2 THE HOUSING FORUM GOOD PRACTICE GUIDE: SUSTAINABLE LEASEHOLD AND LONG-TERM ASSET MANAGEMENT Working Group Chair Dick Mortimer Group Director of Development & Sales Family Mosaic December 2016 Acknowledgements The Housing Forum would like to thank all who contributed to this guide (listed at the back) and also our sponsors Martin Arnold and calfordseaden The Housing Forum The Housing Forum is the only cross-sector, industry-wide organisation that represents the entire housing supply chain as the voice of the industry. We have over 150 member organisations from both public and private sectors, collaborating to inform, network and influence with the shared objective of building more and better homes for the nation. The cross-sector representation of our membership equips us especially to investigate issues that require collaboration in order to achieve successful outcomes. The views in this guide are the views of The Housing Forum and have been contributed from Working Group discussions. If you are interested in joining The Housing Forum please contact: Chief Executive Shelagh Grant: Shelagh.grant@housingforum.org.uk 020 7648 4070 www.housingforum.org.uk


4 WORKING 4 GROUP CHAIR’S INTRODUCTION DICK MORTIMER, GROUP DIRECTOR OF DEVELOPMENT AND SALES AT FAMILY MOSAIC ON THE SCOPE OF THE GUIDE AND WHY IT IS SO RELEVANT TODAY With leasehold stock levels rising, housing associations and other social landlords face a new and critical challenge. Do they continue to own and manage all their existing stock for the foreseeable future, or instead do they take the radical step of analysing what could be released and disposed of? It is to help answer this and related questions that The Housing Forum produced this guide. The guide has been prepared by the Making the Most of Existing Housing Working Group, which met throughout the year, and draws on numerous conversations, members’ insights and experiences and a membership survey into leasehold practices and issues. We focused our attention on two main areas: ensuring best value from existing homes; and assessing how leasehold management can be good business. It is axiomatic that we need to ensure best use of our assets. Housing associations need to look carefully at how and why they retain stock. They need to ask themselves whether retaining stock on a permanent basis is the right approach for today and tomorrow. We noted that the gradual introduction of Right to Buy within the housing association sector, the continued demand for Right to Buy in the local authority sector and the disposal of the most valuable local authority stock will mean a growing proportion of both housing association and council stock will be leasehold. This leasehold stock will have to be managed sustainably, such that it generates a surplus for future investment. Housing associations over the last 10 years and even more so in the next 10 years will be adding substantial amounts of leasehold stock to their portfolios, both shared ownership and outright sale. This has been done as income/profit is needed to replace the grant reductions from central government. Better and more efficient leasehold management by social landlords will lead to more funds being available to house people in housing need. The group discussed the difficult

Axe Street regeneration, Barking, East London, supplied by architect bptw partnership 5 We looked closely at how certain DICK MORTIMER balance of achieving customer satisfaction while ensuring that leaseholders pay the right amount for their services. We looked at ways and means of extracting extra capital resources from our existing stock. And we also came up with suggestions for protecting the asset base so that capital income can be generated from future sales, both in terms of value from leasehold properties and longer-term enfranchisement of the properties. The rights and wrongs of stock disposal exercised much of our time. The issue is not about selling highvalue council or housing association property; it’s about recognising that what was good for social housing 50 years ago or indeed 30 years ago may not be what is needed for residents in the future. If we as a sector manage one million leasehold flats, then a calculation which assumes a £40 per week service charge and a failure to collect 2% of those charges could mean we lose over £41m a year. Money which would have been invested in new housing. organisations make decisions on disposals and I hope this will promote fruitful discussion in the sector. ‘More for less’ is a burning topic for us all these days, and there is much focus on how we increase housing supply. But we must not overlook the potential for housing unit growth within our existing assets. There’s money to be found if we get this right. We did not try to put a figure on savings or additional income that good management could generate. But if we as a sector manage one million leasehold flats, then a calculation which assumes a £40 per week service charge and a failure to collect 2% of those charges would mean we lose over £41m a year. Money which could have been invested in new housing. Similarly for existing stock, if we try to maintain properties that cost us £10,000 more than they bring in over a 10 year period, then it only takes 100 properties to lose £1m from the sector. These are difficult issues to solve but I believe our guide offers illumination and valuable pointers for tackling them effectively and fairly. I would like to thank all of the participants from the working group for their help and input. I hope you find the guide useful.



Introduction to 8 Asset management For most housing associations and other social landlords, a high proportion of their homes could reasonably be described as core stock. The homes are of good quality design and construction, and there is strong demand for them now that is likely to continue into the foreseeable future. These are the successful homes and neighbourhoods desired by tenants and landlords alike and as assets they dominate the financial flows in the business plan. These properties need to be looked after as both assets of capital value and, of course, as tenants’ homes. They should be increasing in value to the housing association through being run as efficiently and effectively as possible while accommodating tenants’ needs. Because of their scale and the scope for value gains through efficiency, these are often the homes with the greatest potential for ‘getting more out of what you’ve got’ - for the benefit of residents, neighbourhoods and future customers. This approach requires a significantly broader data set than when assessing conditions. It involves an understanding of current and future demand, current operating performance, responsive repair costs, general costs and income at a granular level, socioeconomic conditions, resident aspirations and levels of expectation. In the course of this chapter we will be exploring the best way to get the most out of core stock and will be aiming: l To provide guidance on drawing up an active asset management strategy. l To offer advice on the factors to consider when deciding to keep or dispose of stock. l To provide case studies highlighting different approaches to management and disposal.

