Welcometo the autumn edition of our Social Housing newsletter.

As the sector manages the demands of new initiatives and regulation, Clarke Willmott is pleased to be able to respond with the continued expansion of our

social housing team.

Over the summer we have welcomed new team members to all of our practice areas. We now have more than 50 fee earners working for our social housing clients. We have strengthened the team’s expertise and our new experts include Vicky Kells in our securitisation team, Jessica Taylor in our construction team, John Cox and Neil Brand in our Housing Management team, and Jonathan Stokes in a new role leading our plot sales. Fraser Macrae joins us on 1 December as a partner leading our sector banking and corporate team, bringing our team of client partners to ten.

In this newsletter our new development consultant, David Percival, uses some examples from his own case book to discuss how the structure of a property transaction can affect the SDLT and VAT payable. We also look at net contribution clauses in construction contracts, the proposals for Asset Registers, the new grounds for possession under the Anti-Social Behaviour Crime and Policing Act 2014, and the requirements when providing accommodation for adults who lack capacity.

Anne Hayward Head of Social Housing

Social Housing Newsletter

Social Housing Newsletter Autumn 2014

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Over the summer the HCA consulted on proposed changes to the Regulatory Framework which are due to be brought in from April 2015.We do not yet know the outcome of the consultation process but it seems certain that the requirement within the updated Code of Practice for RPs to have a readily-accessible and up to date asset register will be part of the changes. From the published consultation responses and anecdotal evidence from our clients and other key stakeholders in the sector, there seems to be universal approval of the principle of the asset register, which would assist boards in decision making and risk management at a strategic level but would also, crucially, help the HCA and others in the event of a potential or actual failure.

What remains less clear is the requirement to include details of all liabilities on the register – the consultation refers to liabilities including items which relate directly to social housing assets and those which might have an impact on the business as a whole.

This includes loans, guarantees, leases, derivatives, cross default and other obligations and anything else with “potential for any

impairment, particularly in relation to investments in non-core activities”.

Conversations with RPs indicate that further guidance setting out the types of liabilities to be included would be welcomed along with an extended time limit and transitional period as information on these liabilities may not be held in a readily-extractable format. Preparing the new register and, importantly, ensuring it is kept up to date will require many RPs to set aside additional time and resource. Many RPs have already started this process.

Clarke Willmott is looking for feedback about these issues. We will shortly be circulating a short survey about your proposals for dealing with asset registers and should be grateful for any information you can provide.

For further information, please contact: Vicky KellsPartner0845 209 1459 vicky.kells@clarkewillmott.com

Asset Registers

Since last year we have been reporting on a case that has significant practical consequences for social landlords seeking possession on mandatory grounds.

In Akerman-Livingstone v Aster Communities the Courts have been considering the duties of Housing Associations who temporarily

accommodate homeless people in priority need, who have been nominated to them by local authority partners.

Click here to read our update on the hearing in the Court of Appeal.

Continued on page 2

Akerman-Livingstone v Aster Communities: Supreme Court grants permission to appeal

02 Social Housing Newsletter Autumn 2014

The court confirmed that in most, but not all cases, “the countervailing interest of the social landlord in obtaining possession will outweigh that of the defendant who relies on disability discrimination”.

An urgent application for permission to appeal was made by the Appellant on 31 July 2014. Permission was granted and the appeal will be heard by the Supreme Court on 18 November 2014. We will report on the outcome of the appeal in our next newsletter.

For further information, please contact: Jonathan Hulley Head of Housing Management 0845 209 1594 jonathan.hulley@clarkewillmott.com

Akerman-Livingstone v Aster Communities continued

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For any developer, Stamp Duty Land Tax and Value Added Tax are important factors when deciding the best structure for acquisitions of land and buildings for development purposes, but some considerations are particularly significant for Housing Associations. VAT

A sale of land is an exempt supply for VAT purposes and a seller does not ordinarily charge VAT on the purchase price of land. A land owner can, however, opt to tax for VAT purposes and may do so if they occupy land and buildings for business purposes. For example, a hotel owner who is registered for VAT will have made taxable supplies on the land for VAT purposes, such as the sale of food, drink and lodging; and it may have been charged VAT by contractors who have carried out work on the building. The hotel owner could opt to charge VAT on the land and buildings and when it comes to sell the property, it will seek to charge VAT on the purchase price. Ascertaining whether there has been an option to tax is, therefore, a primary consideration for any buyer.

