In the fourth part of our series on contract management pitfalls, we look at the risks arising out of varying the terms of construction contracts.
This White Paper concentrates on three themes: getting the right homes built in the right places, speeding up house building, and diversifying the market. It welcomes the contributions of local authority housing vehicles to the marketplace (while continuing to indicate the Government’s intention to extend Right to Buy) and puts an emphasis on (amongst other things) local government’s role in achieving the volume of house building that the Government feels necessary.
But what does a council need to think about before it can get building?
There are some key decisions that need to be made at an early stage:
- What is the Council’s purpose behind building more houses? Is it:
- To create an income stream for the Council?
- Generally to increase the numbers of for sale and/or rental properties in the area?
- To correct a particular market failure, such as a lack of large family homes, or below-market rent properties?
- Will the Council sell the houses it builds, or hold them as a rental portfolio, or both?
- Will any rentals be at a market rent? Or does the Council want to rent at sub-market rents in one form or another?
- Does the Council want to “go it alone” or joint venture with a partner?
The answers to these questions may be dependent, in some cases, on a detailed financial analysis, as the market position, as well as the Council’s policy objectives, will influence the decisions that are made. Once the answers to these questions are known, then there are some key legal issues that need to be taken into account when the Council establishes any new vehicles and puts in place arrangements for working with them:
- What powers will the Council be relying on when it acts? Is it planning to invest, to trade or act for commercial purposes? Getting the vires right from the start builds a strong foundation for the decision-making that follows.
- What corporate form(s) will be used? This will depend on the Council’s objectives – will the vehicle sell properties or rent them for profit which will be passed back to the Council? Is the Council the sole parent or is this a joint venture? Is this a part of a wider strategy and, if so, is a group structure needed?
- What will the relationship between the Council and the vehicle look like? It is important to consider here the degree of control that the Council will want to hold over the vehicle it creates, the decisions that the Council will make (as compared with those it will entrust to the vehicle) and the individuals who will make those decisions.
- How will the vehicle be funded? Will the Council make any loans to the vehicle – say for working capital needs? The Council will need to consider the terms of any investment, taking into account European state aid rules and rules governing financial assistance to privately let housing.
- Will the Council transfer any land to the vehicle on which it will build? The Council will need to give detailed consideration to the application of section 123 Local Government Act 1972 and European state aid rules.
- If any housing that is built is sold or rented at below-market rates, what is the regulatory impact of this? The Council will need to consider the impact of Right to Buy, the requirements of the Housig and Communities Association (HCA) and the impact that the most recent Housing White Paper might have in future months and years on the expectations on councils in this respect.
- Will the Council be purchasing anything from the vehicle? What impact will EU procurement rules have? The procurement treatment can vary depending on the extent to which the vehicle is mainly trading externally or established to provide services or work to the Council.
- Will the vehicle(s) purchase anything from the Council? Any new company needs to have in place various support services – HR and payroll if there are staff employed by the vehicle, IT and telephony, even legal services – and the Council should consider whether it wants the vehicle to “buy back” those services from the Council, and if so for how long.
- What are the Council’s own governance requirements in relation to setting up the vehicle? No two councils are exactly the same in this regard.
All of these issues need to be taken into account, alongside detailed consideration of tax, financial, and accounting implications which can have a significant impact on the model that the Council chooses. Over the past 12 months, we have been working with a number of local authorities, both through their decision making and business case processes and through implementation stages.
Our experiences span complex joint venture group structures with housing sector partners, single vehicles dedicated to housing sales, and group structures designed to be future-proof and allow for changes in strategy over time and/or the bringing of other council-owned entities into the fold. These experiences have shown that every local housing vehicle will be different. There is no “one size fits all” because no two councils have the same objectives, financial constraints or market conditions.
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