A Housing Forum Good Practice Guide Sustainable Leasehold and Long-term Asset Management 9 Adopting a systematic and proportionate approach Landlords should have an active and dynamic approach to asset management that identifies and responds to stock that could be adding more value, or whose future may be unclear. As part of their basic strategic approach, landlords should be alert to such issues and should have a systematic and proportionate way of responding and reacting. There can be many causes for concern and degrees of seriousness. There may be fundamental factors such as high investment costs, high running costs or low demand due to unsatisfactory design or very poor location. In extreme cases, these factors may combine to produce a very low or even negative net present value (NPV)1 and a social housing value assessment that suggests the stock is and will remain a liability rather than an asset. But most cause-for-concern stock is not in such an extreme position, and the best response is likely to be much less easy to identify than in the worst performing cases. It may be that an analysis has shown that apparently good stock is producing surprisingly poor value. Or some local issues may have caused a sudden increase in voids and a worrying reputational dip, for example a rise in anti-social behaviour. Good strategic asset management Parkside phase 3, Lewisham, south London. New homes for Family Mosaic by architect bptw partnership involves being aware of these issues, considering what to do and making brave decisions. Housing associations have to consider what investment is required to maintain the portfolio in good condition and offer the amenities to meet residents’ ever-increasing expectations. Some buildings can only achieve modern standards with high levels of investment, and the investment required may not offer good value. In addition, there is pressure on housing associations to assess whether they could obtain better value by selling a high-value property and using the funds to support a new development, which will offer contemporary levels of quality, amenity and energy efficiency. 1 Net present value is the measure used to assess the value of assets in the future. It compares the amount invested today against the present value of the future cash receipts from the investment. In other words, the amount invested is compared to the future cash amounts after they are discounted by a specified rate of return.

A Housing Forum Good Practice Guide 10 Sustainable Leasehold and Long-term Asset Management In order to reach the best conclusions, housing associations need to decide the following: l What is the strategic direction of our organisation? l Do we have the structure to be able to manage activities that are more of a commercial nature? l Do we have the skills to manage the range of tenure types? l Where do we want to own property? Are the current areas of operation right for our future strategy? l What standard of property condition do we wish to offer? Are we aiming for Decent Homes Standard, for example, or do we aspire to offer more than that? How can we respond to future pressures to improve property condition? l Is the property mix correct for the foreseeable future? l What balance do we wish to achieve between offering social rents, affordable rents, sub market rents and full market rents? Are there affordability issues with any of the current stock, perhaps as a result of the current programme of welfare reform? l How satisfied are residents with the property they are currently living in? And do we have the information available to interrogate this meaningfully? Specifically, does resident satisfaction information allow us to determine that residents are more satisfied with certain types, ages or locations of property? l What are the cost estimates of work required to bring stock up to the Decent Homes Standard in future? Or the costs to go beyond this, if that is the aspiration of the housing association? l If the property is sold, do we want to and can we replace it? Do we have a pipeline of development and/or acquisition? Will it be in the same geographical location or out of area? l If redevelopment is a consideration, will planning issues halt our plans and send us back to the drawing board? l Are there title restrictions, covenants, loan or transfer issues (which should be captured in the asset and liability registers which housing associations should hold) that need to be considered? Since the Decent Homes Standard was introduced there have been no new mandatory performance standards that housing associations must meet to improve the condition and amenities of their existing stock, so in one sense they are under less pressure to do so than when the Decent Homes Standard was introduced. In addition, the financial pressures on housing associations from rent cuts and welfare reforms make justifying investments in existing stock more difficult. However, at the same time, there is a continuing need to ensure that housing association stock continues to meet contemporary expectations, and to remember that residents’ expectations are likely to change over time. One more factor to bear in mind is that there is a new generation of residents more equipped to use social and digital media and who perhaps expect to have a different relationship with their landlord. There is no getting away from the fact that to identify the best performing assets, you need to hold data on each and every one of the assets. Calculating the property viability assessment of each of its properties is really the only way a housing association can accurately assess the return on assets expected to be assessed as part of the regulator’s valuefor-money (VFM) standard.

A Housing Forum Good Practice Guide Sustainable Leasehold and Long-term Asset Management 11 If the costs held by a property database are considered an accurate forecast of repair costs, then this can serve as crucial part of an automated tool in making decisions about a property’s future. It is important that these databases are regularly updated on components that have been replaced out-of-cycle, such as might occur in a void property. At the centre of a housing Malvern House, Kenley, London Borough of Croydon, developed by Hexagon Housing Association It is important that databases are regularly updated on components that have been replaced out-ofcycle, such as might occur in a void property. How decisions on lifetime components and quality maintenance can be factored in and linked to long-term asset value Housing associations usually have a database that forecasts when components need replacing and how much it may cost. Their property viability assessments rely on the accuracy of the calculations behind the lifespan of components as well as the condition of data and extent to which it is based on actual surveys or ‘cloned’. However, any reliable asset management database will include component replacements based on surveyors’ forecasts of when an item will need to be replaced. When a property becomes void, it offers an opportunity to undertake works in advance of the forecast timing. For example, windows which are due for replacement in three or four years’ time could be specified for immediate replacement as the work is much easier to do in a vacant property and is therefore more cost effective. association’s plans will be realistic lifecycle replacement timings and costs for all the main building elements. In many cases that will be the bulk or the entire investment plan. However, it is important to make allowance for other, perhaps less predictable future investments. Collecting and maintaining accurate, complete and consistent information about the whole housing stock is crucial to effective asset management. This does not necessarily involve commissioning a 100% stockcondition survey, but a robust dataset on 100% of the assets is required to perform sufficiently granular analysis. There is no getting away from the fact that to identify the best performing assets, you need to hold data on each and every one of the assets. Calculating the property viability assessment of each of its properties is really the only way a housing association can accurately assess the return on assets expected to be assessed as part of the regulator’s value-for-money (VFM) standard. The following need to be considered: l Standards – which are to be applied? What are the aspirations of the organisation? What type of properties do you want to be letting and to whom?

