Housing Matters April 2008

Community Land Trusts - securing permanent affordability

The last edition of Housing Matters commented on some of the key legal, corporate and contracting aspects of forming community land trusts (“CLTs”).  This article looks at ways in which a CLT can ensure that its properties remain permanently affordable. 

Much of the impetus behind CLTs is to deliver affordable homes, with the aim that prices remain affordable, not only on first sale but in perpetuity.  An appropriate method of disposal is key to achieving this. Alongside methods of traditional shared ownership, for which the Housing Corporation now requires full staircasing to be permitted, the following methods may be used in an attempt to maintain affordable housing on re-sale. 

Re-sale price covenant
In this method the property is sold in its entirety to a buyer at a percentage of the open market value (“OMV”).  The freeholder retains no equity share.  The buyer covenants that he/she will only re-sell at the same percentage.  A restriction is placed on the purchaser’s title preventing sales unless the CLT has confirmed that the re-sale procedure has been properly completed. Within this method the freeholder or RSL may nominate buyers and rights of pre-emption may also be inserted. 

There are however a number of drawbacks with this method.  Covenant sales are inflexible and do not allow for staircasing by the purchaser.  The main concerns for the CLT when using this method will be that further increases in property values in forthcoming years could be far greater than the equivalent rises in average wages, resulting in the property being taken out of the affordable price range.

Equity purchase
This is very similar to the re-sale price covenant, the main difference being that the CLT retains an equity share in the property.  The CLT disposes of its freehold or long leasehold interest in a property but retains an equity stake as a percentage of its OMV.  Once the mortgage is redeemed the CLT will be entitled to the same percentage of the OMV.  The CLT will also have first refusal to reacquire the property when it is sold.

A potential drawback for the CLT is that on sale of the property by the buyer, the CLT would receive cash, not equity.   The CLT would then need to reinvest the cash in other property, which will be subject to fluctuations in the property market. 

Mutual Home ownership
In this model, residents take a 99 year lease from a mutual home ownership society and acquire a notional number of “units” equating to the value of the let property.  On re-sale the resident would receive an amount equal to the appreciation of the notional number of units.