Public & Private

As registered social landlords have formed into groups, many have arranged borrowings on a group basis.

For some, this means allowing certain members of the group to borrow on the strength of the property security provided by others – a practice called cross-collateralisation.

Other groups do not need to share security in this manner, and put in place arrangements known as "standalone" group borrowings.

However, some using standalone arrangements have found that, to attract funding for certain group members, others are required to provide financial support.

This means all participants enter into a contract to the effect that, if any of them is unable to make a payment, the others will lend them money.

Such payments are usually a one-off and amount to six months' worth of interest for the defaulting group member. In this way, the group is able to avoid that member being in default for six months.

The mechanisms for providing this support vary from transaction to transaction. Examples include subscription for loan notes and a standby credit facility. The common theme is that, in the event of default, the other members of the group lend to the defaulting member.

Any group contemplating such a scheme must consider whether or not the participating members have the power to provide this support. Any participant, charitable or not, must satisfy itself that the provision of this support is in the best interests of that organisation. Where all participants are RSLs, it is often possible to take the view that helping another participant (having the same objects as yourself) furthers your own objectives.

Difficulties arise, however, where one or more of the participants is not a registered social landlord, and where the participants include charities as well as non-charities.

Charitable participants have to be sure that the support furthers their own objectives. Where some of the other group members are not charities, supporting their objectives does not necessarily further the aims of the charity.

Equally, RSLs may find it hard to justify support if the beneficiary could include a non-RSL. The group will generally have to satisfy the Housing Corporation that the provision of support to the non-RSLs does not involve leakage of public funding.

The solutions to these issues vary from group to group. In some circumstances, the borrowing arrangement, including the financial support, is the best financial package available to a charitable group member. Where that is not the case, charities have to satisfy themselves that support of a non-charity furthers their own objectives. They may have to ensure that the use of the funds to be borrowed is limited to purposes that further the charity's objectives. This of course may be severely restrictive from the non-charities' perspective.