Affordable housing

A golden brick agreement is a contract used in affordable housing acquisitions to allow the buyer (often a registered provider) to take legal title at a defined stage of construction (“golden brick”), with the build then continuing under the development documentation (often a development agreement and the wider construction suite).

In practice it is commonly used to support VAT-efficient structuring for affordable housing transactions: “golden brick” is a mechanism for turning what would otherwise be a standard rated or exempt supply of land/buildings into a zero rated supply of a partly completed qualifying dwelling, which is particularly relevant for RPs who have limited VAT recovery.

The structure is used so that the RP can complete the purchase without VAT implications where VAT on bare land would be irrecoverable, while the developer can still recover VAT incurred on development costs. In practice, it can also support developer cash flow because a significant payment is typically made at golden brick, with further staged payments thereafter, rather than the developer waiting until practical completion for the bulk of the consideration.

A “mortgagee protection” provision is usually a mortgagee exclusion clause (MEC). It is a carve out from the affordable housing obligations so that a lender (or its enforcement appointee) is not left bound by restrictions to only use the property as affordable housing, which would reduce the value of the security. The practical point is simple - if the affordable housing obligations are drafted so tightly that a lender cannot sell (or would have to sell lower than market value) in an enforcement scenario, the property is worth less as security, and this directly affects how much funding the RP can raise.

An adequate MEC is critical to allow the lender, on enforcement, to sell free of the affordable housing restrictions (usually after trying to sell to another RP as affordable housing for a period) which is therefore key to enabling a more favourable valuation basis for charging (and therefore funding).

The biggest trap is assuming that because a clause is labelled “mortgagee exclusion”, it is adequate. The clause needs to be reviewed very carefully, and a few of the key points to look out for include:

• Checking it covers the correct parties. It should cover chargees in addition to mortgagees, otherwise it may not protect where security is held via a security trustee (who is not a ‘mortgagee’). The clause should also extend to receivers and administrators and anyone appointed under security documentation, 
• Do not rely on mortgagee ‘in possession’ wording, as lenders do not typically go into possession of tenanted affordable homes.
• The MEC should cover all affordable housing provisions in the document (including related obligations, such as obligations to enter into nominations agreements). Likewise, you need to make sure that the nominations agreement, any transfers or leases or other binding documentation with restrictions on use as affordable housing, also contain adequate mortgagee exclusion clauses.
• It is important that disposal under the MEC is allowed at a price not less than the amount outstanding under the facility (including interest, costs and expenses).

A review of MEC clauses in section 106 agreements and other documentation which contain affordable housing restrictions which will be binding on the RP on purchase should be treated as a standard part of due diligence on any acquisition that may later be charged.

There has been recent case law scrutiny of how MECs operate in practice. Westminster City Council v Gems House Residences emphasise the commercial purpose of MECs in facilitating lending and enforcement, and the importance of precise drafting to avoid unintended outcomes.