Occupancy restricted property / Covenants

Section 106 planning agreements / restrictive covenants

Section 106 Agreements Town and Country Planning Act

Section 106 Agreements (and Unilateral Undertakings under Section 106 of the above Act) are sometimes required by the Local Authority in order for planning permission to be granted. They stipulate certain obligations that should be adhered to when the planning permission is granted (or implemented). The obligations are often intended to restrict or regulate the proposed development or use of the property and vary depending on the planning proposal. Examples of planning obligations might include:

• to limit occupation of a property to certain categories of person (e.g. locals, first time buyers, retired people)
• to bind an annexe to the main dwelling so that it cannot be sold separately and/or to restrict the occupation of an annexe to family members only.

Sometimes obligations are financial i.e. contributions to the local authority towards provision of local amenities.

It is therefore important to establish the nature of the obligations.

If the Section 106 Agreement limits occupation to specific categories of person (e.g. locals, first time buyers), consider:

• The size of the pool of possible occupants - there must be a large number of potential purchasers who meet the local authority's requirements.
• The extent to which employment is available within the local area.
• The level of income likely to be available to most potential purchasers and its adequacy to support the necessary mortgage.
• The general desirability of the area and the specific property.

We will consider lending against the security of the property which is subject to such an agreement. The Valuer will assess the impact of any such agreement on our security, and by exception will request the application is referred to Underwriters if they feel further guidance is required. No commitment of any kind may be given to any customer prior to such consideration.

Keying a section 106/Restricted Re-sale Price (re-sale price covenant) case

• Make enquiries before keying to find out as much information as possible regarding the restriction (e.g % discount, how long the restriction applies for, eligibility criteria).
• The case should be keyed as a standard application (not as a scheme).
• The property value keyed represents the amount they are purchasing the property for or for a remortgage the percentage of the market value they own (It is not the higher full market value figure).
• When instructing the valuer you must provide the information ascertained in respect of the restriction in the ‘Supporting information for valuers’ box. This should include the exact % of the market value that applies.
• Contact your Regional Case Management team (Contact us | TSB Intermediaries) to advise them of the details of the restriction. The team will then add a special condition detailing the restrictions to the application.
• Our guidance notes for valuers advise that for a resale price covenant they should report the value at the appropriate percentage discount.

Discounted Market Sales

Discount Market Sales are acceptable providing they meet the conditions of the Affordable Housing Scheme and the discount is subsequently passed on from purchaser to purchaser.  Where the discount is only offered to the original purchaser this would be classed as a Concessionary Purchase and would be outside of policy.

Occupancy Restrictions/Restrictive Covenants

• Valuers must report any of the facts in relation to the restriction(s) and the impact of these restrictions must be reflected in the valuation. Sometimes, the valuer may be aware that a restriction exists but has not been provided the full details to enable them to consider how it may adversely impact marketability, so it’s important we find out as much information about the restriction for the valuer to review.
• The below highlights acceptable restrictive covenants (this is not an exhaustive list)
  • One of the recognised councils in England, Scottish Local Authorities or Welsh Unitary Authorities - if unsure, refer to Property Risk.
  • Right of First Refusal (RFR) for social landlords to buy back homes purchased under Right to Buy (Section 156 Agreement)
  • Keyworker/Essential worker schemes
  • National Parks

Restricted Re-Sale Price (Re-Sale Price Covenant) - The valuation must be reported at the applicable percentage of Market Value. For example, if the property cannot be sold for more than 70% of market value then the valuation provided should reflect this percentage and 70% of the market value used as the present condition value. When this restriction applies, a special condition should be added.

Restricted Re-Sale (Re-Sale Covenant) - In these cases the property is subject to a covenant or other restriction which limits the sale to persons in a particular class or classes, e.g. a person must have resided in the area for a particular length of time and/or be employed in a specific industry. The valuation must be reported at 100% of market value considering the restrictions.

The following restrictive covenants are unacceptable in all cases:

• Property restricted to age of occupier (Over 55s)
• Time usage of dwelling (E.g. - Can only be used 11 months out of the year)
• Property restricted to agriculture use including Fishery, Equestrian, forestry
• Purchaser(s) must be living and/or working in a small geographical area (e.g. specific parish) which is not in the list of acceptable areas
• Property ownership restricted to a specified age group
• Limit on mortgage payment as a proportion of income (if the valuer is aware)
• Fixed capital values E.g. The property cannot be sold for more than the original purchase price
• Any BTL property with occupancy restrictions
• Help to buy applications subject to section 106/75 agreements
• Properties subject to overage agreements

Resale Price Covenant Schemes