Stamp Duty Land Tax (SDLT)

SDLT is ordinarily payable by a person acquiring land and it has to be paid within 30 days of the date of acquisition. The rate on commercial property transactions varies between 0% and 4%, depending on the price of the land.

One of the effects of paying VAT on the purchase price of the land is that this also increases the stamp duty; effectively, a tax on a tax. For example, if the land price is £210,000, stamp duty is 1% of the price: £2,100. If there has been an option to tax, the addition of the VAT would make the VAT inclusive price £252,000. This would bring the transaction into the 3% SDLT band and SDLT would go up from £2100 to £7560.

Housing Associations

Charities and Housing Associations do, however, benefit from stamp duty reliefs (charity relief or RP relief). Registered Providers can also, in the VAT context, take advantage of the provisions of the VAT Act 1994. Specifically, Housing Associations can issue certificates to disapply an option to tax for buildings to be converted into dwellings and land supplied to Housing Associations for new development.

Another important consideration is the fact that new build construction costs for residential property, as well as the price of new homes, are zero rated for VAT purposes.

The distinction between VAT exemption and VAT at zero rate is important: a zero rating allows recovery of VAT and can apply where there has been an option to tax; whereas the exemption only applies to land where there has been no option, and VAT cannot be recovered where the land is left exempt.

Housing Associations can find it difficult to reclaim VAT. Their ordinary

activities are not taxable activities for VAT purposes, whereas a construction company or developer will often be able to recover all of the VAT that they pay on acquisitions and development costs.

How can the structure of a transaction affect the SDLT and VAT payable?

The following examples show three different structures for the same transaction.

L has placed his hotel on the market with outline planning permission for 20 new affordable homes. The price is £210,000 plus VAT, L having made an option to tax for VAT purposes.

A Housing Association (HA) is interested in buying the land. It will incur costs of £50,000 plus VAT in demolishing the existing building and site clearance, obtaining detailed planning consent and paying surveyors, legal and other professional fees.

The contractor (C) is willing to carry out the development according to a specification prepared by HA at a price of £1.5m plus VAT.

The total acquisition and development cost, exclusive of VAT and SDLT, is £1.75m.

Example A

HA enters into a contract and completes the purchase of the land. It appoints demolition contractors to do the demolition work and professionals to carry out valuations and the legal work. It appoints C to carry out the building work at a price of £1.5m.

HA pays no SDLT because it is entitled to relief, but pays VAT on the purchase and demolition costs of £52,000, which it is unlikely to be able to recover.

Example B

HA agrees with L that following exchange of contracts and prior to completion HA will opt to tax under Schedule 10 of the VAT Act 1994. It is entitled to make that option and does so by serving notice on HMRC. HA saves £40,000 VAT on the purchase price.

In both example A and example B, the amount of VAT payable on construction costs is the same: 0%. No VAT is actually paid by HA on the cost of building the new houses. In both cases, HA enjoys relief from SDLT.

It should be noted that in example B the contract contained an express provision allowing the HA buyer the option to tax.

Continued on page 3

Affordable Housing Developments – Tax consideration

03 Social Housing Newsletter Autumn 2014

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The HA buyer’s option to tax or disapplication of the option has implications for the seller and we have acted in transactions where the seller has expressly prohibited the HA from making such an option. It is an issue that needs to be agreed prior to exchange of contracts.

Example C

C enters into a contract to acquire the land under a back to back deal with HA. C acquires the land at the same price and instructs its own professional team in connection with land acquisition and ancillary development costs. C carries out the demolition work itself. C then enters into a development agreement to carry out the build to HA’s specification under a design and build contract at a price of £1.5m. In this example, C pays the VAT on the purchase price and all the development costs, including demolition costs, but is able to reclaim that VAT.

C transfers ownership of the land to HA at a stage agreed between the parties; this could be at “Golden Brick” or on completion of the build. Notionally, VAT is payable on that price, but the rate is 0%. The contractor recovers the tax it has paid but charges VAT to HA at 0%.

