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Right to Buy: The Re-invention of Thatcher’s Social Revolution

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About The Author

Amy Ling (Former Private Law Manager)

Amy graduated with a first in Philosophy from The University of Manchester in 2012. Following three years working within the social housing sector, Amy is currently studying for her LPC and will begin a training contract at a city firm in September 2016. Amy is an accomplished mooter, and was on the winning team in the 2015 JustCite International Mooting competition. Outside of the law, Amy is a keen runner.

Image © Mariano Mantel

Loathe it or love it, the “right to buy” (RTB) was a policy that defined the Thatcher era. Originally introduced with the Housing Act 1980, RTB enabled council tenants to purchase their homes for the first time at a significant discount of up to 50%. Pictures of the then prime minister handing over the keys from the first sale to the Patterson family represented a historic moment, and symbolic of the aspiration for Britain to be a ‘property owning democracy’. Since then, 1.9 million properties have been sold under the scheme.

Fast forward to 2015 and it is the spirit of this policy that the Conservative Party, in their first Queen’s Speech for 20 years, have committed to extending the RTB beyond tenants of state-owned social housing to the 1.3 million tenants of housing associations in England.

However, the proposals have been met with much opposition from within the housing industry and across the political spectrum. There are concerns both about the impact on the ability to help those in need if numbers of social housing decrease and over the legality of enforcing such sales, given that the assets in question belong to private organisations, independent of the state, many of whom are bound by charitable covenants and trusts.

As commented by David Orr, Chief Executive of the National Housing Federation: ‘housing associations are just as independent from government as Cancer Research UK and Oxfam, and the government has no more right to compel them to sell their property’. Tony Stacy, chair of Placeshapers, a group of 100 housing associations, has also been widely reported as stating that he would ‘definitely challenge [RTB] legally… We are duty bound morally to fight it in any way we possibly can’. Further – and signalling the groundswell of opposition in the House of Lords, in his maiden speech, the former chief of the civil service Lord Kerslake argued that RTB is: ‘wrong in principle and wrong in practice, and it won't help tackle the urgent need to build more housing and more affordable housing in this country, particularly in London’.

So what are the hurdles that the proposals face, and how likely is it they will be overcome?

The Proposals

Although many tenants of housing associations are already eligible to purchase their homes under the ‘right to acquire’, the discounts for this are only at most £16,000 and eligibility is restricted to those in homes transferred from local councils after 1997 or those built with public funding after this time. This means that those living in housing association properties built with private finance have no more right to buy than their counter-parts in the private rented sector.

By extending the rights currently enjoyed by council tenants under Part V of the Housing Act 1985 (which amended the Housing Act 1980) to purchase their homes, housing association tenants would therefore instead enjoy discounts for properties of up to £103,900 in London or £77,000 outside of London, depending on the market value of the property and how long the tenant has lived there. Housing associations would be compelled by law to process such sales, either losing the freehold of the property or, where in a block of flats, take on the management of the property as leasehold. The plans will not be applicable in Scotland, which is abolishing RTB effective 1st August 2016 or Wales, which is expected to follow suit.

Although few details beyond this are currently available, Communities Secretary Greg Clark has argued that the policy presents a ‘win-win’ situation whereby ‘every housing association property sold will be replaced one-for-one with a new property. So [RTB] is not only allowing people to meet their aspiration but also to increase the housing stock as well’.

However, there is widespread cynicism among the industry that such a commitment would be achieved. Despite a similar promise of one-for-one replacement being made by the coalition government in 2011, the average replacement rate is estimated to be in fact one-in-ten, and far worse in some areas. For example: since 2012, in Greater Manchester, only two homes have been built to replace the 863 sold, whilst in London housing charity Shelter reports that 13 boroughs responsible for a total of 2,877 of sales in the capital have failed to replace a single property.

Further, there are concerns about how the proposals will be funded. Should the government not fully compensate housing associations for loss of their assets, then it could potentially be in breach of human rights legislation.

Deprivation of Possessions: The Human Rights Challenge

Article 1 Protocol 1 of the European Convention on Human Rights (as incorporated in the UK by the Human Rights Act 1998) provides that:

Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

However, this is not an unqualified right, as the article goes on to state that:

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general, interest or to secure the payment of taxes or other contributions or penalties.

This clause has generally been interpreted by the courts to mean that legal individuals (both real and legal entities) can be deprived of their possessions so long as compensation is paid for the loss of such assets. For example, in Pye v UK (2008) 46 E.H.R.R. 45 (concerning adverse possession, or “squatter’s rights”) the court noted that whilst states enjoy a ‘wide margin of appreciation’ when enforcing such laws, the interference in the rights of individuals must still be proportionate. Without compensation, the court concluded that ‘taking of property under the second sentence of the first paragraph of Art.1 without payment of an amount reasonably related to its value will normally constitute a disproportionate interference that cannot be justified’.

