1  Introduction

This appendix deals with drafting issues relating to the treatment of residual value in non-HRA housing projects.

As with the substantive guidance this appendix assumes that the Authority will

(a)  own the freehold of the land upon which the dwellings will be provided

(b)  grant a long lease or leases of that land to either the Contractor or to the housing management sub-contractor; and

(c)  have the option (whether on the Expiry Date or upon early termination) to acquire the long lease or leases or to procure their surrender or assignment

(though if a different structure were to be used, changes to the approach outlined in this appendix would need to be agreed with the HCA).

Accordingly the drafting in relation to residual value will have to deal with the two alternative scenarios, i.e. where the Contractor or the housing management sub-contractor retains ownership of the long lease(s) and where the Authority acquires them or procures their surrender and, in each case, both on the Expiry Date and upon early termination.

In closed non-HRA deals the position has been that:

(i)  bidders have bid a residual value sum for the leasehold interest(s);

(ii)  funders have (in a buoyant property market) largely been prepared to fund that sum on a non-amortising basis.  This appendix has been prepared on the basis that the whole or part of the residual value sum will be funded on a non-amortising basis;

(iii)  the Authority has been given the option set out in paragraph (c) above.  The price payable has normally been the market value of the leasehold interest(s);

(iv)  in some cases the Authority has been given a share of the amount (if any) by which the market value of the leasehold interest(s) exceeds the residual value sum (often described as an overage payment).  In effect, this operates as a deduction from the amount paid by the Authority for the leasehold interest(s) (where the option is exercised) or from the amount of the termination sum (where the option is not exercised).  Where an overage payment has been used, the Authority has taken the view that

(A)  it encourages a more 'robust' view on the residual value sum to be taken; and

(B)  particularly in the current market, bidders generally may well take a less optimistic view of values.  As the market may well not be depressed in 25/30 years time, it is appropriate for an Authority to mitigate the risk of low bid values by taking a share of uplifts at the Expiry Date or upon early termination.