A Housing Forum Good Practice Guide 12 Sustainable Leasehold and Long-term Asset Management A hierarchy for the maintenance of property assets Statutory servicing and maintenance Responsive repairs and maintenance Void property servicing Cyclical maintenance and redecoration Major component planned renewals (Lifecycle renewals) Major repairs Improvements and remodelling, estate environment works Re-development Disposal assessment Green and amber illustrate the day to day repair and cyclical repair decisions • “Business as usual” essential activities; • Demand-led/reactive; • Always completed subject to financial control limits; • Major component renewals referred to major works team. Amber • “Business as usual” activities; • Completed adherent to a planned programme; • Always completed subject to procurement and financial control limits. Red Illustrates activities where options appraisal / NPV approach is needed • All activities subject to options appraisal comprising survey, feasibility study, and financial appraisal; • Only completed where value for money realisable; • Options appraisal refers to Strategic Asset Appraisal Model. l Do you want to maintain the property for the short, medium or long term? This will impact on the standard or investment/ type of repair/replacement that is undertaken. l Do you want to continue to give tenants the freedoms and flexibility to make their own alterations, which may be sub-standard and poorly installed without the appropriate certificates and cost you money to rectify when they leave? Should you instead be saying, as private landlords do: “This is our asset. You can rent it but we won’t give permission for alterations unless you put them back to how you found them at the end of the tenancy”? l Often, stock condition surveys do not include the non-core elements. For example, the improvements to communal areas or the outside environment that would be

A Housing Forum Good Practice Guide Sustainable Leasehold and Long-term Asset Management 13 Getting best value ASSET Quantitative NPVs APPRAISAL VALUE Qualitative Strategic Values necessary if you intend to offer different forms of tenure and need curb appeal to help attract prospective residents. Financial measures The estimated 30-year NPV of the net rental stream is a crucial metric. Put simply, this is a financial measure of income and expenditure related to the specific asset over time. Assets with a positive NPV indicate that they can add financial value to the business plan. This is a very good proxy for the long-term financial value being brought to the social landlord and can be calculated from mainstream information on rents, voids, management and maintenance costs and planned investment. Measuring the performance of assets We are clear that in the social housing sector, assets should not be appraised purely in financial terms. A limitation of NPV-only models is their disregard of the strategic value, past investment, legacy and social value. An effective approach may be one that highlights the long-term value that different groups and types of stock are bringing to the business plan. A good way for a social landlord to do this is to look at value in a way that brings together both financial and non-financial factors. This can provide a rounded assessment of the value homes are generating. Quality measures Qualitative measures of housing and neighbourhood performance are also good indicators of housing success. The best ones to use will depend on the individual landlord and its context, but good examples include turnover, demand, resident satisfaction, energy performance, incidences of anti-social behaviour and neighbourhood deprivation. Assets that display positive results on the chosen measures are likely to indicate value to the organisation. Often the broad assessment criteria chosen to evaluate asset performances are similar but the detailed measures and scoring methodology vary according to the specific drivers, objectives and values of the individual businesses.

Case studies – 14 Highlighting how housing associations are determining how to make the most of their existing housing stock Hexagon HA – when to repair and when to re-let Hexagon is a traditional, developing housing asociation working across five South London boroughs, developing approximately 80 homes per year. It owns just over 4,000 homes across South-east London, approximately 25% of which are Victorian and Edwardian street properties (converted flats). These properties are usually hard to heat because of their construction and expensive to insulate. Typically they are located in popular areas. The big conundrum was whether Hexagon should retain or replace them? There were pros and cons to consider: • Replacement – difficult to achieve, and could shift Hexagon’s geographical focus, but high returns from sale. • Retention – high maintenance costs, higher energy bills for residents, but popular and sustainable. What Hexagon did to assist with decision-making Hexagon assessed void properties with a view to re-letting or disposing. The organisation found that in nearly all cases, it made more financial sense to sell these older properties and provide a new home, even when only relatively low levels of expenditure were required to bring the void up to a lettable standard (in some cases as little as £5,000 was required). Hexagon also took account of the future costs. The main driver for the decision to dispose was the size of the receipt that would be generated from selling these high-value properties. Hexagon wanted to protect the family silver. It wished to develop a method of taking into account the broad social-value attributes of its housing stock when deciding on disposals, so that these decisions are not simply made on long-term financial grounds. Hexagon also wanted the method to be capable of being applied with data it already held or could easily obtain with only minimal changes in its practices – basically, the solution had to be practical. Hexagon devised a methodology for assessing the social value of these properties alongside the financial value of disposing of the property and building a new home. With input from staff in housing management, maintenance and stock improvement departments, it came up with a suite of relevant measures that were weighted and the scores fed into a lookup table, which formed the basis for deciding whether it was better value to retain or dispose. The next challenge was deciding on the relevant indicators of social value that should be considered. The impact of this was that disposal outcomes subsequently slowed down as only properties needing a significant investment were sold off. Hexagon’s view is that as an organisation which holds assets, it should be clear about how each asset performs financially and utilise this data to make decisions about retention, depending on the drivers for considering any properties for disposal at any given time. These drivers will be an influencing factor on the extent to which the social value criteria feeds into the final decisionmaking. There is no single measure of social value; a unique set of indicators needs to be developed that reflects the objectives of each organisation and its stakeholders. Within Hexagon’s disposals procedure, social value is considered according to the following factors: • Concentration of stock -is the unit in a block or street with other Hexagon units? • Is the unit family-sized? • Is the rest of property all tenanted/ part already-sold to a leaseholder? • Is the property in an unprotected flood risk area? • Quality assessment, are there 21st century facilities in the home? • Location such as the proximity to shops and transport (the Public Transport Accessibility Level [PTAL] indicator may be of interest here). Other factors which can be considered, (although they are not at Hexagon) include: • Health outcomes – this is difficult to assess in a meaningful way for a dispersed stock portfolio across a broadly homogenous geographical area. • Level of worklessness. • Level of anti-social behaviour. • Locational indicators, including: average gross income per week; percentage of the population claiming housing benefit; percentage of households in poverty; percentage of economically active in (full or part time) work; percentage of pupils achieving five GCSEs at Grades A – C; percentage of those economically active with limiting long-term illnesses; and the total number of reported crimes. • Management time. • Access to public services. • Access to green spaces – this may be a useful determinant of locational quality. • Long-term demand issues.

