Warning: your homes are at risk

Housing Corporation’s proposal to “cull” developing associations; the corporation itself the subject of a sweeping review; a parallel review of regional housing boards – and perhaps even the role of the ODPM itself under review in a reshuffle.

Whoever ends up regulating our diverse sector will have to take into account the pressures on registered social landlords to cross-subsidise affordable housing and regeneration schemes through non-core activities: by being more adventurous in taking on market renting or outright sale, by filling the gap left by the flight of the private sector from care homes (particularly nursing care for the elderly), meeting the demand for student accommodation and market-rent key worker accommodation.

Speaking to lenders, it appears that there are schemes currently on hold because the RSLs feel they fall foul of the tests in the 2000 Housing Corporation circular Regulating a Diverse Sector, as “core” social housing assets would be counted as security along with non-social housing assets to support the loan for projects producing a mixture of core social housing and non-core units.

Lenders are, however, realising that on a non-core scheme it doesn’t matter if the only security they get is the non-core asset, so long as the RSL covenants to repay the loan and there is no limited recourse provision in the security agreements. But when the RSL covenants to repay the loan, it puts at risk all its assets – making a mockery of the idea that they are ring-fenced. This is the case even if the RSL’s assets are charged to another lender, with the usual financial covenants.

The only way to guard against that risk to all the RSL’s assets is to beef up the contract. Here there can be confusion. A “limited recourse” loan, where the RSL charges only the non-core project assets, does not work if the guarantee to repay is not tough enough. Limited recourse means that the only security that the lender can realise, usually to sell, is the non-core project assets, thus keeping the social housing safe; but that could still leave the RSL vulnerable because the lender might decide not to sell the non-core assets but instead use the covenant to pay to threaten to put the RSL into liquidation, knowing that that would provoke regulator intervention, and put the core assets back at risk.

The list of core assets that can’t be used to support a non-core project does not seem to be based entirely on public subsidy. So why can’t the income stream from a housing management contract or a care home asset support student accommodation or nursing care accommodation?

When the RSL covenants to repay the loan, it puts at risk all its assets – making a mockery of the idea that they are ring-fenced

To ring-fence the core assets from

non-core assets, the loan would have to be non-recourse, with no covenant to repay but with a provision that if the RSL did not repay, the lender could realise the non-core assets.

Unless some third party – an NHS body, a university or a local authority – were guaranteeing an income stream sufficient

to repay the lender, it is unlikely a lender would lend sufficient money to finance the whole transaction.

That brings in another risk on non-core schemes that depend on an income stream from a public sector body. Local authorities can, through a variety of powers and approval procedures – principally the Local Government (Contracts) Act – give guarantees of future income to lenders. But, as lawyers who deal with the NHS know, because of the lack of clarity on the powers and procedures of NHS bodies, particularly NHS trusts, the size of the risk that the NHS (and often its joint commissioning partners) expect RSLs to take can be in inverse proportion to the comfort the NHS body can, or is prepared to, give that it is acting lawfully.

If all else fails, get your lawyer’s opinion – that will, at least, comfort your lenders and deter challenge.