We acted for Rooftop Housing Group (“Rooftop”) and its subsidiaries in forming a VAT cost sharing group with Festival Housing and its subsidiary Festival Property Care (“FPC”).
The legislation making cost sharing groups possible was only passed in summer 2012. We believe that this is the first time that a cost sharing group has been set up for a housing association’s “core” maintenance activities of response repairs and voids, gas servicing and repair and planned maintenance. The gas and planned work will be passed to FPC in stages, as existing contracts end. The total contract value is in the region of £55 million.
The arrangements have meant that Rooftop can retain FPC as the provider of these workstreams without the need for a tender process. They should also save Rooftop around £7 million in VAT over the next 10 years.
What was our role?
Early on in the project, we met with Rooftop’s Board and explained cost sharing groups to them. We highlighted the advantages, disadvantages and the commercial legal issues that Rooftop would need to focus on when they received the documentation. We also carried out legal due diligence over the arrangements.
We marked up amendments to new Articles of Association for FPC and a Shareholders Agreement that had been proposed by Festival Housing’s lawyers. These went through several versions, with amendments and counter amendments being proposed by both parties and their lawyers. The final documents recognised that FPC would continue to be majority-owned by Festival Housing, but gave Rooftop significant “minority protection” rights in relation to overseeing the work for the Rooftop organisations.
We also drafted the contract between the Rooftop organisations and FPC. This was based on the current contract, but with a number of important changes. In particular, the payment arrangements had to be structured to recognise the principle of “cost sharing”. However, this was achieved within the context of securing protection for Rooftop from cost overruns that had not been approved in advance.
How did we add value?
We brought to this project our experience of having previously advised on what we believe to be the first cost sharing group in the housing sector. We understood the commercial objectives of both parties. This meant we were able to propose solutions to “sticking points” that were acceptable to both of them.
We introduced the idea of separating the shares in FPC into A and B shares. This allowed Festival Housing to “retain the value” that they had built up within FPC, whilst giving Rooftop significant influence over the arrangements for the work that will be done by FPC for the Rooftop organisations.
Our knowledge of maintenance contracts meant that we know what contract management provisions would be important for Rooftop in a longer contract. These additional protections give Rooftop much greater scope to manage performance; and ultimately the protection that the arrangements can be terminated if performance falls below acceptable levels.
Finally, we were able to reassure the Board at the “sign-off” meeting that their concerns had been reflected in the documentation that had been agreed and that this was a “very good deal” for both Rooftop and Festival.