Amicus Horizon - policies in place for disposal considerations Amicus Horizon owns and manages just under 28,000 homes across London, Kent and Sussex, offering a range of different housing choices including affordable homes, shared ownership and extra care. Amicus Horizon’s stock analysis tool assesses which properties are viable or unviable in the long term. It looks at a range of data including: rental income; historic maintenance expenditure; future planned maintenance expenditure; turnover of tenancies; and energy efficiency. The tool ranks properties according to performance scores against these criteria, and shows which properties are performing well and which are presenting issues. Amicus Horizon says: “We’ll carry out a detailed options appraisal on poorly performing properties before we take any decisions. We’ll consider whether we are able to improve the property or if sale is the best option. We’ll examine all information to ensure we make the right decision for each property. We’ll usually want to sell properties that aren’t viable in the long term. “When we decide to sell, we’ll ensure we gain sufficient value from the sales programme to be able to build more new properties than we sell.” How SDS Stock Profiler has improved Sovereign’s approach to asset management Sovereign owns and manages around 38,000 homes across the South and South-west, and aims to add 1,000 new properties each year for the next three years. One of the largest housing associations in England, it offers a wide range of tenures including affordable rent, shared ownership, private rent and outright sale. To support its strategic asset management strategy, Sovereign has worked with Shelton Development Services in the evolution of NPV modelling by jointly developing the SDS Stock Profiler. Strategic asset management is about efficiency and adding business and social value, and this value can be defined as a combination of financial, social and political factors. Clearly, each of these value components has different weighting according to the asset under review, but the base information in all cases is the financial model. This needs to be flexible and able to align the inputs with the organisation’s business plan, and apply a consistent approach throughout the asset’s life. To deliver the financial modelling, many organisations develop complex spreadsheets but this presents problems because of their size and stability. For example, manipulating data is time-consuming and there is often less flexibility and more potential for error. Sovereign and SDS wanted something that would deal with large volumes of data quickly, flexibly and safely. It also had to align easily to business plan data and deliver end-to-end modelling within the asset life. The SDS Stock Profiler system helps the strategic asset management team to fulfil its principle purpose, namely understanding the value that each asset contributes to the business. It allows investment decisions to be made, by enabling an understanding of the financial impact of these decisions and thus assessing the overall value. The model is used in a number of different ways. Macro-level asset management has resulted in a stock rationalisation exercise across a number of tenures. And on a micro level, investment, remodelling or disposal options for individual properties can be evaluated and correct-value decisions made. Five top tips for assessing whether to keep or dispose of stock 1 3 5 Have clear processes policies and procedures in place for decision making relating to retaining or selling properties. It is essential to know how stock is performing. Do not underestimate the importance of collecting accurate data. 2 4 Take account of the future needs of residents. Take account of business needs. Do you need to dispose of assets because the business plan demands it to invest in new stock? Or to support future development? Ensure you take into consideration the social value of the assets. As housing associations we are social businesses and this should not be lost. 15



18 Why leasehold management is a growing issue Like councils before them, housing associations have over the past 10 years added substantial numbers of leasehold stock to their portfolios, both through shared ownership and outright sale, as they have sought to bring in income to replace the grant reductions from central government. Housing associations will be doing this even more in the next 10 years as they seek to meet the needs of those who cannot buy homes or pay market rents. The arrival of Right to Buy within the housing association sector, the continued demand for Right to Buy in the local authority sector and the disposal of more local authority stock means a growing proportion of social housing providers’ stock will be leasehold. This leasehold stock will have to be managed efficiently, such that it generates a surplus for investment in housing. This requires a long-term management strategy for the stock, with careful attention being paid to sinking funds, stock rationalisation, planned maintenance and keeping an asset register under constant review. Because of the changes in legislation and Government policy, flexible tenure stock is the future of many housing association and other social landlords and they will have to seek development funding from other sources. One of these sources could be surplus generated from the successful management of the leasehold properties in their stock. Better and more efficient leasehold management by social landlords should lead to more funds being available to house people in housing need. It will also lead to better and more efficient management of rented stock as lessons are learned and quality thresholds rise. Social landlords need to ensure best use of their assets. Housing associations, in particular, need to look carefully at how and why they should retain elements of their stock. Successful leasehold management will be a key factor in the future sustainability of any multi-tenure social housing provider. In a flexible-tenure future, if the management of leasehold properties does not generate a surplus, this will mean the rented stock will be effectively subsidising the leaseholders. Our Working Group at The Housing Forum came together with the aim of highlighting the challenges of leasehold management and to offer our collective experience and advice to social landlords to help them develop a strategy to manage leasehold properties efficiently. Thus, the aims of this chapter are: l To help social landlords think more laterally about leasehold management and its potential for their housing stock. l To understand that successful leasehold management is not easy. It has a constantly evolving set of parameters: legal, contractual, standards, energy and cost. Social landlords need practical advice on how best to develop a strategy for successful leasehold management. l To highlight some ideas, some problems and some evidence of good practice to help social landlords develop a successful leasehold management strategy.

A Housing Forum Good Practice Guide Sustainable Leasehold and Long-term Asset Management 19 Ensuring successful recovery of expenditure for major works Social landlords often fail to recover legitimate costs from leaseholders, for a variety of reasons. This may be because they fail to follow the correct procedures for major works under Section 20 of the Landlord and Tenant Act, or because they are undercharging for management administration fees and service charges, which means that the time they spend recovering expenditure from leaseholders is being subsidised by tenants. It is worth remembering that the relationship between the landlord and the leaseholder is a commercial one and should be considered as such. Here are a few areas where social landlords can find themselves out of pocket. Poor accounting for works and services As an example, major repair works are complex and take time to deliver. Many landlords feel that because of the length of time involved and the complexity, items which should be charged to the leaseholders often get absorbed by the landlord. To stop this happening, landlords need a clear understanding from the outset of what is chargeable and what is not chargeable. This will require an understanding of the repair covenants in the lease. Once the understanding is developed, a very detailed system of data recording and management needs to be put in place. This includes strict adherence to the correct service of notices, formal communication channels and a clear and well-defined recovery mechanism. Gosport Towers, Hampshire, Hyde Housing, supplied by Martin Arnold

