Property securitisation: five current issues
1. Mortgagee exclusion clauses
Mortgagee exclusion clauses in S106 Agreements which do not conform to the funder’s requirements continue to affect housing charging by restricting value to Existing Use Value – Social Housing (EUV-SH). It’s critical to understand this as early as possible into a charging exercise to ensure you will have sufficient asset cover in the portfolio.
The best form of clause to use is that agreed by the Property Finance Working Group – National Housing Federation – Example Standard Mortgagee Protection Clause. Many local planning authorities are adopting this form. If your local authority wants to use a different form of clause then we’re happy to review it for you to ensure it will allow your organisation to achieve Market Value – Subject to Tenancies (MV-STT) valuations for its security. Even very small deviations from the standard, which may appear insignificant, can result in a funder’s solicitor restricting the value.
2. Fire safety and EWS1
Funders require fire safety information and, where relevant, EWS1 as a condition precedent in loan documents. Obtaining an EWS1 can be difficult as there is a lack of qualified inspectors and this is causing delays. Homes in buildings over 18 metres high will generally need an EWS1 to be used as new security for your loans. Additionally, buildings below this (and particularly those over 12 metres) with any cladding/balconies may also need EWS1.
The Government has recommended that EWS1 forms should not be required for properties under 18 metres. However, many funders have advised that until the guidance for valuers (published by RICS) and government policy for remedial works changes, then their position is unlikely to change.
3. Energy Performance Certificates
Most funders, whether explicitly as a Condition Precedent or in the Officer’s Certificate, require confirmation that all properties to be charged have valid EPCs or, alternatively, are not lawfully required.
Housing associations are exempt from the Minimum Energy Efficiency Standards (MEES) and do not need to renew EPCs during the term of a tenancy. However, maintaining a register of EPCs (including where EPCs have expired) is essential to be able to provide this confirmation to your lender. Prioritise commissioning EPCs for those properties where EPCs are missing or should have been obtained. The pandemic has caused delays in obtaining EPCs as some residents have been less comfortable allowing the EPC inspector access. There is no statutory right for a landlord to access homes for EPC inspection.
4. Modular construction/MMC
The drive to use modern methods of construction (MMC) to develop new homes is increasing, with a number of procurement frameworks being set up for use by housing providers. However, the number of funders willing to accept homes built using MMC as security has lagged behind this demand. Valuers JLL and Savills have agreed an MMC Information Standard, including information on warranties.
We are now seeing more funders, notably THFC, accepting modular homes as part of a security portfolio. You should liaise with your funders to check their individual requirements. For example, the proportion of MMC in relation to the overall portfolio may be restricted.
The effect of the COVID-19 pandemic plus the SDLT holidays which super-charged the residential property market has meant that we are still experiencing delays when undertaking due diligence. Some local authorities have long turn-around times for return of their local authority searches. This is especially relevant if the stock is concentrated in one local authority area for stock transfer or smaller associations.
Land Registry turn-around times for registrations have improved for more straight forward applications but transfers of part and first registrations are still taking around 12 months to conclude. Funders are generally unwilling to accept properties into charge which are awaiting registration.