Reinvigorating Right to Buy

April 12, 2012

Michelle Knight and Sarah Greenhalgh look at how the Government plans to kickstart the Right to Buy scheme and explain the impact on local authorities and housing associations.

The Government confirmed recently that from 2 April 2012 the right to buy discount available to tenants who qualify for the right to buy their home would be £75,000.00, subject to a cap of a maximum discount of 60% for a house and 70% for a flat.

Background

Part V of The Housing Act 1985 sets out the main provisions governing the right to buy in England. The legislation was introduced in order to give council tenants the right to buy (RTB) their home at a discounted value, depending on how long they had been a tenant. A proportion of the discount is repayable where the former tenant sells their home within a certain period of time after completion. Concerns over the reduction in social housing led to discounts being reduced in 1997 and subsequently the introduction of the ‘Right of First Refusal’ for Registered Providers where a former tenant wishes to sell their home within 10 years of purchase.

The right to buy includes housing stock transferred from Local Authorities to Housing Associations; this right is referred to as the preserved right to buy (PRTB). To qualify for the PRTB, a tenant must have been a public sector tenant for five years. The percentage discount received depended upon the length of time spent as a public sector tenant and was capped at between £16,000.00 in most of London and £38,000 in the South East.   

The reform of the current right to buy legislation was first announced at the Conservatives' annual conference in Autumn 2011. It was not originally clear whether the reforms would include former council properties that qualify for the PRTB. However, the Government made it clear in their consultation paper, Laying the Foundations: A Housing Strategy for England that the discount changes will apply equally to the PRTB. The consultation ended on 2 February and the Government have now confirmed that the maximum discount level will be raised to £75,000.00 from 2 April 2012 under The Housing (Right to Buy) (Limit on Discount) (England) Order 2012. These changes will almost certainly result in reduced housing stock at a time when waiting lists for social housing are full. However, the Government has reaffirmed their ‘one for one’ commitment - to replace every additional home that is sold with a new affordable home.   

Reinvigorating Right to Buy – the new discount cap   

The new discount cap will be £75,000.00 across the country and applies to both local authorities and housing associations. The maximum discount percentage will remain unchanged at 60% for a house and 70% for a flat. The cost floor (which limits the discount to ensure that the purchase price does not fall below the costs incurred in respect of the dwelling house), will also be amended to apply to dwelling houses:

for 10 years for houses built or acquired by the landlord prior to 2 April 2012
for 15 years for houses built or acquired by the landlord on or after 2 April 2012.

The discount rates and qualifying period for eligibility have not changed.   

One for One Replacement – Local Authorities   

The way in which receipts will be dealt with by local authorities differs substantially from the current arrangements. Receipts will first be used to meet debt on additional properties sold. They will then be used to meet Treasury and Council forecast receipts. Finally, the balance will be used for investment into replacement properties. However, this balance will be handed over to central Government unless the local authority enter into an agreement showing that they can meet the one-to-one promise by contributing only 30% of the RTB receipts towards the cost of new affordable homes (matching the current affordable homes programme where the balance of costs are met by investment from private companies or by developing land currently owned).   

There are also new RTB pooling arrangements effected through The Local Authorities (Capital Finance and Accounting) (England) (Amendment) (No2) Regulations 2012. These require pooling payments to be made to the Government quarterly in arrears. The existing exemptions from pooling still apply, so that Councils can continue to apply for exemption from pooling arrangements (and therefore one-for-one replacement) for RTB receipts from new social homes built after July 2008.   

Currently local authorities cannot deduct administrative costs relating to RTB applications which do not result in a sale. The new legislation will introduce flat rate allowances for successful sales and will include 50% uplift for withdrawn applications. Full guidance for local authorities on the changes is available on the Communities and Local Government website.   

One for One Replacement – Housing Associations   

The Government have acknowledged that they cannot mandate how housing associations use their receipts from PRTB sales as private bodies. However, it is expected that any surplus receipts from sales are likely to be recycled to support new build and other public benefits. Where receipts are shared with councils, the sharing arrangements will continue in the same way as they do now. However, it is envisaged that housing associations will work with local authorities to develop replacement homes and the Government are working on incentives to encourage housing associations to reinvest. For further guidance on the forecast impact to housing associations please visit the Communities and Local Government website where an Impact Assessment has been prepared. Section 7 specifically outlines the impact to housing associations.  

Practical Steps to take

The discount cap should be applied to all existing RTB or PRTB applications where the transfer will not complete before 2 April. Local authorities and housing associations should therefore review all of their current applications and re-issue the Section 125 notices using the new discount cap.
Local authorities and housing associations need to be aware that all precedent documentation will need to be amended to take account of the new discount rules. This includes conveyancing documents, guidance notes issued to tenants and precedent letters.
Be aware that there are likely to be an influx of new applications and plan for this now.
Housing associations in particular must be aware that their administrative costs will rise due to the increase in PRTB applications (those that result in a sale as well as those that do not complete).
Your Stock Transfer Sharing Agreement will outline the allowance made for deducting sales costs from receipts and this will continue to be the case.

The Housing (Right to Buy) (Limit on Discount) (England) Order 2012 was laid before parliament on 12 March and will come into force on 2 April 2012.

Michelle Knight is a solicitor and head of the Home Ownership team and Sarah Greenhalgh is a paralegal at Anthony Collins. Michelle can be contacted on 0121 214 3550 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..