The tax disadvantage to C is that C will not enjoy stamp duty reliefs and will probably therefore have to pay SDLT on the purchase price, in this case, £7,560.

HA does not have to pay SDLT on the cost of the land and buildings paid to C in example C.

The impact of the tax rules

Although Housing Associations enjoy stamp duty reliefs that are not available to developers or building contractors, the latter can often reclaim VAT. Housing Associations and contractors both have the benefit of the 0% rate of VAT on construction costs for new houses as well as on the purchase price of new houses.

The above illustrations show that it is possible for the contractor to recover up to £52,000 of the VAT paid, which the Housing Association, if it cannot make a Schedule 10 disapplication of the option to tax, is unlikely to be able to reclaim. The SDLT suffered by the contractor in example C is far less than the impact of VAT on the Housing Association in example A.

Making appropriate use of the tax rules will, therefore, have significant impact on acquisition and development costs for Housing Associations.

For further information, please contact: David Percival Consultant 0845 209 1799 david.percival@clarkewillmott.com

The construction package required for major housing developments comprises a complex and comprehensive set of contractual arrangements between developers, social housing providers, consultants, contractors and sub-contractors.

In a rare case on the interpretation and effectiveness of clauses in a Consultant’s Appointment in connection with renovation and improvement works at a property in Putney, the Court of Appeal had to consider a clause in the architect’s appointment which sought to limit the liability of the architect under the appointment by way of a “net contribution clause”. These clauses are a common feature in collateral warranties and are increasingly included in primary contracts themselves, in this case in a Consultant’s Appointment.

The inclusion of a net contribution clause is an attempt to circumvent the normal common law rule of “joint and several” liability which enables a party to claim for the whole of its losses from one wrongdoer notwithstanding that other parties may also be at fault.

The Court of Appeal’s decision in this case provides an interesting decision on the enforceability of such a net contribution clause.

The clause read as follows:

“Our liability for loss or damage will be limited to the amount that it is reasonable for us to pay in relation to the contractual responsibilities of other consultants, contractors and specialists appointed by you”.

On appeal from the High Court the Court of Appeal held that the meaning of the words of the clause was clear and unambiguous and binding; and the High Court should therefore have found as such, and then gone on to consider the amount that it was reasonable for the architect to pay having regard to the contractual responsibilities of the contractor.

Carefully worded net contribution clauses can therefore operate to limit the liability of a consultant in an appointment or warrantor in a collateral warranty. Social housing providers should therefore remain vigilant with regard to the inclusion of net contribution clauses in contracts and warranties.

For more information, please contact: Jessica Taylor Partner 0845 209 1299 jessica.taylor@clarkewillmott.com

Net Contribution Clauses – West and West v Ian Finlay & Associates (a firm) [2014] EWCA Civ 316

Affordable Housing Developments – Tax consideration continued

04 Social Housing Newsletter Autumn 2014

Most people will be aware that the Supreme Court’s decision in Daejan Investments Limited –v– Benson [2013] swayed the balance of power from tenants to landlords in relation to the service charge consultation requirements. In summary, the Court held that the focus should be on what prejudice the tenants have suffered as a result of the landlord’s failure to consult or inadequate consultation and not on the gravity or the seriousness of the failure itself. The burden falls on the tenant to prove prejudice and if there is no prejudice, dispensation should be granted.

The cases following Daejan all (unsurprisingly) grant dispensation to landlords who have fallen short of a flawless consultation exercise. In the case of Jastrzemski [2013] the Court held that it was appropriate to grant dispensation even though there was a question mark over whether the s.20 notice had been properly served. Similarly, in OM Property Management [2014] the Upper Tribunal (reversing the earlier decision) decided that the leaseholders had not been prejudiced by the landlord’s failure to follow the consultation (as the lowest estimate was accepted).

Landlords should not however become too laid back because there is a sting in the tail. In granting dispensation, the Tribunal will usually order that the landlord pay the tenant’s reasonable costs. Until the tenant’s costs have been agreed (or assessed) and paid, the service charges for which dispensation had been granted will not fall due. Therefore, even if landlords are granted dispensation, they should not expect payment immediately. Interest will not start to run on the outstanding service charges until (usually) 14 days after the tenant’s costs claim (if costs are ordered as a term of dispensation) has been settled.

