Custom and self-build housing
Although well established in continental Europe, custom and self-build housing was, until recently, regarded in the UK as a minority activity largely confined to high end luxury properties. Cherwell District Council's visionary support for the Graven Hill development (as featured on Grand Designs) has challenged that assumption.
When complete, Graven Hill will comprise up to 1900 custom and self-build homes together with one million square feet of commercial space, a primary school, pub/restaurant and local shops. The overall development is expected to create 2,000 new jobs.
The complex project raised a number of key legal issues which needed to be addressed by our experienced team.
At the outset, it was important for the Council to confirm it had the necessary powers to set up and fund the development company. This also included looking at related public sector issues such as complying with state aid and procurement law obligations and commercial matters such as liability for corporation tax, VAT and stamp duty land tax. By preparing a comprehensive report on these issues, the Council was able to justify its involvement with the new development company and the purchase of the Graven Hill site from the MOD.
The Graven Hill development company was set up as a company limited shares which is wholly owned by Cherwell District Council. Other councils may want to consider sharing the risk and rewards of a large development project through joint venture arrangements either with housing associations (which are major housebuilders in their own right) or more traditional private sector developers which are keen to explore new options for housing delivery.
Governance issues included developing a structure which avoided conflicts of interest, delivered a management board with the skills and experience required to carry out a major development project and also in relation to the internal governance of the development company. Internal governance arrangements are set out in the development company's constitution (articles of association), a shareholder agreement (which deals with issues such as matters reserved for the Council's decision and policies concerning payment of dividends so the Council gets a return on its investment) as well as standing orders and financial regulations to provide transparency and accountability.
Some councils may already have available sites which can be used for custom and self-build schemes. Usual issues will include valuation (and any obligation to obtain the best price on selling to the development company), transferring land from the housing revenue account and any required consents. Advice will also be needed on the terms of the contract including clawback and overage provisions if all or part of the site is developed commercially rather than as custom and self-build homes. In the case of Graven Hill, the former MOD site was purchased by the Council and immediately sold on to the development company but issues such as valuation, clawback and overage also needed to be addressed.
The development company will need to consider its approach to dealing with plot sales and the terms of sale. For major custom and self-build schemes, these will need to consider issues such as how to prevent plot 'flipping', re-purchase of a plot if a home builder doesn't complete the proposed development within 32 months of reserving a plot and protection for custom and self-builders' mortgage providers who will have made stage payments as the build progresses. The lending market for custom and self-build is now more developed and lender approved documentation has been developed for these types of schemes.
A newly formed development company will need access to funding to deliver its business plan objectives. Sources of funding include share capital (equity), unsecured debt and long term loans to facilitate site acquisition and development. Councils can consider using capital reserves or PWLB/Treasury borrowing as sources of funds which can be on-lent to a development company. Lending by a council needs to be on market terms (both in relation to interest rates and commercial terms) to comply with state aid rules. The difference between the rates a council can borrow at and the rate it lends to the development company provide an additional financial return to the council. Financial consultants will be needed to sign off on the commercial arrangements to provide comfort on state aid compliance. A council will want to take fixed and floating charges over the development company and the development site.
The Graven Hill scheme is being delivered on a 'golden brick' basis with the development company providing site infrastructure and carrying out construction to 'just beyond foundation' stage. This approach has benefits for home builders who only pay stamp duty land tax on the value of the plot, avoid VAT on the purchase price and should be able to recover most VAT on the construction costs of their home. The construction documentation needs to be legally robust to manage the development company's construction risks and potential liabilities to home builders.
Graven Hill adopted an award winning approach to planning, delivering maximum flexibility for home builders whilst also reserving the possibility of reverting to more traditional development to mitigate the development company's risk and financial exposure if plot sales for custom and self-build homes are lower than expected.
The innovative approach to planning involved three elements:
- Local Development Order - Graven Hill was the first self-build scheme in the UK to use a new build Local Development Order which grants planning permission for the custom and self-build properties avoiding the need for individual homebuilders to submit a planning application for their plots, whilst also allowing design freedom with the parameters of the Plot Passport.
- Plot Passport - Each plot has a 'passport' governs what can be built on each plot including, setting maximum ridge height, minimum number of parking spaces, the perimeter of each home and minimum standards for sustainability. This approach simplifies the planning process for homebuilders and improves the commercial appeal of the development for custom and self-builders. The Plot Passport requires self-builders to comply with the Design Code.
- Design Code - the design code enables a level of design freedom across the site, whilst ensuring distinct the characters to emerge from the different neighbourhoods.