A Housing Forum Good Practice Guide 20 Sustainable Leasehold and Long-term Asset Management Failure to follow properly Section 20 consultation Many landlords report that they have failed to recover the full costs of works because of a failure to follow Section 20 consultation properly. Specialist legal advice should be sought to ensure the Section 20 notices and the supporting information are correct. Many leaseholders take their own legal advice on receipt of Section 20 notices. The law requires that leaseholders paying variable service charges must be consulted before a landlord carries out qualifying works or enters into a long-term agreement for the provision of services. Detailed regulations have been produced under Section 20 of the Landlord and Tenant Act 1985 (as amended by Section 151 of the Commonhold and Leasehold Reform Act 2002) which set out the precise procedures landlords must follow; these are the Service Charges (Consultation Requirements) (England) Regulations 2003. Similar regulations have been enacted in Wales. The regulations separate the consultation procedures into four schedules, each covering different contracts. The requirements in the regulations are defined under three headings: l Qualifying works. l Qualifying long-term agreements. l Qualifying works under long-term agreements. Concerns over affordability Many social landlords have concerns regarding affordability. The leaseholder is required by the terms of the lease to pay the service charges and ground rent. Remember, the relationship between the landlord and the leaseholder is a commercial one and should be considered as such. Any non-payment will result in a breach of the lease. The landlord or residents’ management company will be required to collect the service charges and should therefore initially try proactively to seek to get them paid - for example, finding easy ways for payments to be made, such as direct debit or making a concession as long as a precedent is not set. Many leases allow late payment fees to be charged by the landlord where leaseholders do not pay on time. Often the payment of service charges can be delayed for a variety of reasons; for example, when someone has died, a property has been sold, a leaseholder is made redundant or an investment landlord cannot attract a tenant. It is therefore important that the landlord, managing agent or residents’ management company investigates proactively. Where flats and apartments are subject to mortgages, the leaseholder will not only be breaching the terms of the lease but also the mortgage company’s requirements. Mortgage companies should be made aware of the debt, as they will be keen to protect their investment to avoid any possible forfeiture of the lease and the loss of their security. They may even offer to add the debt to their client’s mortgage with or without Many landlords report that they have failed to recover the full costs of works because of a failure to follow Section 20 consultation properly. Specialist legal advice should be sought to ensure the Section 20 notices and the supporting information are correct.

A Housing Forum Good Practice Guide Sustainable Leasehold and Long-term Asset Management 21 Many social landlords have concerns regarding affordability. The leaseholder is required by the terms of the lease to pay the service charges and ground rent. Remember, the relationship between the landlord and the leaseholder is a commercial one and should be considered as such. a leaseholder’s consent. Legal action is usually sought by seeking a county court judgment (CCJ) which may award the monies owed plus fixed costs (for claims under £5,000) and late payment interest to be paid by the defaulting leaseholder. Once a CCJ is granted by the court, a landlord’s solicitor will have a variety of options to enforce the court’s order. In most cases if there is a mortgage on the property it is likely that the mortgage provider will be given a further opportunity by the landlord’s solicitor to protect the mortgagee’s interest and pay on behalf of the leaseholder the full amount owing including the solicitor’s costs, interest, administration charges and, of course, all the arrears of service charges and ground rent. If payment still remains outstanding following the court’s determination a number of enforcement measures are available. Lack of adequate reserve funds The majority of housing associations have set up appropriate sinking funds to cover future maintenance works. However, and particularly with smaller housing associations and other social landlords who find themselves with a major repair programme to carry out, there is sometimes a lack of adequate reserve funds to pay for the works. It is likely that a loan may have to be negotiated or grants obtained. Housing associations who find themselves in this position must focus on full recovery of the cost of the works from leaseholders. Failure to maintain a property adequately Landlords may fail to recover the full costs of a repair if a leaseholder successfully claims the landlord has failed to maintain the property adequately. This is a common ground for appeal by leaseholders. The best defence is for the landlord to have a current asset management plan or strategy, with a predicted programme of repairs and replacements. The asset management plan is likely to include day-to-day repairs, planned maintenance and long-term component renewal. Having taken the appropriate professional advice and put an asset management plan in place, the landlord must adhere to it. The question of whether a landlord has failed to maintain a property is generally decided by the first-tier property tribunal, based on expert opinion. Inadequate collection processes and overgenerous payment terms Housing associations and other social landlords do not always have the best track record when collecting debts, and sometimes offer overgenerous payment terms. This may be understandable as social landlords, in general, come from a background where helping people in housing need is a priority and it is sometimes difficult for individual officers to implement collection processes from people who may well be cash poor (although asset rich). There is no simple solution to this problem except to educate officers that they must be commercial, fair, reasonable and consistent throughout.

A Housing Forum Good Practice Guide 22 Sustainable Leasehold and Long-term Asset Management Undercharging for management services and admin fees Housing associations may find it difficult to assess the time they spend dealing with leaseholder issues and the administration fees associated with those costs. Accurately recording time spent on each project is the only way that this issue can be addressed. If leaseholders are not charged for the full cost of management time and services, together with administration costs, it can mean tenants’ rents effectively subsidise leaseholders’ services. Resolving the overlapping roles for management charging It can also be difficult for housing associations when external agents and housing management staff are being used. But if the landlord’s officers do not leave the external agents to deal with matters, then they are effectively using their time but are not recovering costs for that. Again, in order to be fair to everyone, officers need to be trained to understand that they must be consistently commercial, fair and reasonable throughout. Writing off costs is something a commercial landlord would not do. To successfully manage leasehold property, social landlords need to adopt a commercial mind-set. That said, housing associations are not always providing value for money for leaseholders because: l Services are often delivered through inflexible partnering contracts designed for social housing. l On some Section 106 schemes there is the risk of double charging of shared owners by managing agents and landlords. l Asset management focuses on social housing standards, health and safety, Decent Homes, environmental efficiency and stock condition. It does not tend to consider the needs or views of leaseholders. Balancing the provision and management of services and costs Some housing associations can have a very poor track record in managing leaseholder services, such as service charges, service of formal notices, consultation, billing and debt collection. This may be understandable: they want to help people, and provide low cost housing, so getting tough with leaseholder problems can conflict with their natural instincts. l Accounting and partnering practice on contracts works mean it is not easy to be transparent and demonstrate good value. This can affect satisfaction levels and even create the false impression that leaseholders are subsidising tenants. Some working group members were concerned about charging management fees on the cost of the works, which can often be in addition to any professional fees or preliminaries. This is a major bone of contention with leaseholders. Many working group members felt that there were savings to be made in the Some working group members were concerned about charging management fees on the cost of the works, which can often be in addition to any professional fees or preliminaries.

