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How a S106 can impact shared ownership sales

24 September 2018 • Catherine Jones

Housing providers have many responsibilities when marketing shared ownership plots for sale, and one of the first things to check is whether properties are affected by a S106 Agreement. Many S106s contain important restrictions and constraints on the sale of the shared ownership units, and a lack of early clarity on this issue – often a result of poor communication between development and sales teams – can cause real headaches for both RPs and potential purchasers.

 

Good communication

Ensuring your development team liaises with your sales team, and Croftons, early in the process is crucial to avoiding issues, as it is important to identify early whether there is a S106 as part of the planning permission, and if so how the affordable housing provisions will affect the shared ownership sales – the earlier sales teams are armed with this information the better.

This is of particular importance if you think that the S106 will need to be varied, as we can be progressing a variation to the Agreement whilst the properties are being built in order to avoid any delays to sales. This will ultimately help you achieve your sales targets and cash-flow, with capital receipts coming in on time.

We also recommend speaking to us for advice early on in the process so that any points that need to be reflected in the shared ownership lease can be picked up in the drafting prior to documents being issued. Again, doing this early, and concurrently with other steps, will save time and avoid delays when you come to sell.

Key considerations

In terms of how the S106 affects sales and marketing of plots, there are three main things to consider:

  • Are there any requirements for marketing?
  • Are there any restrictions on the purchaser?
  • Are there any restrictions on the initial share or staircasing?

Marketing shared ownership plots

The affordable housing provisions in the S106 may contain conditions on how plots can be marketed for a particular time period, of say 3 months from launch of the scheme. However, you can help avoid any delays by starting to market the plots off-plan, so that any periods which restrict marketing are being run down before the plots are ready for occupation.

In terms of marketing, the affordable housing provisions may dictate how you formulate your marketing strategy. Any points in the S106 must be picked up in the strategy so that sales officers are complying with the S106 from the outset. When faced with potentially difficult terms we’d advise speaking with the housing team at the Local Authority for their input, as you may find them willing to relax restrictions if they are causing you difficulties in obtaining reservations.

Restrictions on the purchaser

One of the most common provisions to find in the S106 relating to shared ownership sales will be certain criteria that the purchaser must fulfil in order to be considered to buy a plot. It is often stipulated that they must be able to demonstrate a “local connection” to the area in which the scheme is located. This term will be defined in the agreement and sales officers should be aware of the requirements as soon as possible.

Not only will the purchaser be required to have a local connection, but the agreement will often operate a “cascade” system, whereby an RP must first try to sell the plots to purchasers living in a narrowly defined area, usually the local ward in which the scheme is situated. You will have to show that you have tried to sell to purchasers who fulfil this criteria before being able to move on to the next category which widens out the catchment area. If sales aren’t made, this process will continue with each area being wider than the last, until eventually the RP is able to sell the plots to anyone living or working in the Local Authority area.

Another way in which the purchaser can be restricted is by reference to “key workers”, such as NHS workers, teachers and Council staff, and the provisions mean that these groups will be given priority when applying for plots.

Restrictions on initial share and staircasing

Before marketing plots, sales officers should check whether the agreement requires a minimum initial percentage share to be sold. Again, housing officers at the LA may be able to relax this if RPs find it difficult to find enough purchasers who are able to purchase the minimum percentage. However, it is restrictions around final staircasing that are likely to cause more issue than the initial share, as any constraints on staircasing are likely to cause a problem for the buyer’s lender.

Designated rural schemes cause particular problems as the S106 will likely contain requirements for staircasing to be restricted to 80%, or alternatively for the RP to have to buy back the property once 100% staircasing is achieved. The reason for these conditions is to retain the shared ownership plots as affordable housing in the future in a bid to combat the lack of affordable housing for local residents in rural areas.

It is important to consider the impact constraints on staircasing have on the ability for a buyer to obtain a mortgage. Many high street lenders will refuse to lend on a property where the shared owner is unable to staircase to 100% and obtain the RP’s superior interest. It is therefore essential that buyers are able to make a lender aware of any restrictions from the outset, to avoid costly delays in having to find a new lender should the bank withdraw the mortgage offer when they become aware of the restrictions.

Potentially ambiguous wording can also cause confusion and additional enquiries as part of the sales process. Many S106 agreements contain a provision which requires the shared ownership plots to remain as affordable housing “in perpetuity”. Although the Local Authority is likely to mean that the plots need to stay affordable from the point of being acquired by the developer, to the transfer to the RP and subsequent sale as a shared ownership unit, it is a good idea to approach the Local Authority for confirmation on this point in writing to avoid unnecessary delays to sales.

Unique conditions

Finally, it is important to remember that there is no standard Agreement - all S106s will contain unique conditions and the affordable housing provisions should be checked in detail to ensure compliance at all stages of the sales process to help shared ownership sales run smoothly. Ensuring development and sales teams – and legal teams where required – communicate early is vital to this in order to avoid unnecessary issues, expedite sales, and ensure capital receipts from your scheme are received promptly.

 

For any further advice in relation to S106, shared ownership, or any other aspect of your development programme please contact Catherine on 0161 827 7188 / catherine.jones@croftons.co.uk 


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