New Supply Shared Equity (NSSE) scheme: administrative procedures

Section Three

Grant administration procedures

Making applications for grant funding

3.1 Funding applications should be submitted through the HARP system, in line with the terms specified in individual Programme Agreements. (Prior to tender application stage, and to enable an acquisition to proceed, there is the opportunity to submit an acquisition application to allow an acquisition offer of grant to be issued. For all acquisitions, a grant settlement form should be submitted through the HARP system within 14 days of grant payment.)

3.2 The Scottish Government has responsibility for appraising projects in non- TMDF authority areas. TMDF authorities have responsibility for appraising projects in their areas.

3.3 Where projects have already received grant funding through the Affordable Housing Supply Programme or its predecessor programmes, this will be taken into account in the assessment process and will be included as part of the project’s grant requirement.

Subsidy benchmarks

3.4 For the avoidance of doubt, no grant subsidy benchmarks have been set for shared equity units - the grant provider’s contribution is however expected to be lower than £40,000 per unit.

Third party warranties

3.5 Third party warranty premiums will be eligible for grant funding. Third party warranties are a mandatory grant requirement for Type 1, Type 2 and Type 3 projects.

3.6 The grant provider (i.e. either Scottish Ministers or a local authority, whichever has responsibility for managing development funding in an individual local authority area) will accept NHBC Buildmark, Zurich and Premier Guarantee third party warranty schemes cover; or such other third party warranty scheme as may be acceptable in terms of the Council of Mortgage Lenders’ Handbook for Scotland.

3.7 In situations where the Local Authority or Registered Social Landlord owns the land which is to be developed for New Supply Shared Equity, NHBC Buildmark and Premier Guarantee each require the land owner and builder to be registered under their respective warranty schemes so that effectively a double registration premium is required. A second registration premium will be eligible for grant funding only where it can be demonstrated that this provides value for money.

Housing tender returns

3.8 The Scottish Government has appointed the Building Cost Information Service to process data provided in the housing tender returns to produce indices monitoring trends in the costs of affordable new build housing. Grant applicants must upload a housing tender return for each project through the HARP system as part of the tender application process.

Private and other finance

3.9 RSLsshould confirm at Programme Agreement stage that they will be able to access the private finance required to ensure delivery of the proposed project. At tender application stage, all sources of project funding must be in place and detailed. Local authorities must confirm at tender application stage that:

• they have prudential borrowing capacity and/ or other available resources to fund the homes
• resources are not needed for other purposes, and
• committing funds to a new build programme does not compromise the sustainability of the Housing Revenue Account (where applicable).

Grant Offer

3.10 Following tender approval, grant applicants will receive confirmation of the projects which can be supported in the form of a Grant Offer from the grant provider. The Grant Offer will be issued through the HARP system and will confirm (amongst other things) the total approved grant subsidy and the planned profile of annual grant payments.

3.11 Upon receipt of the grant offer, the grant recipient should print two hard copies. If it wishes to accept the offer, the grant recipient should sign and date both copies and post one of the copies to the relevant grant provider. The other copy should be retained by the grant recipient for its records.

Grant payments

Non- TMDF authorities

3.12 The phased grant payment process for grant recipients in non- TMDF authorities will operate in the following way:

• Each tender offer of grant letter generated through the HARP system will request that the grant recipient provides a profile showing the monthly draw down of grant payments for the duration of the project. The grant recipient should ensure that any subsequent variations to the profile provided are notified immediately to the Scottish Government area team.
• Grant claims will normally be paid on the basis of one claim at acquisition stage, and at monthly intervals thereafter.
• Claims and all relevant back up should be submitted through the HARP system.
• Ordinarily, claims will only be paid on the basis of verifiable costs. These are costs that have some form of third party verification - whether it be an invoice, ‘ Statement for Settlement’ in relation to an acquisition, valuation certificate etc.
• It is recognised however that some grant recipients may undertake construction projects themselves, either fully in-house or by project managing contractors. In the former case, valuations provided by in-house Quantity Surveyors will be accepted. In the latter case, valuation certificates or invoices from contractors and suppliers should be provided.
• Where claims cannot be certified (such as an acquisition), they will be accepted for payment on a claim by claim basis provided that an appropriate official at Director level has certified the claim.

TMDF authorities

3.13 While the majority of the above procedures will apply to TMDF authorities, TMDF authorities may wish to implement an alternative approach to the one outlined in the second bullet point above.

Cost over-runs

3.14 In line with previous procedures, RSLs must notify any unforeseen and unavoidable cost over-runs to the grant provider immediately they become apparent, together with an initial estimate of cost. This will enable early discussions to take place on the actions proposed by the RSL to mitigate the effect of the cost overrun, thereby offsetting or eliminating the potential additional grant requirement. As noted below, the grant provider will take the final decision on whether cost overrun requests are acceptable based on the evidence provided.

Post-completion procedures

3.15 As soon as all of the homes in a project have been certified as complete by the project architect/ supervising officer and are approved for occupation by the local authority, the grant recipient should notify the grant provider and submit a project completion application through HARP.

3.16 In order to record ongoing property sales, further project completion applications should be submitted through HARP at three monthly intervals until all the properties are recorded on the system as having been sold. Receipt of this information will enable the grant provider to:

• record that projects developed with grant funding have been successfully completed
• confirm the actual housing mix, and the final costs and funding for the project, and
• identify whether any grant requires to be increased or repaid. In this respect, there are four scenarios where a reassessment of grant may be required at completion stage, and which should be reflected in a project completion application. These are:
  • where RSLs have incurred unavoidable and unforeseen cost overruns (see below);
  • where the housing or tenure mix has changed since tender submission or approval;
  • where for justifiable reason sales receipts differ from projected levels; and
  • where a substantial reduction in capital costs has occurred.