A Housing Forum Good Practice Guide Sustainable Leasehold and Long-term Asset Management 23 This task would be well suited to a working group of The Housing Forum who could co-ordinate ideas. Packington Estate regeneration, Islington, North London, Hyde Housing. Image supplied by Rydon the contractor/ developer. Designed by architect, Pollard Thomas Edwards. process and a reduction in management fee should be offered. Others felt that if the landlord is entitled to recover these costs, they should indeed seek to recover. All working group members agreed, however, that challenges and disputes will diminish if the landlord is transparent with costings and can demonstrate to leaseholders the value they receive for the services. Social landlords adopt widely differing approaches to Section 20 consultation. One that our group came across insists on having individual block costs for a cyclical redecoration programme, which, while being a belt-and-braces approach, is expensive and administratively intensive. It struck us that it could lead to greater efficiencies across the sector if a group of social landlords jointly developed a robust way of dealing with Section 20 and other leasehold issues. Optimising leasehold reversions One of the major sources of income that housing associations and social landlords will increasingly be able to tap into in the coming years is the money they will be able to collect from extending the length of leases. The importance of considering this aspect of a landlord’s work should not be underestimated. With an unexpired lease of less than 80 years, it is very difficult for a purchaser to obtain a mortgage. This means that a leaseholder who is at 80 years unexpired or approaching that milestone will need to agree a lease extension. The value of this extension is called the leasehold reversion and it will become a major aspect of the social landlord’s business negotiating these reversions. The basic calculation every landlord should carry out and keep under constant review is the value of leasehold reversion plus any income versus cost of maintaining, administering and insuring the property. This calculation will inform the landlord’s overall asset management strategy and help decide whether to repair or dispose. This is a complex calculation but it offers the landlord an opportunity to share in the value of the property. As a landlord’s leasehold stock matures, such lease extensions should offer a strong stream of long-term income.

A Housing Forum Good Practice Guide 24 Sustainable Leasehold and Long-term Asset Management

A Housing Forum Good Practice Guide Sustainable Leasehold and Long-term Asset Management 25 Like local authorities, housing associations will have to offer the Right to Buy to their tenants, and this will increase the number of leaseholders significantly. The premium to be paid for the new lease, according to Schedule 13, Part II of the Leasehold Reform, Housing and Urban Development Act 1993 (as amended), is the total of: l The reduction in the value of the landlord’s interest in the flat; that is, the difference between the value of the interest now with the present lease and the value of the interest after the grant of the new lease with the extra years. l Compensation for loss arising from the grant of the new lease. The reduction in the value of the landlord’s interest is: l The loss of the income from the ground rent for the remainder of the original term; plus l The loss due to the additional years waiting for the reversion (the surrender of the flat at the expiry of the term). The marriage value is the value of the leasehold reversion when two or more value components are blended together. This value is taken as the potential for increase in the value of the flat arising from the grant of the new lease; the act requires that this ‘profit’ should be shared between the parties. The proportion of the split of marriage value between the landlord and the leaseholder is legally set at 50:50. In the calculation of the marriage Maydew House, Southwark. Image supplied by calfordseaden value, the leaseholder’s and landlord’s valuers will rely on local knowledge and experience to assess the increase in value in the flat arising from the new lease. The compensation is to provide remedy to the landlord for any other reduction in the value of his interest in other property (other flats in the building or the building itself) and any loss or damage arising from the grant of the new lease. It is difficult to find examples of where a landlord could claim compensation since he will, in most cases, retain the freehold. Probably the only possibilities could be a claim for loss of opportunity for redevelopment potential or for a reconversion of a house containing flats back to a single dwelling. The act does not require a formal valuation to be carried out but it would be prudent to obtain one. The valuation will provide the basis for the leaseholder’s offer to the landlord contained in the tenant’s notice. The legislation requires that the value of the interest to be acquired should be determined in accordance with general market values – assuming a willing vendor and a willing purchaser. The principles of the act are not to provide a forced bargain for the leaseholder but to compensate the landlord adequately for the reduction in the value of his property – a fair price based as closely as practicable on open market values. The essential difficulty is the assessment of an open market value in the artificial situation created by the imposition of the leaseholder’s rights. The importance of managing ground rent as a source of income It is important that housing associations should be also be thinking about the

