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Councils building houses: outside the box

Housebuilding iStock 000008203889XSmall 146x219Sarah Lines sets out the potential delivery structures for councils looking to embark on new house building.

For the first time in many years councils are delivering new build housing directly through council owned housing companies. Other councils may want to do this too, even if they have their own housing stock. The good news is that they can because councils have been freed from the Housing Revenue Account Subsidy System. From that point on, councils with an HRA became self-financing and were freed from the national subsidy system.

This article looks at the possible delivery structures for new house building by those councils with sufficient headroom in their HRA and those who were successful in the HRA Borrowing Programme.

The key messages to local government from central government are:

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  • Deliver affordable rented housing, not social rent;
  • Make the best use of public assets;
  • Be innovative in the partners you choose, in what you build and how you deliver it;
  • Involve the LEPs.

What can self-financing councils do with their freedom from the HRA Subsidy System and how does it work?

Councils can keep their rental income to fund borrowing for new build affordable housing (social rented generally will not be allowed). How much depends on each council’s HRA settlement debt to the Government and the notional cost of maintaining and improving their retained housing stock over a 30-year period from 2012. The HRA is still a ring-fenced account and so where HRA self-financing is being used to build new homes it must be on HRA land. Where a council builds and retains new build, these must be let on affordable rents and/or affordable home ownership terms not social rent. The impact on housing benefit levels has been addressed by the availability of a special dispensation that will be given by the Secretary of State (provided that the Section 151 Monitoring Officer has supplied the necessary letter to him/her). 

The Government recognised that HRA Councils would need additional borrowing and created the HRA Borrowing Programme 2015-16 and 2016-17. This programme is being funded from the Local Growth Fund and the successful councils have been announced. There are no further rounds to be announced before the General Election.

Form should ideally follow function. The first questions to identifying the legal structure and financial arrangements must be:

  • What is the local housing need? How up to date is the Local Housing Needs Survey and what proportion of rent and home ownership are required? 
  • Does it identify any custom/self-build or community led developments? 
  • What sites are available for speedy redevelopment? 
  • What are the blockages to achieving early redevelopment?
  • What are the prospects for multiple sites and cross subsidy?
  • One development partner or several?

Procurement and State aid will come into play in all of these scenarios where the council seeks to:

  • impose its requirements on what housing is built upon the land;
  • subsidise the organisation delivering new build; and
  • transfer land.

With the Local Housing Needs Survey as a useful starting point and a site (or sites) identified, the council can begin to consider the legal structure and potential partners. 

Structures for local housing developments

  • a wholly owned local housing company;
  • a public-public joint venture/jointly owned local housing company;
  • a public and private owned local housing company;
  • resident-led/local community involvement.

Wholly owned local housing company

As a council owned company its structure will need to be compliant with the Local Government Act 2003 and Local Government Act 2012. The most likely options are a company limited by guarantee or shares. Government guidance on rent setting would not apply unless the company became a registered provider. The tenancies would be assured (fixed or periodic) and rent levels would be set at affordable rent levels. Affordable home ownership is also available.

Public-public joint venture/jointly owned local housing company

There is nothing to stop neighbouring or geographically separate local authorities from joining forces and creating a jointly owned vehicle or contractual partnership. The same points as made in respect of the legal structure for a sole council owned housing company would apply here with regard to tenure and rents, etc. However, combining two or more councils would add scale which in turn could lead to economies of scale. Governance and conflicting priorities could be in issue here and clear expectations should be agreed before entering into formal arrangements. Also to be considered is joint working with the parish/town council in the area. We have seen the innovative use of rural exception sites where the parish council has worked as an enabler for the benefit of a community land trust.

Public-private owned local housing company

This could be a corporate joint venture vehicle where the council ownership would be, at the most, 50:50 in order to avoid being on the council’s balance sheet. Some councils opt for a 49:51 ratio and care is taken to consider where the balance of power/control lays in the governance provisions. A golden vote in favour of the council would tip the balance of control as far as the ONS is concerned whether or not the shareholding was 49:50 in favour of the private sector. This is important because as long as it could be demonstrated that the company is not controlled by the council the HRA debt cap would not apply and RTB 1-4-1 replacements may be available.  

Resident-led/local community involvement

Always to be considered given the additional funding streams available to communities under the Localism Act are resident-led solutions. For example, a community land trust (“CLT”) or a self-build co-housing/co-operative society. Small scale sites lend themselves to local involvement. We have experience of acting for CLTs in partnership with Registered Providers as well as CLTs acting on their own. Recognised Community Bodies can access funding to work up their proposals including access to private financing for the actual build. In addition, a large scale project could always include an element of resident led involvement.

A note on house-building powers and the RTB

Some existing local housing companies have sought to exclude the RTB from applying to the properties built. This was seen by some to be an added advantage to having a local housing company.

In his written statement to Parliament delivered on 20 March 2015, the Housing Minister “reminded” councils who are seeking to develop new homes that the Government’s policy “is that where a local authority is developing or acquiring and retaining new social or affordable homes for rent, that they should be brought forward using the powers available to them under part II of the Housing Act 1985 and that the housing accounted for through the Housing Revenue Account”. Therefore, those councils who are using the General Power of Competence and are accounting for new social or affordable housing in their general fund could find themselves the subject of a direction from him under Section 74 of the Local Government and Housing Act 1989. The direction will require them to bring that stock into the HRA with the result that the RTB would apply. The message from the current Government is stark: Government policy does not support the creation of a new brand of council built social/affordable housing stock that does not have the RTB attached to it.

The outcome of the General Election will be significant here, particularly if Labour gain power. The recommendations in the Lyons Housing Review (page 140) support house building for social and affordable rent and the need for the proceeds from RTB sales to be ploughed back into the sector to replenish stocks.

There is much case law on whether local authority decision-making can be constrained by government policy. In general terms where a local authority seeks to deviate from government policy it can do so where it can demonstrate that it has good reasons and has properly considered the implications. 

This will be a blow to those local authorities who had specifically hoped to create an inalienable supply of social/affordable rented homes and/or who wished to adopt a multi-tenure approach designed to reflect local needs. In the Housing Minister’s view the choice of tenure ranges from affordable to market sales.

Taking a multi-lateral approach

In order to meet the demand for housing that is badly needed by neighbourhoods councils should not simply settle on a single formula. A multi-lateral approach is needed, working collaboratively with the private sector and registered providers.

Sarah Lines is a Senior Associate at Anthony Collins. She can be contacted on 0121 214 3609 or This email address is being protected from spambots. You need JavaScript enabled to view it..

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