Unavoidable and unforeseen cost overruns

3.17 RSLs seeking additional grant funding through the post completion procedures to cover unavoidable and unforeseeable capital cost overruns must be able to demonstrate to the grant provider’s satisfaction that the additional capital costs have not resulted from their deliberate actions. And that they could not reasonably have been foreseen.

3.18 Following discussions and agreement between the grant provider and the relevant local authority, grant funding of any approved cost overruns will be met from the Resource Planning Assumption for that local authority area.

3.19 The grant provider will take the final decision on whether cost overrun requests are acceptable based on the evidence provided.

3.20 Unavoidable and unforeseeable cost overruns which are below £20,000 or 1% of the works cost, whichever is lower, will not be considered eligible for additional grant funding. Likewise the first £20,000 or 1% of the works cost, whichever is lower, of the cost overrun will be met by the RSL.

3.21 If accepted, additional capital costs above the minimum threshold amount specified in the final sentence of the previous paragraph will normally be funded in the same ‘ AHSP grant : total cost’ ratio as that approved at tender stage.

3.22 Annexe D (example 4) illustrates how a re-assessment of grant at completion stage could work in practice for a Type 1 property. In this example, less grant was required at completion stage than had been approved at tender stage. The difference between these two sums must therefore be returned to the grant provider. The principles set out in this example would apply equally to a Type 2 or Type 3 project.

3.23 The following sections will apply to all relevant projects approved under the More Homes Scotland Programme.

Consumer Code for Home Builders

3.24 Documentation in connection with sales of the new build property under the shared equity arrangement are set out in Annex A. Although the established view is that the Consumer Code (“Code”) for Home Builders ( www.consumercodeforhomebuilders.com) does not apply to a sale of this nature, Scottish Ministers take the view that Local Authorities and Registered Social Landlords should abide by the spirit of and principles underpinning the Code and that it is reflected in the sale offer.

3.25 Local Authorities and Registered Social Landlords should discuss the terms of the Code with their solicitors and adapt it to the development as appropriate. Without prejudice to that, Local Authorities and Registered Social Landlords and their solicitors should note the following:

• If there is a reservation fee payable in advance of formal offer there should be a written Reservation Agreement in terms of and subject to Condition 2 (Information - pre-contract) of the Code.
• If there is either no reservation fee or the reservation fee is only payable after conclusion of missives it has been decided that a Reservation Agreement will not be required. Local Authorities and Registered Social Landlords should, however, set out clear details of the estimated cost and nature of any management services the Home Buyer must pay for. The offer accordingly requires the solicitor acting for the Home Buyer to confirm as part of his acceptance that this has been done.
• A similar issue arises with the terms of the home warranty where the Home Buyer’s solicitor again agrees on their behalf that the terms of cover have been explained to them.
• The covering letter sent to the Home Buyer’s solicitor along with the offer should draw these matters to their attention.
• Local Authorities and Registered Social Landlords should as a matter of course provide bespoke advice in relation to health and safety precautions and information on:
  • Layout appearance and plot position of the home;
  • List of home contents;
  • The standards to which the home is being built;
  • Contact person or personnel.

3.26 As provided in section 1.28, local authorities and registered social landlords must ensure that a letter in terms of the template set out in Annexe J is issued to all prospective purchasers who have been assessed as eligible for shared equity support, before the local authority or registered social landlord instructs its solicitors to issue to the purchaser’s solicitors a formal legal offer for the sale of the property - this is required so that the explanation of the key terms of the equity loan is given at the “pre-contract” stage.

3.27 Once the sale is effected the Local Authorities and Registered Social Landlords must be aware that they require to provide:

• An appropriate after sales service all in accordance with the published ASSEP Procedures;
• Advice on health and safety precautions when living in a development where building work takes place;
• An appropriate system and procedures for receiving, handling and resolving buyers service calls and complaints as well as advice on dispute resolution; and
• Explanation of the arrangements to complete any work outstanding at hand over

all in accordance with the Code together with any other matters which may be required in order to comply with the spirit of and principles underpinning the Code.

3.28 In providing an after-sales service, Local Authorities and Registered Social Landlords should recognise that the contractual arrangements relating to the design and construction of the houses are between the Local Authority or Registered Social Landlord and the building contractor/developer and design team, and that individual Home Buyers have no direct contractual recourse against those third parties in the event of snaggings or defects arising in their home. That is one reason why the provision of an appropriate third party warranty is a mandatory grant requirement as set out in section 3.2 above, but in keeping with the spirit of the Code Local Authorities and Registered Social Landlords should also have procedures in place to assist Home Buyers in bringing relevant matters to the attention of the builder/developer during the applicable defects period and in ensuring that such matters are appropriately addressed. It will not generally be sufficient for the Local Authority or Registered Social Landlord to simply refer the Home Buyer to the terms of their third party warranty cover.

3.29 Local Authorities and Registered Social Landlords should also ensure that, in their contracts with the builder/developer, appropriate provisions are included so that the Local Authority or Registered Social Landlord can enforce any after-sales arrangements against the builder/developer if required. For example, when negotiating its contract with the builder/developer, Local Authorities and Registered Social Landlords should seek to harmonise the duration of the contractual defects liability period with the duration of the period in the Code for reporting defects (two years), and may wish to consider whether to insert specific defects/snagging reporting arrangements, which permit Home Buyers to report concerns directly to the builder/developer, and which require the builder/developer to remedy such matters within agreed timescales. Where required and practicable Local Authorities and Registered Social Landlords should be prepared to enforce the terms of the building contract against the builder/developer for the benefit of affected Home Buyers, and should have regard to any outstanding complaints made by Home Buyers before releasing any contract retention upon the expiry of the defects liability period in the building contract.