Although the court also noted that compensation below market value would be suitable in some situations, the sale of homes in this case at a lower rate is unlikely to be in the public interest. This is because it is in the public interest for those in need to be housed and for government resources, including welfare payments such as Housing Benefit, to be used in an efficient way. Without paying full market value for such properties, the ability for replacement homes at subsidised rents would be limited, with the result being that those on the waiting list would be housed instead within private rented accommodation at a far higher cost to the taxpayer.

What this means for the proposals is that although the tenant themselves purchases the property at a discount, the government will need to top-up that receipt back to the full market value. Government estimates that this cost will be approximately £4.5 billion, and has proposed that it would be funded by the sale of 15,000 ‘high value’ council properties per year as they become vacant (though earlier this month the Department of Communities and Local Government has admitted that it has not yet estimated exactly how many local authority homes are likely to be sold in reality to provide such funding). Further, estate agents Savills highlight that such estimates may be over-optimistic: they are based on an assumption that each local authority home sold will bring in £300,000, when the average value of a social home is less than £208,000, dropping to less than £100,000 in regions such as the North East.

Paying full compensation for the cost of the home may avoid any challenges under human rights legislation, however even if this is the case, the very sale itself could lead such organisations to be in breach of their charitable covenants and duties as borrowers. 

Duties as Charities and Borrowers

Many housing associations were set up by philanthropists in the late 19th and early 20th century. For example, Peabody Housing Association, founded by George Peabody in 1862, was later incorporated by the Peabody Donation Fund Act 1948 and is registered with the Charity Commission. The Charities (The Peabody Donation Fund) Order 1997 sets the objects of the charity as ‘to relieve the need of persons in Greater London who are in conditions of need hardship or distress by the provision of accommodation or otherwise’ and rests the powers of sale in the Governors as trustees. Many other housing associations are either registered with the Charity Commission directly or are restricted by the covenants of their founding trust deeds. 

For property to then be sold without the exercise of powers of the trustees, or at a value that covers the loss of that asset, could therefore be in breach of such duties. As argued by Charlotte Cook, partner at Winckworth Sherwood: ‘giving away charitable assets at a discount is not currently allowed. Charity trustees, or board members, have a duty not to dispose of assets for less than their fair value. Trustees can be personally liable if they allow this.’

In particular, difficulties may arise where the receipts from sales do not cover the true loss entailed. Beyond full compensation for the value of the asset itself, the cost of building a replacement and the loss of income during the time of producing such a replacement should also be considered. For example, where a relatively lower-value property is sold in an area with high land prices, the cost of replacing the house one-for-one may exceed the receipt of the sale, even with full compensation of the market price. This would require additional investment on the part of the association in order to ensure that it continues to meet its trustee duties or potentially face breach. During the time that a build is proceeding (often several years), there will also be a direct impact on cashflow for the organisation: particularly in areas such as London, where the average “affordable rent” is currently at over £1000 per month. This would not be an insignificant loss.

Further, extension of RTB may lead to some housing associations facing the risk of breaching lending covenants on pre-existing loans: where the security given for such loans can then be dissipated without warning. As highlighted by the ratings agency Fitch, this could constrain the [housing associations] overall capacity to borrow even though the need for social housing is high due to strong demand across the country. The reduction in the available security could also lead to higher borrowing costs’. Due to the highly regulated nature of the social housing industry, any breach of loan covenants in this way would be considered by the Homes and Communities Agency as ‘a material breach of the governance and viability standard… requiring regulatory action’.

Associations may therefore face the extremely difficult conundrum of using the receipts from sales to pay down existing debts, thereby avoiding breaching loan covenants, or to pay for replacement homes, thereby avoiding breaching trust covenants to provide homes. Either way, the requirement providing homes such as to those in ‘hardship and distress’ may be breached for at least a period of time. It is on these issues that the government is likely to face the most challenges or attempts to circumvent the rules, however it is difficult with the level of detail available to determine just how successful they may be.

Conclusion

Although the proposals are popular among many within the Conservative Parliamentary Party (David Davis MP describes RTB as ‘both revolutionary and tried-and-tested’), even figures such as Boris Johnson have expressed worry that the ‘social mix’ of communities will be damaged if replacements are not guaranteed by the details of the Bill.  Many too recognise the potential inequity of a scheme which promotes the opportunity for homeownership among those with far greater security of tenure and quality homes than those living in the private rented sector, to which this will not be extended and for whom rent controls were rejected.

Despite the fanfare surrounding their purchase, the story of the Pattersons, like that of RTB, has not been one of out and out success. As reported in 2013, the struggle to keep up with mortgage payments and interest payments cost them their marriage, with the home eventually being sold. With hindsight, the sale of so many social homes such as this was not a success: a lesson that the Housing Bill must address to avoid in order to relive the triumph of Thatcherism and avoid becoming nothing more than, as described by John Healey MP a ‘cheap tribute act’. 

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Tagged: Housing Law, Human Rights

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