The quirks of charging newly constructed properties
We are increasingly seeing both for profit and not for profit organisations looking to charge new build properties earlier than ever, even where they are not yet registered as the owner.
To be successful requires not only good record keeping but the ability to foresee the difficulties and to pre-empt delays. Here we focus on five problematic areas and explore ways organisations can overcome them when looking to secure new builds:
New home warranty documents
New build properties will need to have the benefit of a new home structural warranty. New home warranties provided by NHBC and Premier Guarantee Cover are widely accepted by funders and investors. In the event that the properties benefit from a warranty from a different provider (or indeed a developer is proposing to offer a warranty from a different provider), you should take legal advice at the earliest opportunity so they may consider the acceptability of such warranties by funders. You may only be issued with a cover note for these warranties at practical completion. A cover note only confirms that cover will be provided and is not the warranty document. Before charging a development, the cover note must be activated by either you or your developer. This can be time-consuming and delays may occur where this is not necessarily within your control.
The planning make-up of a development may contain multiple phases and, if that is the case, you will need to confirm under which phase(s) the property has been constructed and provide the relevant planning permissions normally either:
- a full permission or;
- an outline permission plus the reserved matters application.
Since outstanding planning conditions are still capable of enforcement with new build properties (the "10 year rule"), you will need to provide discharge of all planning conditions that relate to the property (or at least a confirmation of compliance) from the local planning authority and that includes the discharge of any contamination conditions. Where outline planning conditions have been discharged, the documentation must clearly demonstrate whether the discharge is in respect of the development as a whole or just in relation to a particular phase is discharged. Where it is unclear, additional confirmation may be needed. Whilst planning trackers from developers can be helpful, they do not serve as evidence of discharge.
Section 106 agreements
If your property is subject to a section 106 agreement (and any variations or supplemental deeds), then these also need to be provided to your charging lawyer, regardless of whether or not you are a party to the agreement(s).
A section 106 agreement will bind the land and, potentially, the borrower. In the event that there is a default on the loan which is then enforced, the funder or security trustee and successors could also be subject to any outstanding obligations. This may be an obligation to pay a sum of money, to provide affordable housing, schools or other infrastructure or to enter into a separate nomination agreements.
Confirmation from the local planning authority/authorities that all obligations within the section 106 agreement, both financial and non-financial have been satisfied will need to be obtained. Obtaining confirmation from the local authority may take several months or more, particularly in the current climate. Should there be financial or other obligations outstanding without an adequate mortgagee exclusion clause (MEC), this may result in the property not being acceptable as security, a reduction in valuation or the additional cost of buying an indemnity insurance policy. Where there is an adequate MEC in the agreement(s), it will provide comfort on the binding nature of these agreements as well as maximise the valuation.
Mortgagee exclusion clauses
Your charging lawyer will consider the adequacy of any MEC.
Where there is a restriction on occupation or use, there needs to be a MEC to achieve the maximum valuation. Whilst deeds of variation can be agreed, negotiation with local authorities or other third parties may take several months. It is important that MECs should be considered as part of a pre-charging review and not at the point that there is an urgent need to raise finance.
Restrictions on occupation or use without an adequate MEC will reduce the valuation to an EUV-SH basis or, in some cases, will mean that a scheme is not acceptable security. As well as being in section 106 agreements, such restrictions may also be found in title documents, nomination agreements and sometimes planning permissions.
Community Infrastructure Levy
Where affordable housing is within a local authority where a Community Infrastructure Levy (CIL) charging schedule is in place then it is likely that there is a CIL liability. Given that Social Housing Relief is the mandatory, it may also have been granted over the development. In your charging pack, you will need to provide the Liability Notice and the Demand Notice with confirmation from the local authority that all monies have been paid. In many cases, this level of information will not be held on development files and again may require a separate approach to the local authority.
It is essential to maintain good records and filing systems and to start collating the property charging information and documentation as it becomes available. As new build sites become more complex and require increasing levels of documentation, having accurate and complete development records is the key to a successful charging transaction.