F2-28/99 Changes to the Preserved Right to Buy cost floor rules
Distributed to All registered social landlords (excluding co-ownership societies, almshouse charities and Abbeyfield societies) and local authorities.
1 Introduction
1.1 The regulations regarding the cost floor rules under the Preserved Right to Buy (PRTB) have been amended. The new regulations came into effect on 20 May 1999 and apply to any PRTB application submitted on or after 20 May 1999.
1.2 A copy of Statutory Instrument 1213 is attached at Appendix 1.
2. Circumstances in which the PRTB applies
2.1 Certain secure tenants of public sector landlords have the Right to Buy the home they currently occupy at a discounted price. Where the tenants' homes are transferred to a Registered Social Landlord (RSL) and as a result they cease to be secure tenants with the Right to Buy, the PRTB applies.
2.2 The majority of cases involving the PRTB arise in the context of local authority stock transfer to RSLs.
3. The cost floor
2.1 The cost floor is the amount below which a discount shall not reduce the sale price of a property purchased under the PRTB. The purpose of the cost floor is to ensure the expenditure incurred in providing the property is protected.
2.2 The cost floor is the aggregate of the "relevant costs" (defined in the attached regulations) incurred by the current landlord in respect of the property. Relevant costs include costs of acquisition, construction or improvement of the property and certain repair and maintenance works.
NB The amount of discount a tenant can receive is also limited by the revised discount limits set out in Circular 3/99 which currently range from £22,000 to £38,000).
4. Calculating the cost floor
4.1 To calculate the PRTB cost floor the landlord should take the relevant costs incurred during a fifteen year accounting period, counted back from the date of the tenant serving the claim to exercise the PRTB. This differs from the ten year period under the Right to Buy to acknowledge the fact that transfer landlords operate under a different financial regime from local authorities.
4.2 Prior to the amendment of the cost floor regulations, there was no time limit applied to PRTB cases. Landlords were also unable to include the costs of repairs, maintenance, costs of dealing with defects to the property or administrative costs in the cost floor calculation.
4.3 LA stock transfers to RSLs where the stock value is positive and all other non stock transfer cases
Where the overall Tenanted Market Value of the stock was positive at the time of transfer (i.e. the aggregate value of the transferred dwellings), the following costs (including VAT) should be included when calculating the cost floor:
- cost of construction
- cost of acquisition
- works initially required following acquisition of the dwelling by the landlord
- repairs to the extent that the cost exceeds £5,500 (i.e. if the repairs cost £8,500, the sum of £3,000 is included in the cost floor calculation)
- other works to the dwelling house not referred to above, eg improvements
4.4 LA stock transfers to RSLs where the stock value is nil or negative
Where the overall Tenanted Market Value of the stock was negative or nil at the time of transfer (i.e. the aggregate value of the transferred dwellings), the following costs (including VAT) should be included when calculating the cost floor, provided that they are attributable to the dwelling which is being purchased under the PRTB:
- works initially required following acquisition of the dwelling by the new landlord
- works of repair or maintenance or works to deal with any defect affecting the dwelling house
- improvements or other works to the property
- works to any garage or parking area where the facility benefits the dwelling house
- works to provide or improve any communal facility provided in particular for the benefit of the dwelling house
- professional and consultancy fees
- administrative costs not exceeding £2,000
5. Items that cannot be included in the cost floor calculation
5.1 The following are not treated as relevant costs for the purposes of the cost floor calculation:
- interest
- costs which the landlord can recover as a service charge or an improvement contribution
- costs incurred on any relevant works if payment for them was made in an accounting period more than fifteen years before the date of service of the PRTB application
- costs incurred on any relevant works if payment for them was made on or after the date of service of the PRTB application unless the landlord has entered into a written contract for the works to be carried out before that date or if the applicant has agreed in writing to the works being carried out and the works have been carried out not later than the date of the landlord serving the section 125 notice or the works will be carried out under the proposed terms of the conveyance or grant
6. Commitments made to tenants
6.1 Sometimes a local authority [as part of the formal consultation process under Schedule 3A of the Housing Act 1985 (as amended)] undertakes that, following the transfer, the RSL will carry out any works to the dwellings which are initially required to put them in good order or to deal with any defect affecting them.
6.2 In these cases the cost of those works may be included in the cost floor calculation even if they have not been carried out at the time a tenant submits an application to exercise the PRTB.
7. Estimating costs
7.1 Where the cost of any works cannot be readily ascertained then the landlord may estimate the reasonable cost of these works.
8 Enquiries
8.1 Please direct any enquiries on this circular to the Capital Funding Section of the Headquarters office of the Housing Corporation.
