First Homes is a new government scheme to help first-time buyers on to the property ladder by offering homes at a discount of at least 30% compared with the market price. The same percentage discount will then be passed on with the sale of the property to future first-time buyers.
Councils will be able to prioritise First Homes for local people and for key workers such as teachers and health service employees. The government hopes that First Homes will eventually account for at least 25% of all affordable housing units delivered by developers through planning obligations.
Unlike shared ownership, where buyers can “staircase” the amount of their equity in the property until they own it outright, the principle behind First Homes is “once a First Home, always a First Home”. When the owner of a First Home decides to sell on, they will need to find another eligible buyer for the First Home, who will buy it at the same percentage discount as the original buyer, meaning that First Homes will always be sold below market value (subject to some limited exceptions).
At the moment, the only First Homes are new-builds, so developers’ solicitors will be the first to get to grips with the mechanics of selling subject to the First Homes obligations. However, buyers’ solicitors will also need to understand and explain to their clients what they are buying and what obligations they, in their turn, will have when the time comes to sell up and move on.
Buying a First Home
The “First Homes Agreement” that a solicitor will be asked to review is a section 106 planning obligation, binding on the developer and all future owners. This sets out who can buy a First Home, both on its first sale and on subsequent sales. There are national eligibility criteria (first-time buyers with a household income not exceeding £80,000 a year, or £90,000 in Greater London). There is also a price cap of £250,000 (£420,000 in London). Councils can impose their own local criteria in addition to the national stipulations. These could include a (lower) local income cap.
There will be a restriction registered on the title of each First Home to ensure that the property, both on the initial sale and all further sales, is being sold to an eligible buyer. This provides for the council to certify that the disposal is permitted under the terms of the section 106 agreement.
With such a large discount in the price, there are strict criteria about how a First Home can be used. Buyers will be required to live in it as their main residence, and the council’s consent is needed for any subletting exceeding two years in total during the period of ownership. Consent will only be given in cases of real need, including relationship breakdown and redundancy.
Selling a First Home
People’s needs change over time, and so a large part of the section 106 agreement deals with what the owner will need to do when they eventually want to sell. The owner will initially have to market the property at the discounted price to people who meet both the national and any local eligibility criteria.
The local eligibility criteria will fall away if the owner cannot find a buyer who meets those criteria within three months of putting the property on the market. The owner then has to market the property using only the national criteria for a further three months (or six months in total if there were no local eligibility criteria).
If the owner still has no luck in finding a buyer who meets the national criteria, then the owner can apply to the council to release all of the First Homes obligations. The council can only refuse consent if it is not satisfied that the owner has used reasonable endeavours to market the property as a First Home. In that case, it can either buy the property itself or require a further marketing period up to a maximum of six months with national restrictions, after which the owner can sell free of the First Homes obligations. The council can shorten or dispense with the marketing requirements and allow an earlier sale if it considers that holding the owner to their contractual obligations would cause the owner undue hardship.
Where the owner is permitted to sell free of the First Homes obligations, in the very limited circumstances permitted under the section 106 agreement, the council will require the owner to pay it a proportion of the sales proceeds, putting the seller in the same position financially as if they had sold the property as a First Home. This will be a condition of the council releasing the Land Registry restriction.
The position is very similar where the sale is by a lender, where the owner has defaulted on their mortgage, save that there is no marketing period and the lender is able to sell immediately free of the First Homes obligation. After redeeming the mortgage, the lender has to pay part of the sale proceeds to the council (applying the discount percentage) before paying any surplus to the defaulting borrower.
Developers, councils, lenders and buyers will all be familiarising themselves with First Homes in the coming months. We hope this article gives you a head start.
Christine Wilson is assistant director – legal and deputy general counsel, and Clare Dodds is head of legal development at Homes England
