Between a rock and a hard place?

Adopting the affordable rent tenure is a challenge for registered providers. Patricia Umunna, Louise Leaver and Anjana Ghosh look at the impact on RPs’ relationship with lenders and local authorities.

On the one hand, the Tenant Services Authority (TSA) are insisting on Registered Providers (RPs) adopting the new affordable rent tenure in order to access any grant (the Rock) and on the other hand, lenders are looking for every opportunity to re-visit pricing (a Hard Place) and also some local authorities are resistant to introducing the new affordable rent tenure in their boroughs (another Hard Place).

This briefing sets out to identify some of the specific areas of possible friction where RPs need to consider whether the consent of their lenders or agreement with local authorities is required in order for the RP to proceed with any change to affordable rent.

Do you need lender consent to change your form of tenancy?

The Homes and Communities Agency (HCA) Affordable Homes Programme – Framework states that the TSA does not intend to prescribe the type of tenancy that RPs should use when homes are let on affordable rent terms. RPs will have flexibility on the type of tenancy to be offered for affordable rent, and they retain the option to offer lifetime tenancies if they wish to do so.

If you intend to offer affordable rent on fixed term tenancies your form of tenancy will require changing. Any RPs who do need to change their form of tenancy will need to check their existing loan agreements, fixed charges and other security documentation to see if a lender’s consent is required for any change in the form of tenancy agreement used by the RP.

Some documents are more prescriptive than others and do require that tenancies must be in a form acceptable to the lender. One of the caveats often negotiated by Borrower’s solicitors was that a lender’s approval would not be required where the tenancy is in a form approved by the TSA. Given the change in approach to regulation it seems unlikely that the TSA will approve any particular form of tenancy agreement and therefore this carve-out may not prove to be particularly useful. It may be possible however to amend your existing tenancy agreement in such a way to avoid the necessity for lenders consent. Whether this is possible, will depend on the particular wording of your loan agreement.

Under the HCA Framework, you can also use your existing form of tenancy if you choose to do so. However if you do intend to use your existing form of tenancy for any affordable rent re-lets, you should check the form of tenancy to ensure there is not provision in the tenancy itself which would preclude you from letting on affordable rent terms.

Are your local councils prepared to amend S.106 agreements and nomination agreements?

The Government has recently published the new Planning Policy Statements 3 – PPS3 Housing which contains a new definition of “affordable housing” that includes affordable rented housing. Whilst affordable rented housing is a new form of affordable housing similar to social housing, it is outside the national rent regime and did not fall within the previous definitions of “affordable housing” used in existing planning consents and S.106 agreements. The new definition of “affordable housing” in PPS3 is:

“Rented housing let by registered providers of social housing to households who are eligible for social rented housing. Affordable Rent is not subject to the national rent regime, but is subject to other rent controls that require a rent of no more than 80 per cent of the local market rent.”

Any RP who is planning to do any development under an existing planning consent which permits “affordable housing” will need to consider whether it would be favourable to amend the existing S.106 agreement and/or consent in light of the new definition in order to allow it to develop on an affordable rent basis.

Prior to the publication of the new PPS3 some local planning authorities have been open to the inclusion of the new definition of affordable housing in new S.106 agreements and Deeds of Variation to existing agreements as it provides a greater mix of affordable housing and flexibility of tenure. However there are others who have been refusing on principle to amend either S.106 agreements or nomination agreements to include affordable rents.

It would be advisable to make enquiries of those local authorities with whom you have entered such agreements to find out their attitude towards the new affordable rent regime at an early stage of the planning process. The jury is still out on how well the new product will work in practice but it is hoped that it will give RPs greater freedom to respond to local housing need.

Nomination agreements will also need to be revisited and any RP planning to rent on an affordable rent basis will need to carefully consider its nominations agreements to confirm whether or not it is possible to rent to nominated tenants on an affordable rented basis. If not, it will be necessary to seek amendments to such agreements.

Do your lenders have the right to require approval of your business plan?

Does your loan agreement contain a clause which allows the lenders to approve any proposed business plan (or any changes to the assumptions used in the business plan) before it is accepted as the business plan for the purpose of the loan agreement?

Along with other changes such as the cap on housing benefit and the universal credit, the change to affordable rent tenure could have a substantial impact on the business plan. If your loan agreement contains a clause allowing the lenders the right to approve the business plan, it is worth involving them in the process early on. Most clauses of this nature require the lenders to act reasonably in approving the business plan and there is therefore some ability to challenge any refusal or delay by a lender to approve a new business plan.

Often disposals and on-lending restrictions allow carve-outs by reference to the business plan so any failure to approve a new business plan may limit your ability to implement any disposals programme or the conversion of voids required under the new contract with the HCA.

If your loan agreement sets out an approval process it is less likely that the lenders could charge a fee for approving the business plan. However given the changes required to the business plan and potentially the financial covenants, you may find lenders ask for a fee or change in pricing to reflect any perceived increased risk. As this is a much negotiated part of the facility, the wording in each facility agreement is likely to be different and you should take advice on whether such action by the lenders is reasonable.

Several lenders have mentioned that business plan approval is likely to become more important to them in the future for monitoring covenants and managing the perceived increase in risk arising from the affordable rent tenure. Therefore be aware that this requirement may start creeping in to term sheets and funding offers. It is important to deal with this at an early stage in any negotiations with funders for new finance or terms as it will form part of their credit committee approval and will be hard to remove or water down at documentation stage. Any caveats or qualifications should be included at term sheet stage and should minimise the ability of a lender to have absolute control of the business plan process.

Patricia Umunna and Louise Leaver are partners in the finance team and Anjana Ghosh is a planning solicitor at Winckworth Sherwood. Patricia can be contacted on 020 7593 5103 or at This email address is being protected from spambots. You need JavaScript enabled to view it., while Louise can be reached at 020 7593 5050 and by email atThis email address is being protected from spambots. You need JavaScript enabled to view it.. To contact Anjana, call 020 7593 5088 or email This email address is being protected from spambots. You need JavaScript enabled to view it..