The impact of NHS England Capital Grants Charges on future security
Capital Grants from NHS England (NHSE) are not a new concept and many housing associations will have previously entered into such agreements in order to acquire or develop properties for a specific care use.
In a grant funded situation, the affected title to the property is usually registered in the name of the housing association and the grant secured by way of a charge over the title in favour of NHSE (or, in the case of historic charges, its predecessors).
In a significant majority of cases, the grants provided by NHSE are actually equity mortgages whereby NHSE is entitled under the grant agreement to a proportion of the Open Market Value (OMV) of the property on a sale equal to the proportion of capital (purchase price plus the value of any capital works) they invested when the property was acquired. Typically (and especially in older agreements), this is 100%. This would also apply if there was another 'trigger event' such as a change of use of the property, given the property would have been grant funded on the understanding that it would be used for a specific care use and NHSE are obviously keen to preserve this.
Even though a housing association is the registered proprietor on the title, they do not necessarily have any equity in the property (certainly where the NHS provided a 100% grant). A housing association will maintain and service the property generating revenue from tenants where possible, but usually upon a disposal or change of use, they must repay the proportionate OMV of the property (at the time of the trigger event) to NHSE equal to the NHS's initial investment.
In the current market, should a housing association wish to put the grant-funded property forward as security in a charging exercise, this poses some problems: the current market determines that a lender requires a first ranking charge on the property title. Given the NHSE charge on the title of grant funded properties, the lender would only have a second ranking charge and, therefore, would not currently accept the property as security in a charging exercise if the NHSE charge remains on the title.
In order for NHSE to remove the charge from the title under the terms of the grant agreement, the housing association would be under an obligation to pay the relevant proportion of the OMV of the property to NHSE. Given there is no change of use nor is the property being sold, NHSE (keen to preserve the use of the property) would be likely to question why the charge is being removed. Even though under equitable principles, they would likely agree to discharge the charge, they may prefer to preserve the current use of the property. The majority of the grant agreements (especially the older ones) did not foresee that the grant recipient would need to charge the property in the future.
Should the charge be removed by NHSE, then the housing association would find itself in the position of having paid OMV for a clear title. In the current market, if there are any use provisions which bind the property to a specific use, a lender will only accept the property as security at Existing Use Value-Social Housing (EUV-SH), and the difference between this and OMV is significant. It will be important to check that if the NHSE charge were to be released, there are not any provisions in ancillary title documents which contain use provisions of a similar kind which would still bind the land and, therefore, still limit the property to a EUV-SH value in a charging exercise.
Given the terms of the grant need to be secured with a default mechanism, NHSE are unlikely to agree to securing their grant interest by way of notice or restriction on the title. In the event any terms are not met then NHSE would not have the necessary mechanism either to enforce use or sale. It is unlikely that the positon on securing grant funding by any method other than a charge is likely to change in the future.
Equally, although NHSE might agree to limit its priority if a compelling business case were made that the additional bank funded expenditure would benefit the residents, it is unlikely a deed of postponement would work in this situation; NHSE would not have a specific amount to defer (as the OMV would vary over time) and the new lender would not necessarily be willing to accept a deed of postponement. Whilst not completely unheard of, in the current market only certain lenders will accept this form of security. NHSE and the incoming lender would also have to consider the differential in value between EUV-SH and OMV.
Given NHSE has recently made £100 million available between 2016 and 2021 to support grant funded projects and the recent White Paper, grant funding will continue to be a feature in the affordable housing sector. Housing associations should, however, consider when entering into a grant agreement that they may not necessarily obtain equitable ownership of the property and it may not be as easy to use as security.
With this in mind, should you require any advice on existing properties you may think have been affected, or if you are thinking of entering into a new grant funded acquisition or development, please contact us.