For further information, please contact: Kary Withers Partner 0845 209 1469 kary.withers@clarkewillmott.com

Service charge consultation requirements – is dispensation really welcome relief for landlords?

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‘A gilded cage is still a cage,’ said Lady Justice Hale in her landmark Supreme Court judgment in March 2014 in the case of P (by his litigation friend the Official Solicitor) (Appellant) v Cheshire West and Chester Council and another and P and Q (by their litigation friend , the Official Solicitor) (Appellants) v Surrey County Council [2014] UKSC 19.The decision, which resolved two unrelated cases that had come before the Court of Protection in 2011 considered the application of Article 5 – the right to liberty in the European Convention on Human Rights – to those adults who lack capacity to make decisions about where they should live or the care they receive and are living in their own homes rather than in residential care. Their own homes might be supported living accommodation, an adult placement scheme, or their own home either rented (licensee or tenant) or owned by them.

In considering this issue the Supreme Court also considered the circumstances that might constitute a deprivation of liberty and concluded that in respect of adults who lacked capacity to decide where they should live or the care they receive, Lady Justice Hale confirmed that the test was whether that person is ‘under continuous supervision and control and not free to leave’. She did not expand on the definition of being ‘under continuous supervision and control’ but with regard to being ‘free to leave’ she refers to Lord Justice Munby’s comments in JE v DE [2007] 2FLR 1150 ‘I mean leaving in the sense of removing himself permanently in order to live where and with whom he chooses.’

To be covered by Article 5, the individual must also be receiving more than a ‘negligible amount’ of care that is funded or provided by the local authority or other public body, such as the NHS through their local Clinical Commissioning Group (CCG).

Over the last 30 years there has been a huge rise in the number of adults who lack capacity to make decisions about where they should live, or their care and treatment, living in our communities in their own or shared homes (often referred to as supported living accommodation) rather than in residential care or long term hospitals. Following the test set out in Cheshire West, many of those people are likely to be ‘under continuous supervision and control and not free to leave’ and deemed to be deprived of their liberty. In the words of Lady Hale ‘The fact that my living arrangements

are comfortable, and indeed make my life as enjoyable as it could possibly be, should make no difference. A gilded cage is still a cage.’

Public bodies including Housing Associations have a positive obligation to ‘take measures providing effective protection of vulnerable persons, including reasonable steps to prevent a deprivation of liberty of which the authorities have or ought to have knowledge’. Social housing landlords therefore need to be aware of their responsibilities under Article 5 if their properties are leased to or lived in by those who lack capacity to make decisions about their care and who may as a result of the care they receive be under ‘continuous supervision and control and not free to leave and so be deprived of their liberty’.

Continued on page 5

Providing accommodation for adults who lack capacity

05 Social Housing Newsletter Autumn 2014

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Landlords should check with the commissioner of the care, either the local authority or Clinical Commissioning Group, to confirm that if there is a deprivation of liberty it has been authorised by an order from the court. If there appears to be no such court order the landlord should alert (in writing) the relevant local authority of their concerns that one (or more) of their tenants, by virtue of their care package is possibly deprived of their liberty and that an application should be made to the Court of Protection forthwith for authorisation.

An authorisation from the Court will only be granted if the circumstances that give rise to the deprivation are in the best interest of the person who lacks capacity to make decisions about his or her residence or care.

Sir James Munby, President of the Court of Protection has also made it clear that any such court authorisation will need to be reviewed at least annually and this should hopefully mean that these most vulnerable people in our communities will have care packages reviewed and updated on a regular basis.

For further information, please contact: Joanna Burton Solicitor 0845 209 1816 joanna.burton@clarkewillmott.com

The new absolute ground for possession on anti-social behaviour grounds came into force on 20 October 2014.Housing Associations could choose to use the new mandatory ground, instead of existing discretionary grounds for possession. This new ground provides an unqualified right to possession, subject only to the courts considering the proportionality of the decision to seek possession.

