Council housing shake up opportunity for the sector

16 March 2012

In April, under powers ushered in by the Localism Act 2011, councils are being handed control over their housing assets and finances. Denise Chevin reports

A quiet revolution is about to take place across 171 local authorities which could usher in much-needed opportunities for the construction sector. From April, councils that still retain their council housing — including those that have set up arm’s length management organisations, or ALMOs — will be granted control over their housing assets and finances for the first time in decades. It means they will be able to keep all the rental income they get from tenants and decide how to spend it.

These changes to the so-called Housing Revenue Account (HRA), coupled with newfound borrowing powers, could be used to build new homes or revamp existing stock. Under the current system some councils have to pay a proportion of their income to the government through an annual settlement, which is then redistributed, meaning that there has been no financial incentive for managing stock efficiently. In effect, the reform of the HRA creates 171 new businesses, which will be run more along housing association lines.

Steve Trusler, director of strategy at Wates Living Space, says: “The reform of the HRA is one of the few chinks of light out there at the moment in terms of opportunities.

“The one area I have concern over is about timing. It’s such a massive change legally and accounting-wise — there’s a big issue around skills. Some local authorities are really on the ball in terms of their business plans, others aren’t.”

“No one is really sure how long the new system will take to get up and running, and if anything, we may see a hiatus in terms of funding and spending.”

Ian Doolittle, a partner specialising in public sector housing at legal firm Trowers & Hamlins, agrees: “There is certainly a brave new age dawning on 1 April. But it will take time to exploit the new freedoms.”

A study by PricewaterhouseCoopers last year revealed that councils would be expected to generate more than £300bn of rental income over the next 30 years.

It concluded: “Efficient operation of the HRA could lead to the build-up of some £50bn of new investment resources across the country, over 30 years (£25bn in today’s money). Councils can now look at their housing as a real asset capable of generating additional investment resources.”

The report’s author, Richard Parker, a partner with the firm, says: “In essence every council should be better off. They can spend the revenue how they like, but they will be limited to what they can borrow.”

One of the many complicating factors in this new regime is that as part of the settlement councils have to take on a certain amount of historic debt. In total this amounts to £29bn between them. This debt has been apportioned among the councils using a formula that works on the basis of averages across the country and inevitably produces anomalies. They have also been given a debt ceiling, and the amount they can borrow is known as the debt head room.

Though the amount of debt available to councils provides a good indicator of whether they could be generating construction work, it’s not a dead certainty by any means. Some authorities, points out Parker, may simply not want to borrow. Or they may have debt head room, but because of other factors, the interest rate at which they can borrow may be too high to make it viable.

So in terms of business development, construction firms will find it hard to pinpoint those authorities with the greatest potential workloads. “In the past people could track quite easily who had the cash through things like the Decent Homes programme,” says Parker. “Now it will require a greater assimilation of data — and greater understanding of the client base than before.”

The newfound freedoms could catalyse all sorts of new arrangements and joint ventures which, he says, construction firms should be proactive in setting up.

Chris Moquet, business development partner at consultant Calford Seaden, who has also been poring over the figures, agrees it’s difficult to track which council may be in a position to spend. “Our view is that there will be more money available in Greater London and that that could be quite substantial. But there will be a lot of suck and see. But less interference will equate to proper planned programmes of maintenance,” he says.

So, a period of short-term pain may seem inevitable, but in the longer term construction firms are optimistic. Wates’ Trusler concludes: ”What we’re seeing is a bit like one massive large-scale voluntary stock transfer — all with different customers. Most people see this as a step in the right direction, it’s just a question of how long it will take to settle down.”

Back to basics: Consequential losses

If a contractor breaches a contract, the general rule is that the employer can recover damages in two ways: either for losses that a reasonable person would expect the relevant breach to produce (direct losses), or for any other losses that the parties, at the time they made the contract, would reasonably expect to result from the breach (consequential losses).

If a contractor builds a hotel and breaches the contract by not completing the works in accordance with the contract, the rectification costs incurred by the employer would be a “direct loss”. If the breach of contract delays the opening of the hotel, the employer is also likely to have a viable loss of profits claim — a “consequential loss”.

Contractors often seek to limit their liability for consequential losses.

Many of the standard form building contracts (for example some of the JCT Design and Build and NEC forms) contain provisions that seek to limit liability. But contractors should be wary of the following:

The standard form building contracts seek to comply with the Act by limiting the contractor’s liability rather than excluding liability entirely.

By Steven Hayward, a solicitor in the construction and engineering team at IBB Solicitors

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