those who have exercised their right to buy) as the terms of their lease will not change if the freehold transferred to a private landlord. However, the consultation guidance states that leaseholders should be kept informed of progress on the transfer proposal and told that they may make any objections to the transfer to the Secretary of State, who will take such objections into account when making a decision on the consent application. Although an LHA may ballot leaseholders about a transfer proposal (which should run concurrently with the statutory tenant ballot), it is not obliged to do so and it should conduct any such a ballot as a separate exercise to ensure that tenants’ views can be clearly demonstrated.

First stage of consultation

The first stage is where the LHA issues a formal consultation document to secure and introductory tenants explaining its proposals and inviting tenants’ comments. Before the first stage consultation document can be prepared, an LHA will need to carry out a stock condition survey to ensure that any promises being made to tenants are based on sound data and are therefore deliverable.

The first stage document contains information about:

  • the identity of the person to whom the disposal is to be made
  • the reasons for the council pursuing housing transfer
  • future rents and service charges
  • the promised repairs and improvements
  • the effect of transfer on tenants’ rights (particularly the right to buy) and any differences which will arise
  • tenants’ security of tenure, ie their right to stay in their homes

The formal consultation document must invite representations within a reasonable period, which the Secretary of State considers to be at least 28 days (ie the deadline must be 28 days or more after the tenant has received the document).

Second stage of consultation

The second stage is where the LHA must consider any representations made by tenants within the period specified and may wish to revise its proposals as a consequence.

Following consideration of the tenants’ comments by the LHA, the formal second stage notice can be issued. This normally consists of a short letter explaining to tenants any changes in the transfer proposal. The letter must also remind tenants that they have a right to make formal objections to the proposals by writing to the MHCLG within a period of at least 28 days and draw attention to the fact that the Secretary of State will not give consent to a transfer if the result of the statutory ballot shows that a majority of tenants voting are opposed.

The LHA then holds a ballot of tenants on the proposal.

Originally there was no legal requirement to hold a ballot, although this was seen as the fairest way to test tenant opinion. However, HRA 2008, s 294 has made a ballot mandatory. The ballot usually commences immediately after the issue of the Stage 2 notice, and for the 28 days (or other specified period) in which objections may be made to the Secretary of State to run concurrently with the ballot. An independent body, such as Electoral Reform Ballot Services, is employed to conduct the ballot.

Final stage of consulting

Finally, the LHA informs tenants of the result of the ballot and notifies them of their further right to contact the Secretary of State regarding the transfer proposal.

The LHA, at the end of the ballot, must write to all tenants (whether or not they voted) informing them of the result. A majority vote against transfer would mean that transfer cannot proceed and the LHA must make this clear to tenants. Where the majority vote in favour of transfer the LHA must inform tenants of how they now intend to proceed. If the LHA intends seeking the Secretary of State’s consent to the transfer, then they must advise their tenants that they have up to 28 days to make further representations to the Secretary of State. The Secretary of State may not consider any representations received after this 28 day period.

There are no statutory requirements for consulting long leaseholders (ie people who have exercised their right to buy on a long leasehold basis or have bought from those who have exercised their right to buy) as the terms of their lease will not change if the freehold transferred to a private landlord. However, the consultation guidance states that leaseholders should be kept informed of progress on the transfer proposal and told that they may make any objections to the transfer to the Secretary of State, who will take such objections into account when making a decision on the consent application. Although an LHA may ballot leaseholders about a transfer proposal (which should run concurrently with the statutory tenant ballot), it is not obliged to do so and it should conduct any such a ballot as a separate exercise to ensure that tenants’ views can be clearly demonstrated.

Post-ballot

Following a successful tenants’ ballot, the LHA and the RP will negotiate the price (or transfer value) and the details of an extensive transfer contract document.

The transfer value is the amount the receiving RP will pay for the stock (a purchase generally financed by borrowing). It is therefore also the capital receipt the LHA will receive and which it can use to pay down associated debt. An LHA or tenant group intending to transfer homes will need to generate a transfer value using a discounted cash flow model for social housing (its Transfer Valuation Model). This method is understood by the government, the RSH, funders and receiving landlords. MHCLG will wish to be satisfied (particularly so where there is to be an overhanging debt write off) that the transfer value has been acceptably optimised in respect of the balance between maximising transfer value, minimising debt write-off and securing additional private investment which delivers growth and the requirement for overhanging debt write-off is accordingly justified.

The transfer contract contains the terms of the sale of the housing stock and the relationship between the LHA and the RP. The LHA will be asked to provide warranties covering certain matters affecting the transferred stock. The transfer contract will also contain service-level agreements where either party is to provide services to the other and the LHA will need to consider how other ongoing responsibilities, such as common landscaping, is to be dealt with in the transfer contract.

The RP will covenant with the LHA to keep any promises made to tenants by the LHA during consultation, to offer transferring tenants a new agreed form of tenancy agreement and to meet the RSH’s regulatory standards. The transfer contract will also detail the treatment of net preserved right to buy receipts as transferring secure tenants have their statutory right to buy preserved by HA 1985, s 171A. There is usually a sharing mechanism for such receipts.

The transfer contract should also include a requirement to cap leaseholder service charges for capital works at no more than £10,000 (or £15,000 in London) in the five-year period following transfer.

The RP will need to obtain funding for the transfer (including its works programme) as well as finalising registration as an RP with RSH. The RP will no longer require consent of the Secretary of State and the RSH to mortgage its properties to secure private finance for the acquisition of the stock and subsequent repairs and improvements.

The whole process takes between one year and 18 months, with at least six (and often more) months usually elapsing between the ballot and the transfer itself.

Wales

A number of Welsh stock transfers have already taken place. In Wales the role of Communities and Local Government is taken by the Welsh Government (WG) and the Welsh Local Government Association (WLGA) takes an active part in developing housing policy. Otherwise, the law and practice is similar to England, save that RPs remain as registered social landlords regulated by WG and also in relation to the constitutional make-up of the landlord. WG encourages the use of the Community Housing Mutual model, which gives tenants 'ownership' of the landlord at a membership level. There are also requirements to ensure that Welsh residence (and the Welsh language) is embedded in the structure and process.

Alan Aisbett is a consultant at Bryan Cave Leighton Paisner LLP

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