Making the most out of Right to Buy receipts
The Local Authorities (Capital Finance and Accounting) (England) Regulations 2003 (the Regulations) restrict a local authority's use of certain "capital receipts" that it receives, requiring these to be pooled and paid to the Secretary of State.
The capital receipt is received when a local authority sells a property under the Right to Buy (RTB) (Schedule 6A of the Housing Act 1985) is a capital receipt that is subject to this pooling restriction.
However, Section 11 (6) of the Local Government Act 2003 allows 'RTB receipts' capital receipts to fall outside of the pooling requirements where an agreement has been entered into between the Secretary of State and the particular local authority. Most local authorities in England have entered into an agreement with the Secretary of State allowing them to use, subject to certain restrictions, their RTB receipts to provide social housing – the "RTB Retention Agreement".
Social housing for the purposes of the RTB Retention Agreement is defined as "low cost rental accommodation" as defined in section 68(1)(a) of Housing and Regeneration Act 2008 (the 2008 Act). This definition then directs you to section 69 of the 2008 Act which defines low cost rental accommodation as that which is:
- made available for rent;
- at below the market rate; and
- made available in accordance with rules designed to ensure that it is made available to people whose needs are not adequately served by the commercial housing market. In addition to having to be used for the provision of social rented housing, the RTB receipts must constitute no more than 30% of the total amount spent on the development costs associated with this.
The development costs include those associated with the acquisition and construction of the social housing, with part 6 of the RTB Retention Agreement setting out the specific development costs which can be funded. The remaining 70% of the cost of developing the social housing must be funded by other sources (excluding grant from Homes England or the Greater London Authority).
A local authority that enters into the RTB Retention Agreement has a three year timeframe to use their RTB receipts, before these must be paid to the Secretary of State, with interest, if unused.
So how can RTB receipts be utilised?
Whilst restrictive, the RTB Retention Agreement does allow local authorities to use RTB receipts in a variety of ways to provide new social rented housing, often with local authorities working together with housing associations and other third parties.
We have advised many local authorities on the different types of models that can be used in accordance and some of these are described below.
Local Authority spends the RTB receipts itself.
Local authorities can use the RTB receipts themselves. This requires the local authority to fund the remaining 70% themselves from reserves or borrowing. This may prove problematic for local authorities who are at, or close to, their HRA debt cap. Also the lack of availability of land and / or the potential lack of skill set to manage construction for some might make this option less attractive.
Independent charitable Community Benefit Societies
RTB receipts can be "gifted" to bodies in which the local authority does not own a controlling interest and we have advised a number of local authorities who have sponsored the establishment of (or are in the process of doing so) independent organisations, usually community benefit societies and often charitable, to develop and provide social housing.
If the body is a charity it must be independent from the State and therefore the local authority will not have a controlling interest in the charitable CBS. This allows RTB receipts to be passed directly to the independent body. The local authority could also loan the body the remaining 70% of the development costs.
Whilst the local authority will not be able to exercise constitutional control, control/influence over the body's activities can be achieved in other ways – for example within loan covenants and/or land transfer arrangements.
"Gifts" to a housing association
As a local authority will not own a controlling interest in a housing association, RTB receipts could be gifted to a housing association on the same basis as the money could be gifted to an independent body described above.
The local authority can provide the RTB receipts to a housing association by way of grant, with specific conditions to satisfy the terms of the RTB Retention Agreement, including the receipt of nomination rights.
Housing Delivery Partnerships
Partnerships between local authorities and housing association and/or the private sector are becoming increasingly common in the sector, with the aim of increasing the supply of new homes of all types and tenures.
Partnerships can take many forms including co-operative alliances, contractual partnerships and corporate partnerships (often 50/50 Limited Liability Partnerships (LLP)).
Partnerships are attractive due to the flexibility they can provide to both local authorities and the private sector partner and, like the models described above, RTB receipts could be freely passed to a 50/50 partnership, as the council would not own a controlling interest in such a body.
The three year time limit to spend the RTB receipts and the other constraints in the RTB Retention Agreement mean that, for some local authorities, spending the RTB receipts is often easier said than done. A number of local authorities have been required to pay back RTB receipts to government with compound interest. Use the RTB receipts or lose them – we can help you work through the options.