Build to rent in London and the 15 year covenant
Policy H11 of the London Plan treats build to rent as a package, not a tenure label. The criteria, the covenant and clawback drafting, discounted market rent, and how the viability appraisal differs.
A build to rent scheme in London has to meet a list of criteria before the policy applies to it, and the one that changes the deal is the covenant: the homes must be held in unified ownership and management for at least 15 years, secured by a section 106 agreement, with a clawback payment if units are sold within that period. Everything else in the policy follows from that commitment.
Policy H11 of the London Plan 2021 sets out the definition. Developers who assume build to rent is simply a tenure label, applied after the design is fixed, usually discover the covenant and the unified ownership requirement at the point the legal agreement is drafted.
What the policy definition requires
The criteria, in the order they tend to matter during a negotiation:
- A development of at least 50 units.
- Self contained homes, let as separate dwellings.
- The development held as a single entity under unified ownership, not sold off unit by unit.
- Unified management, with on site management arrangements.
- Longer tenancies made available to all tenants, of three years or more, with break clauses for the tenant.
- A management plan covering service standards and tenant relations.
- A covenant of at least 15 years, with clawback if the covenant is broken.
Fifty units is the floor rather than a target. Below it, a scheme intending to rent its homes is assessed as conventional housing, with affordable housing provided in the usual tenures. That is a material difference to the appraisal, so settle the unit count early.
A point worth stating to clients at the outset. The policy is a package. A scheme that offers the covenant but not the longer tenancies, or unified ownership but no on site management, is not a build to rent scheme for policy purposes and will be assessed as something else.
Unified ownership and management
Unified ownership means one entity holds the whole of the residential element. In practice that entity is an investor, a fund or a registered provider, and the planning consequence is that the scheme cannot be broken up and sold flat by flat.
Three practical issues recur.
Mixed schemes. A block with build to rent on upper floors and a separate for sale element elsewhere on the site is workable, provided the build to rent units are identified and the covenant attaches only to them. Draw the boundary on a plan and carry it into the agreement.
Forward funding. Where the investor is not yet identified at the point of permission, the obligation binds the land rather than a named party, which is standard, and the covenant then runs with the land to whoever acquires it.
Management. On site management is part of the definition and also part of the service charge. The authority will want to know who manages the building, not merely that someone will. A management plan naming the service standards, the repairs response times and the complaints route answers that.
The covenant period and how it is secured
Fifteen years is the minimum, running from first occupation unless the agreement says otherwise, and it is secured as a restriction in the section 106 agreement supported by a clawback payment.
The clawback is the mechanism that makes the covenant real. If units are sold within the covenant period, the obligation requires a payment to the borough, typically calculated as the value of the affordable housing contribution that would have been required had the scheme come forward as conventional housing, less what has already been provided. Negotiate four things in that provision:
- The formula and the index applied to it
- Whether the payment is apportioned to the units actually sold or applied to the whole
- The treatment of a sale of the entire block to another investor, which should not trigger clawback where the covenant is passed on
- Whether the period runs from first occupation of the first unit or of the last
The third point is the one most often left ambiguous. A sale of the whole operating asset to another long term holder is consistent with the policy, and the drafting should say so expressly rather than leaving it to a release negotiation years later.
Discounted market rent as affordable provision
Affordable housing in a build to rent scheme is normally provided as discounted market rent, managed by the operator rather than transferred to a registered provider. The homes sit within the same block, under the same management, with the discount secured by the agreement.
That structure answers a practical problem. A registered provider taking a handful of units in a managed block creates two management regimes in one building, and the service charge arithmetic rarely works.
The threshold approach to affordable housing applies, so a scheme offering the required proportion as discounted market rent at the levels the Plan expects can use the fast track route and avoid a viability assessment. The percentage, the rent levels and the proportion expected at the lower end of the range are set by policy and by Greater London Authority guidance, and both have been revisited since the Plan was adopted. Check the current requirement rather than relying on a figure from an earlier scheme.
Two further requirements that come up. The discounted homes should be distributed through the building rather than clustered on the least attractive floors. And eligibility and allocation arrangements are usually secured in the agreement, including income caps and a local connection mechanism in some boroughs.
Tenancy length and management standards
Three year tenancies with tenant break clauses are the policy position, and they are offered rather than imposed. A tenant who wants a twelve month term can have one. What matters is that the longer term is available in practice and advertised.