The court must make an order for possession if one of the following five conditions is met:

1. The tenant, or a person residing in or visiting the property has been convicted of a serious offence and that serious offence was committed:

• in or in the locality of the property or elsewhere;

• against a person who has a right to live in housing accommodation in the locality of the property occupied by the offender or elsewhere;

• against the landlord of the property; or

• against a person employed in connection with the landlord’s housing management functions.

2. The court has found that a recipient (including a tenant or family member) of an injunction to prevent nuisance and annoyance has been found to have acted in breach of a provision of that injunction order;

3. The tenant or a person residing in or visiting the property has been convicted of a breach of a provision of a Criminal Behaviour Order (CBO);

4. The property has already been made the subject of a closure order;

5. The tenant or a person residing in or visiting the property has been convicted of an offence under the Environmental Protection Act 1990 i.e. they had been served with a statutory nuisance abatement order and had been successfully prosecuted for breach of a term or condition of that notice.

A notice must be served giving four weeks notice before possession proceedings can be commenced. Within seven days of service of the notice the tenant has the right to request a review of the decision made to issue the notice. If the tenant seeks a review the tenant must be informed in writing of any decision before the day on which proceedings for possession can be commenced and reasons must be given if the original decision to evict is upheld.

The court cannot dispense with the service requirements and only has limited discretion to suspend or postpone an order on a mandatory ground for 14 days or six weeks.

If a Housing Association intends to use the mandatory grounds for possession and a review of that decision is offered to the person intended to be evicted, then the Association’s ASB and Evictions Policy and Procedure must specifically refer to the use of these new grounds. It must also set out the circumstances when the mandatory grounds for possession will be relied upon and refer to a right of review or run the risk of the decision to rely on these grounds being challenged in court.

Should you require any assistance with or a review of your ASB and Evictions Policies, please contact:

John Cox Senior Associate 0845 209 1090 john.cox@clarkewillmott.com

Anti Social Behaviour Crime and Policing Act 2014 – time to review your ASB and Evictions Policies and Procedures

Providing accommodation for adults who lack capacity continued

06 Social Housing Newsletter Autumn 2014

Chartered Institute of Housing (CIH) Eastern Conference and Exhibition 2014

Oliver Smedley, Partner, will be speaking at the CIH Eastern Conference and exhibition in Stansted.

The CIH Eastern conference is the region’s premier annual housing event and attracts over 450 professionals during the three days. The conference will provide great opportunities for networking with colleagues and learning about the latest challenges and issues in the Eastern region.

11 - 13 November 2014 - Stansted

IT in Housing Conference and Exhibition 2014

Susan Hall, Partner, will be speaking at the IT in Housing Conference and Exhibition in both London and Manchester.

The largest, longest-running and most highly regarded IT conference and exhibition in the housing sector.

18 - 19 November 2014 - London

27 - 28 November 2014 - Manchester

National Housing Federation South West Finance Conference 2014

Oliver Smedley, Partner, will be hosting a break-out session on the topic of Property Joint Ventures - Mitigate your risk.

This country is in a housing crisis but can we turn the tide? The operational environment is heading towards greater turbulence with uncertainty and risk on the increase. Just consider what’s around the corner: the consequences on your costs of the inevitable soon to occur rise in interest rates, or the income pressure from the now confirmed national roll-out of Universal credit, never mind the outcome of the General Election, which could see record welfare cuts.

This conference will explore how housing associations can help to turn the tide, seizing opportunities and mitigating against these risks. Attend this conference to evaluate the policy landscape and the upcoming General Election, learn how to maximise your core, examine new horizons on offer and understand the economic environment, all the day after the Autumn Statement.

4 December 2014

National Housing Federation London Development Conference 2014

We will be exhibiting at the London Development Conference on 2 December 2014.

This year’s London Development Conference is packed full of practical workshops and high profile plenary sessions to get you thinking about your organisation’s future plans.

Clarke Willmott Christmas Drinks

Our Social Housing team are delighted to host our Christmas drinks event at the house of Dr Johnson.

You will be able to meet the team, enjoy a tour of his house and learn more about one of the literary titans of the 18th Century and the second most quoted person after Shakespeare.

4 December 2014 - London

For further information or if you would like to attend, please contact us.

Forthcoming events

If you would like to receive future editions of our Social Housing Newsletter please contact news@clarkewillmott.com

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