A Housing Forum Good Practice Guide 26 Sustainable Leasehold and Long-term Asset Management long-term income stream and how to optimise that by the setting of the ground rent. A ground rent is created when a freehold piece of land or a building is sold on a long lease. A building can be either sold as a single house or divided into flats. Ground rents were originally the result of leases sold by the owners of landed estates to speculative builders in the early 1900s, but are now also a feature of Victorian house conversions, apartment blocks and modern estates. Ground rents can also be reversionary investments. Most landlords would know them if they have invested in flat-schemes in cities. The individual leases provide an annual payment, known as ground rent, which in turn provides a source of income to the freeholder. It is this accumulative long-term income stream that attracts investors. The investment value of the ground rent income stream can be 1-2% of the gross development value of the apartment scheme and the payment is usually made annually. Ground rents are a product of the freehold/leasehold structure in English law. The ground rent is an annual payment to the landlord in consideration of the grant of a long lease, with the landlord ultimately benefitting from the reversion at expiry. Long leases are drafted by housebuilders on disposal of flats, or in some cases houses. Over the past 30 years housebuilders have become increasingly aware of the investment value that can be created by drafting their leases in a manner that secures a ring-fenced income stream for future freehold owners. This is particularly the case over the last 10 to 15 years as leases have been optimised in terms of the rent review clauses, notice fees and other provisions in order to maximise freehold sales receipts for the developer. The market has always existed but was considered specialist. There is a greater awareness of the value of ground rents as a long-term investment, particularly among investors like housing associations or councils which manage large diversified portfolios. The key to setting ground rent is in the successful drafting of the lease, regular communication with leaseholders and effective collection. Failure to fully recover the costs of leaseholder works will mean the rented stock is cross-subsidising the leasehold stock and this cannot be allowed to happen. Two reports showing the importance of ground rents Managing leasehold services following outcomes of the Right to Buy which allows for a commercial return Like local authorities, housing associations will have to offer the Right to Buy to their tenants, and this will increase the number of leaseholders significantly. A very different mind-set is required when managing housing stock with a view to allowing a commercial return. Whether that return is called surplus, margin or profit, the point is that long-term stock management and maintenance of leaseholder housing must be paid for by the leaseholders. Failure to fully recover the costs of leaseholder works will mean the rented stock is cross-subsidising the leasehold stock and this cannot be The Evolving Residential Ground rent market, spring 2013 (CBRE) http://www.cbre.eu/ portal/res rep.show report?report id=2854 Ground rents uncovered (Savills) http://www.groundrents incomefund.com/wp-content/ uploads/2012/10/SavillsResearch-Ground-RentsUncovered-WinterSpring-2010.pdf

A Housing Forum Good Practice Guide Sustainable Leasehold and Long-term Asset Management 27 Transformation of the Loughborough Park Estate, Brixton, South London. Image supplied by bptw partnership allowed to happen. Local councils have for many years had to grapple with the challenges of leaseholder housing: the London Borough of Lambeth, for example, has approximately 30,000 homes, of which almost 10,000 are leasehold. Housing associations will have to focus on a number of specific issues in dealing with the impact of the Right to Buy: l The accuracy of accounting data and reporting. l Correct apportionment of costs. l Managing sales and resales; values, fees, administration costs, lease terms, lease extensions, ground rents. l Differentiating services and products – some private landlords are seeking to add services to their list of management tasks such as concierge services including package collection, dry cleaning and security, sales and resale agent services. l Section 20 notices and the management of cash flow. The cost of the works often places a great financial strain on the freeholder’s cash flow. Careful service of notices and discounts for early payments can ease the problem. l A different mind-set is needed for different tenures – one size does not fit all. Good property management is key, along with high levels of communication and effective collection.

Live issues – 28 Highlighting the challenges for leaseholder recovery and how they could be avoided The need for materials guarantees and proper maintenance A working group member was involved with a package of external works proposed to an apartment block carried out under a qualifying long-term agreement (contractor partnering framework). The feasibility report outlined flat roof covering would be replaced owing to its condition. A Section 20 notice of intention was issued to various leaseholders on the block on this basis. The procedures of the client in this scenario are that an initial bill for the works is issued at the same time as the notice of intention, charging leaseholders for the works based on the initial estimated scope of works with the final bill being issued at agreement of the final account. One leaseholder challenged this proposal upon receipt of his initial bill as he recalled paying towards new roof coverings which included a 10-year materials guarantee, less than 10 years earlier. The freeholder was unable to produce the guarantee paperwork, and in any event, had carried out no maintenance to the roof so the guarantee would have been invalidated. As a result, the cost of the roof works could not be reclaimed. The key message for social landlords is that they must be rigorous in their keeping and filing of maintenance paperwork as the costs of re-charging qualifying works can only be claimed where the building has been adequately maintained. Additionally, recharge would have been possible had the leaseholder not raised the challenge. Charging leaseholders for work they do not feel is required A working group member’s window-replacement project in an apartment block hit problems when leaseholders objected to being charged. Although the windows maintained by the freeholder were mostly in a poor condition, some leaseholders had maintained theirs well and they were in significantly better condition. The leaseholders claim it’s unfair to have to pay towards the costs of new windows. Again, this case underlines the problems that can arise if buildings are not maintained. We anticipate this one will go to a first-tier tribunal. Charging leaseholders for others’ entry-phones A door entry-phone system was installed in an apartment block and the leaseholders were charged an equal portion of the costs. However, a number of ground floor flats had their own front entrance door leading directly to public space, not to a communal area, so were not served by the new entry phone system. A leaseholder in the block challenged successfully that no one should pay towards a door entry-phone where no system is installed to their apartment. Apportioning costs can be a minefield. Housing associations always need to be aware that leaseholders are looking to be treated fairly and reasonably and looking for good value for money.

The Electric Empire in Lewisham, southLondon, Asra Housing Association. Image supplied by Martin Arnold 29

30 Leaseholders unfairly subsidising total project costs Advance charging for refurbishments An external works project across a number of separate blocks on an estate had the access scaffold costs included on the prelims element of the contractor’s proposals, which was then calculated pro-rata across all blocks based on number of dwellings. A leaseholder challenge was raised, since the scope of works varied across the blocks and the extent of scaffold varied significantly between the blocks. It was held that given the variance in scope, the scaffold costs should have been considered on a block by block basis. Costs therefore had to be revised. This case highlights that it is hard to generalise when apportioning costs. A working group member has a client who chose to raise leaseholder charges in advance of refurbishing its large property portfolio. It did so because waiting until completion of the works to recoup the costs would impact heavily on its cash flow. In accordance with Section 20 of the Landlord and Tenant Act, the new charges are based on an initial estimated scope of works and associated costs. A final bill is submitted upon completion of the works and agreement of the final account, at which point adjustment of the account is made. For this all to proceed smoothly, the following issues need careful handling: • The initial scope of work needs to be reasonably accurate, otherwise significant changes in charges between initial and final bills can be open to challenge. • Changing the scope of works during work phases can have a significant change in costs and may require additional Section 20 notices being served, which can lead to delays to the works. • Leaseholders can be out of pocket for significant periods if costs reduce between initial and final bills. Thrive Homes’ environmental improvements, Otley Way, South Oxhey, Watford

