Non-development covenant on an ex-LA house

by Readers Question

9 months ago

Non-development covenant on an ex-LA house

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Non-development covenant on an ex-LA house

Help sought, please, to get around a non-development covenant on an ex-LA house.

We live in an ex-LA semi on a corner plot in a commuter town in Hertfordshire. The plot is large enough to add at least one more dwelling, and there are smaller (non-LA) plots nearby that have had two and even three new houses built on them (probably not ex-LA), so Planning is not likely to be an issue.

However, at the time it was sold off to the previous owner under Right-to-Buy, the LA put a covenant on the property preventing the plot being split. I asked the LA a few years back about relaxing that part of the covenant, and they replied:

“In the event that the Council is able to agree to a particular proposal as not being detrimental to the neighbourhood, the Council is bound under s123 of the Local Government Act to obtain full value for the landed interest being granted” [in modifying that covenant]. You will appreciate that this would be the same with any private landowner. The price sought is an equal share of the net profit arising out of the relaxation. The net profit is the actual benefit produced after allowing all outgoings including any diminution in the value of the existing property.”

So even though we would be doing all the work and taking all the commercial risk for the construction works and sale, they would expect to take half the net profit created by building and selling any extra dwellings. This killed the idea at the time, but I am hoping things may have changed with this housing crisis?

One solution could be building to let (i.e. never selling them off), but their definition of “benefit” in their last sentence above, might still trigger such a payment to them.

Has anyone faced and overcome similar situations?

Richard



Comments

Neil Patterson

9 months ago

Hi Richard,

The restrictive covenants when you buy a council property are normally time limited to the first three years.

Have you checked to see if there is a time limit on this restriction?

Alistair Cooper

9 months ago

The time limited restrictions usually apply to the resale of the property as a whole, whereas the initial 'discount' is clawed back if the property is sold within 3 (nowadays 5) years.
These additional development/uplift covenants are typically lifetime and a 50% share of the planning gain is quite common.
You could try negotiating the % by arguing that it would not be financially viable to proceed upon the basis of a 50% profit share but the Council will counter argue the public interest.
Bearing in mind the level of planning permission that you may be able to gain (i.e. 1 or 2 additional dwellings) it may well be worth proceeding as the Council are seeking 50% of the NET profit after all reasonable costs so that still leaves you with the remaining 50%. I would imagine they would see a benefit whether you sell or retain & let.
Watch out for any further developer premiums or S106 contributions demanded in return for granting planning consent as being faced with paying both would be unreasonable.

Graham Bowcock

9 months ago

Dear Richard
As ever with these questions it sounds like you need some good advice from a local chartered surveyor. What you are talking about is often known as clawback or overage and is quite common. I expect that the Council's property department will take a commercial view on the implementation of any such agreements so issues about housing supply are unlikely to sway them (although the planning department might buy this argument).

Such agreements are complicated, so you will need steering through the formula which calculates the payment which is due; in most cases there are deductions allowed, for example the costs of obtaining planning consent, so as to avoid double counting, but it depends on how savvy the original solicitors and agents were when any agreement was written.

Notwithstanding the formula you could just make an offer to the Council to buy out the agreement, leaving you free to progress as you wish.

Graham

Richard Peeters

9 months ago

Thanks guys for those responses. Yes, it does seem to be a lifetime covenant. I don’t consider that we bought at any discount, although the previous RTB owner did, so it seems a bit unfair that the LA can profit from this forever.

If “planning gain” means payment would be triggered whether built-to-let or even if sold off in part or in full with just Planning consent, then any of those routes seem prone to lose half to the LA.

There may be structures to reduce the accounting profit within that formula, but the formula is likely to have been tested hundreds or thousands of times since RTB was enacted, so that is unlikely to be safe escape route either.

That leaves the idea making a pre-emptive offer to the LA (how to calculate this?). However, they would have little incentive to agree to an offer, if they could hold out for more, all with no effort on their part. One Department of the LA is unlikely to consider another’s priorities e.g. to provide more local housing, whether affordable or not.

Maybe I’ll write to them again, to see if anything has changed in the meantime.

The politics angle: I imagine that there must be thousands of ex-LA properties nationwide that cannot/won’t be split and developed because of these covenants, so it would take a nationwide solution to unlock this potential national asset.

sam

9 months ago

Is 'net profit' a theoretical calculation or actual ? There are literally a million ways that a cost overrun can happen. Another few million ways of not making a profit.

You can reduce if not get rid of your tax liability entirely if you move into the new dwelling and sell the one you are living in - surely that will improve your side of the equation ?
Check with your accountant/HMRC web site how you can benefit from zero rated vat on new builds.

Neil Harvey

9 months ago

Richard,
Covenants are a tricky issue. You can get covenant insurance, but since you have already contacted the LA, that is likely to be difficult, and since they have to approve the application, they will be aware of it and more likely to claim their share.
I would suggest you take legal advice before contacting the council again, they will always claim they want a share of the profit, but they may not actually be entitled to it, if I am reading an article I found correctly.
It has a section entitled "Local Authorities as Covenant Owners"
This is the link:-
http://www.cubismlaw.com/the-cube/sector-specific/property/dealing-with-restrictive-covenants
I hope it may help a bit. Please let us know how it goes.
Neil

Nick Pope

9 months ago

Firstly I am of the opinion that some share of development value is due to the council where the house was originally sold at a discount as it was "our" money at the time. I appreciate that when you bought the property you did not get any benefit from the discount and I hope you did not pay extra for the potential development value.
As mentioned above you need a chartered surveyor to give you advice before going back to the council. You can pay for the covenant to be released without actually doing the building as the profit would be based on the difference in value of the land with and without the covenant. The council d are unlikely to have a right to benefit from the profit made on the completed properties because, as mentioned aove, it is taking no commercial risk.
So lets say you could get planning for 2 extra houses and that the plots would be worth £150,000 each, i.e. £300,000. This is not the profit to be shared. As mentioned in the Council's letter you can deduct costs in getting planning and the consequent reduction in the value of the original house as it will have a smaller garden and closer neighbours which could bring down the gain to, say, £250,000.
As the land is, presumably, less than 1 acre and assuming you occupy the house as yout principal private residence it is also unlikely that you will Capital Gains Tax. Check with HMRC for details. If you have let the house then tax may be payable.
All these factors can be taken into account when negotiating with the council.
So, find a good chartered surveyor experienced in this kind of work.

Edwin Cowper

9 months ago

With every respect to those who have commented, regrettably you're looking down the wrong end of the telescope.

I have researched this for a local authority ten years ago and again four weeks ago.

You should consult a top class property lawyer. You are likely to save a lot of money as a result

Neil Harvey

9 months ago

Edwin
Can you elaborate a bit please?
The article I referred to suggests LAs are not entitled to use such covenants to gain "overage".
What did your research conclude?
Thanks
Neil

Simon Lever

9 months ago

Take an alternative view.
Cover the plot in manure and then grow weeds and do not maintain the area of land you wish to develop.
Wait for the complaints from the neighbours to the council and then talk to the council and make them an offer.
If they do not wish to take the offer confirm to them that the plot will continue to be coverd by manure and will not be kept tidy.
Your land and if you cannot develop it then you may as well reduce the value of all properties in the area.
Once house prices start to fall then you can redevelop as the gain will be much lower!
(The above is tongue in cheek but if you get fed up enough you could consider it!)

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