Management standards are secured through the management plan, which typically covers:
- Repairs response times by priority
- A named on site or locally based management presence and its hours
- A complaints procedure with escalation
- Arrangements for the discounted market rent homes, including how vacancies are advertised
- A commitment to a recognised code of practice for the sector
Boroughs vary in how prescriptive they are. Offer the plan rather than waiting to be asked, because a plan drafted by the operator is better than one drafted by a planning officer.
Viability treatment of a build to rent scheme
The appraisal differs from a build to sell scheme in a way that matters to the negotiation. A for sale scheme is valued on net development value from unit sales. A build to rent scheme is valued as an investment, by capitalising the net operating income at a yield, after deducting operating costs, voids, management and a sinking fund.
That means three inputs carry disproportionate weight: the achievable market rent, the operating cost ratio and the exit yield. Expect the borough's reviewer to test all three, and expect the operating cost assumption to be the most contested, because it is the least transparent.
Where the scheme uses the fast track route, none of this is examined. That is the main commercial reason build to rent schemes aim for the threshold, and it is why the design has to comply with the other relevant policies, including amenity, play space and daylight. Capacity has to be established by design rather than asserted, as we set out in the design led approach to optimising site capacity, and the Play Space Assessment is a common weak point on dense schemes with a high proportion of smaller units.
Where the site sits in an opportunity area, area framework expectations and infrastructure contributions interact with the appraisal, which we cover in what an opportunity area allocation changes.
Conditions and obligations used in practice
The split between condition and obligation is reasonably settled.
| Mechanism | What it carries |
|---|---|
| Section 106 obligation | The 15 year covenant, clawback, unified ownership and management, discounted market rent levels and eligibility, tenancy terms, management plan |
| Planning condition | Approval of the management plan details, phasing, external works, energy and carbon measures, acoustic and overheating verification |
Energy and carbon obligations deserve attention on a long hold asset, because the operator carries the running costs for at least 15 years and has a direct interest in the fabric performance rather than in the minimum compliance position. The Energy Statement is worth writing with that in mind rather than as a planning formality.
One honest uncertainty. The London Plan 2021 remains the adopted strategic plan at the time of writing, and both Policy H11 and the associated guidance have been subject to review. Confirm the current criteria, the affordable rent levels and the covenant expectations with the borough and the Greater London Authority before fixing the scheme.
Enter your postcode on PlanScope to see which supporting documents a London residential scheme of this kind typically needs.
This is general guidance rather than legal advice. Check the position with your local planning authority or a qualified professional before relying on it. PlanScope provides AI-assisted draft reports for planning applications. Reports should be reviewed before submission. We do not guarantee planning approval.
Frequently asked questions
How many units does a build to rent scheme need?
At least 50, under the London Plan definition. Below that threshold a scheme intending to rent its homes is assessed as conventional housing, with affordable provision in the usual tenures rather than as discounted market rent. Settle the unit count early, because the appraisal and the affordable housing structure both depend on which route applies.
What happens if units are sold within the covenant period?
The section 106 agreement triggers a clawback payment, usually calculated as the affordable housing contribution that would have been required had the scheme come forward as conventional housing, less what has been provided. Negotiate whether a sale of the entire block to another long term holder, with the covenant passed on, is excluded from the trigger.
Is affordable housing in build to rent transferred to a housing association?
Normally not. Affordable provision is usually discounted market rent managed by the build to rent operator within the same block, which avoids two management regimes and the service charge problems that follow. The discount, eligibility and allocation arrangements are secured in the section 106 agreement.
How is a build to rent scheme valued for viability?
As an investment rather than on unit sales. The appraisal capitalises net operating income at a yield, after operating costs, voids, management and a sinking fund. The achievable rent, the operating cost ratio and the exit yield carry most of the weight, and the operating cost assumption is usually the most contested input.
Are three year tenancies compulsory for tenants?
No. The policy requires that tenancies of three years or more are made available to all tenants, with break clauses in the tenant's favour. A tenant who prefers a shorter term can take one. What matters for compliance is that the longer term is offered in practice and advertised, and the management plan should record how.
Sources and further reading
This article is general guidance about the planning system in England and, where stated, the rest of the UK. It is not legal or professional advice. Check your local planning authority’s validation requirements and take professional advice for your specific site.