31 Failure to clarify who is responsible for repairs in units procured through Section 106 A housing association purchased 66 homes through a Section 106 agreement from a speculative developer in 2008. The homes were part of a 220-unit scheme. The developer and contractors are all in administration. The freeholder has set up a separate legal entity and appointed a managing agent. There have been significant problems with leaks from the cold water supply to the blocks leading to the insurer refusing to insure against escape of water. Additionally, there is leaking from roof terraces into four of the properties. Shared owners are not prepared to accept the insurance situation or the uninhabitable homes. The freeholder has not got funds to deal with the issue. The housing association has significant equity stake in the properties, but no management control or legal responsibility to pay. Shared owners have individual leases with the housing association and have been pressing for action through them. There is no straightforward solution here. This case study demonstrates the consequences of not procuring freehold, or of not using the lease to clarify legal responsibility for repairs, maintenance and insurance. The situation would have been improved if there was a clearer legal separation between the role of the housing association in enabling the shared ownership purchase and the duty of the freeholder to manage the building. However, there is often still an incentive for a housing association to be involved to protect its financial investment in the unsold equity. In this case, the housing association has provided financial and technical support to investigate and to some extent have underwritten the insurance, so the homes are saleable.

32 1 2 3 5 4 Hone your communications strategy – communication with leaseholders needs to be clear, unambiguous and, very importantly, timely. Develop an understanding of leasehold – it is complex and relies on landlords to collect precise data and accurate Information, receive good advice and develop a full understanding of what is involved. Understand definition of terms – many of the terms used in leases and leasehold negotiations are obscure but have precise meanings. Ten top tips for successful leasehold management Draw up a strategy for sustainable leasehold management – this must form part of the overall asset management strategy. Engagement is key – every effort must be made to build communication into a two-way engagement with leaseholders. The first time they hear about works should not be when they get the bill. Hold meetings to talk about proposed works, rather than simply send letters.

Define building contracts clearly – building contracts need to recognise and spell out the leaseholder’s rights and obligations. 7 8 9 10 6 Consider carefully how works are procured – procurement of leaseholder works and the use of qualifying long-term agreements are a developing area of law and need to be considered carefully. Opting for a long-term framework, for example, could provide benefits in areas like social value but may be challenged by leaseholders for not yielding the cheapest price. Keep the works to programme– leaseholders tend to be very vigilant while the works are being delivered, so careful management of the delivery of works is essential. Landlords can of course use this to their advantage Draw up a plan for billing for the work – interim billing and final billing are options for billing and key stages towards full recovery. Great care must be taken to get the information in the bills correct. Put a recovery strategy in place – this needs to be agreed and communicated to leaseholders from the outset. Included should be early payment discounts, interest charges etc. 33

34 Credits and Contributors The Housing Forum is indebted to the many people who contributed to the content, writing and production of this publication. Those who contributed and supported us: working group chair: Dick Mortimer Group Director of Development & Sales Family Mosaic contributors and commentators: Jim Martin Executive Chairman Martin Arnold Kerry Heath Development & Regeneration Director Hexagon editor and production: Denise Chevin design: Mark Bergin Seventy Eight Design markbergin.carbonmade.com illustration: Marcus Marritt marcusmarritt.com With thanks to: All case study contributors and to our sponsors Martin Arnold and calfordseaden This report has been developed by members of the Making the Most of Existing Housing Working Group Graham Acus Director Hunters Kevan Allaway Senior Associate Faithorn Farrell Timms LLP Peter Arnold Head of Market Development Rydon Steve Barford Executive Director - Property Sovereign Jo Barrett Operations Director Thrive Homes Dave Bateman Head of Planned Investment Affinity Sutton Tony Battle Joint Managing Director Kind and Company Mark Bottomley Consultant bptw Paul Finch Managing Director Sanctuary Maintenance Contractors Pete Gardom Project Champion City-Insights Kerry Heath Development & Regeneration Director Hexagon Housing Association Alex Burton Partner calfordseaden Adrian Cheetham Head of Maintenance Operations North Sanctuary Maintenance Contractors Michael Cleaver Director of Home Ownership Amicus Horizon Steve Coleman Director Takeparts Colin Farrell Senior Partner Faithorn Farrell Timms LLP Mat Fenner Director, Surveying Silver

2016/2017 Working Groups Justin Kelly Partner bptw Jim Martin Executive Chairman Martin Arnold Gavin Missons Housing Policy Manager Sevenoaks District Council Geoffrey Murray New Business and Development Opportunities Consultant Silver Daren Nathan Development Director Durkan Leigh-Anne Pattison New Business Project Director The Hyde Group Andrew Sharp Business Development Director Osborne Katie Smith Assistant Director, Building Surveying Silver Lettice Swan Business Development Executive MDA Consulting Alex Thomas Key Account Manager Worcester Bosch working group support: Shelagh Grant Chief Executive The Housing Forum shelagh.grant@ housingforum.org.uk Charlotta Andresson Project Executive The Housing Forum charlotta.andresson@ housingforum.org.uk Printed by Hartgraph Ltd. Member organisations can join any Working Group and to register your interest in participating, please contact: Shelagh Grant shelagh.grant@ housingforum.org.uk Charlotta Andresson charlotta.andresson@ housingforum.org.uk The Housing Forum Working Groups produce influential reports for our members, which are recognised at the highest level in government and throughout the industry. The topical agendas continue to draw in external specialists from finance, planning, government and trade associations. 35

The Housing Forum 1 Minster Court Mincing Lane London EC3R 7AA 020 7648 4069 info@housingforum.org.uk www.housingforum.org.uk

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