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First Homes: model Section 106 agreement

The Government has issued model s106 agreements for use with First Homes delivered through developer contributions. Stuart Tym examines the detail.

As is fast becoming the pre-Christmas norm there were a few extra baubles on the Department for Levelling Up, Housing and Communities' tree in the days leading up to Christmas. The one that really caught my eye was the First Homes Model s.106 Agreement clauses and updated First Homes guidance.

The eagle eyed will know that this has been pending since May 2021 when the guidance was first released and that the CIL Amendment Regulations 2020 mandatory exemption from CIL, which became law in November 2020, requires that "a section 106 planning obligation must be entered into to ensure that this will be the case on all future sales". This means if there is no s.106, there is no CIL discount in the case of First Homes.

This marks a move away from Starter Homes by the government to a First Homes product which:

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  • is 25% of the affordable housing on a site, not 20% of all of the homes on the site, as Starter Homes were.
  • is sold at a minimum of a 30% discount, with local authorities having discretion to set higher discounts on properties on a site-by-site basis, not the 20% discount of Starter Homes.
  • is sold at no more than £250,000 (£420,000 in London) with lower caps capable of being set at a local level - the cap cannot be increased by anyone other than a relevant government minister. 
  • passes the discount on to subsequent buyers, via a restrictive covenant, secured by s.106 - not, as with Starter Homes, a discount which only lasted for the first five years of ownership.
  • prioritised current and recent Armed Forces personnel as well as local people (which Starter Homes were silent on).
  • requires at least 50% of the property to be mortgaged (up from the 25% requirement for a Starter Home); and 
  • can only be sold to a First Time Buyer on a "low income" - albeit this being defined as £80,000 in the regions and £90,000 in London remains questionable. £90,000 households may be low in London, but for a lot of “Regions” outside of the South £80,000 is a pretty good wage.

So, what do we learn from the model s.106?

  • The intention remains that once the properties are designated as First Homes they remain as such in perpetuity. I remain of the view that this is counter intuitive. Most young people, or couples, buy a first home which after a period of time they need to sell, to buy something bigger, as their circumstances change. If the value of the First Home is fixed to remain at 30% lower than the local market they will not be able to sell and move into anything other than something smaller or of less value. Typically, in a stereotypical family unit, this does not suit the individual, until several decades on, when they may want to down-size for retirement.
  • Attempts are made to control the manner by which First Homes are clustered together and that they are indistinguishable from market homes.
  • Sets the council as the tribunal of evidence as to whether 

- a proposed purchaser meets the National Eligibility Criteria; and / or

- the dwelling meets the tests for Disposal, being a First Home and the level of discount.

and gives them 28 days within which to issue a Compliance Certificate.

  • A standard restriction on title is stipulated; requiring a local authority certificate on each resale as well. Now, we all now the stresses local authorities are under - Sam Stafford's blog is essential reading if ever this is underestimated - so where is the resource coming from? Will the subsequent seller - who at this point is likely surprised that the equity they thought they had built up in their First Home is nowhere near enough to move on with, once they have passed that discount back - have to pay a fee to the local authority for said certificate?
  • Sellers have to market for at least six months (and for developers on the first sale, the first three months may require local criteria to also be taken into account) before either selling to the council at a discount or selling as something other than a First Home. Where selling free of restrictions, an Additional First Homes Contribution is paid out of the Sale Proceeds which is typically 30% of the sale proceeds (i.e. the initial discount is returned to either the market or the council, in some form).
  • Whilst those specialising in tax law may need to give an opinion, it appears that the s.106 is drafted to acknowledge that any SDLT is paid on the open market sale price before a 30% carve out is paid to the council for its use in providing Affordable Housing in lieu - a double whammy for the resale, appearing to tax money not even received by the seller. Given that SDLT is generally paid by a buyer, not a seller, this may simply be a point of clarity.
  • The owners of a First Home must use it as their main residence and not let or sub-let it (*renting a room with a live in landlord is permitted) without the council's consent. The first two years (on aggregate if more than one instance) can be dealt by notification to the council rather than requiring its consent in writing to the letting. Certain reasoned justifications for the sub-letting (armed forces, to escape harm etc) are listed.
  • A mortgagee carve out is included, which the government strongly advises councils to use. Rather than requiring the mortgagee to sell on at a discount for an initial period, they can sell on the open market immediately, on giving the council notice. The updated guidance states that "once the Mortgagee has recovered the funds due to them under the security documentation, any remaining proceeds from the sale should be used to reimburse the local authority for the loss of the First Home from their area. This reimbursement should be up to (but should not exceed) the value of the discount, as a percentage of the sale price and net of any additional Stamp Duty liability that may be incurred from the sale by the seller. If the remaining proceeds from the sale of the property are not sufficient to cover the total percentage value of the discount, then all of the remaining proceeds should be transferred to the relevant authority. Further detail on how this should be calculated, including worked examples and further detail on when additional Stamp Duty liability may be incurred, will be published and appended to this Guidance in due course." It is less than clear whether the current draft clause actually achieves this. 

As always with model clauses, I expect the devil remains in the detail and will only be settled when sites start to use the specimen drafting going forward, with it receiving scrutiny from lawyers representing competing interests but there remains practical difficulties with this model that I find difficult to justify. The real effect of the model will not be seen for many years to come when the first set of resales start to come to the market and the reality is fully realised.

Stuart Tym is a partner at Shoosmiths.

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