Discounted market sale and restrictions in perpetuity

Discounted market sale housing is sold at a discount of at least 20 per cent below local market value, with eligibility set by reference to local incomes and local house prices, and with provisions in place to keep the home at a discount for future eligible households. That last clause is what makes it an affordable tenure rather than a one-off subsidy to the first buyer, and it is where most of the drafting effort goes.

The tenure is attractive to developers because it needs no registered provider, no rent stream and no transfer. It is treated with caution by officers for the same reason: nobody is left holding long-term stewardship.

What the tenure provides

A purchaser buys the freehold or a long lease outright at a discounted price, owns the whole dwelling, and takes on a restriction that limits who they can sell it to and at what price. There is no rent, no staircasing and no shared equity calculation.

Against shared ownership, it is simpler for the buyer and costs less to administer. Against First Homes, the minimum discount is shallower, at 20 per cent rather than 30 per cent, and there is no national price cap, which makes it workable in high value areas where a First Home cannot reach the capped price. The trade-off is that a 20 per cent discount in an expensive district may still be beyond local incomes, which is the main policy objection to it.

The affordable housing definition in national policy requires both the discount and the perpetuity provision, so a scheme offering a discount on first sale only is not affordable housing and does not count towards a policy requirement.

Setting the discount and the valuation basis

Fix the discount as a percentage of open market value, assessed unit by unit by a registered valuer on the dwelling as built and marketed. Expressing it as a fixed price looks tidy at the section 106 stage and ages badly, because the relationship to the market drifts within two years of the first sale.

Specify who values, on what basis and how a dispute is resolved. A clause naming a registered valuer, requiring the valuation to assume the restriction is in place for eligibility but disregarded for the open market value figure, and providing for an independent third valuer on disagreement, prevents the argument that otherwise surfaces at the first resale.

The Affordable Housing Statement should set out the discount, the units, the valuation mechanism and the eligibility criteria rather than leaving the authority to infer them from a price schedule.

Keeping the discount on resale

The mechanism is an obligation in the section 106 agreement that binds the land, supported by a restriction on the title register so the Land Registry will not register a transfer that breaches it. The seller markets at the discounted price, the buyer's eligibility is checked, and the authority or its nominated monitor certifies compliance.

Build in a cascade, because at some point a unit will not sell within a reasonable period. A workable cascade widens the eligibility criteria in stages: local connection first, then income, then first-time buyer status, and only at the end permits a sale at full market value with the discount paid to the authority for reinvestment in affordable housing. Set the marketing periods and name who decides each step.

And without a cascade the unit sits unsold, the developer's cash is tied up, and the authority faces a request to vary the agreement under section 106A. That variation costs both sides more than drafting the cascade would have.

Mortgageability and lender criteria

This is where discounted market sale schemes fail in practice. A lender needs to know that it can realise its security, which means the agreement must contain a mortgagee exclusion clause: a defined process on default under which the lender can sell free of the restriction after offering the unit to the authority or a nominated provider for a stated period.

Lenders also want the discount to be calculable, the eligibility criteria to be objective rather than discretionary, and the restriction not to prevent a repossession sale. A clause requiring the authority's consent to a sale, without a deadline for giving or refusing it, will be rejected by most lending panels.

Get the clauses in front of a lender before the agreement is engrossed. Several authorities publish model clauses that lenders already accept, and using those is far quicker than negotiating bespoke wording that then turns out to be unmortgageable. A unit nobody can buy with a mortgage is not affordable housing in any practical sense.

Eligibility and local connection

Eligibility is determined by reference to local incomes and local house prices, which in practice means an income cap, often a savings or asset cap, and usually a requirement that the purchaser cannot otherwise afford to buy on the open market in the area. Many authorities add a local connection tier: residence, employment or close family in the parish or the district, applied for an initial marketing period.

Keep the test objective and keep the evidence requirements proportionate. Three months of payslips, a mortgage offer and a council tax record are checkable. A requirement to demonstrate housing need through an interview is not, and it will slow every sale.

Where the authority maintains a register of eligible households, use it. Where it does not, the developer will be running the eligibility check through its own solicitor, and that process needs to be named in the agreement so a conveyancer knows what to produce.

Enforcing the restriction over time

Enforcement rests on three things: the title restriction, which stops a non-compliant transfer being registered, the covenant in the agreement, which gives the authority a remedy against the owner, and the monitoring arrangement, which is the part that decays.

Authorities with no dedicated monitoring team can take months to certify a resale, and the owner's complaint lands with the developer who sold them the house years earlier. Fund the monitoring properly through a monitoring fee at the outset, and specify a response period with a default position if the authority does not reply.

An illustrative example. A 60-unit scheme in a high value district delivers nine discounted market sale houses at a 25 per cent discount, with percentage-based resale pricing, a four-stage cascade, a mortgagee exclusion clause taken from the authority's model, an income cap and a 12-week local connection period. Seven years later the first resale completes in eight weeks because the mechanism names a valuer, a monitor and a response period. The drafting did that, not the discount.

Where the tenure is resisted by officers

Expect three objections, and prepare for all of them. The first is stewardship: no registered provider means no organisation with a long-term interest in the homes. The second is affordability depth, since a 20 per cent discount in an expensive district may not reach the households in greatest need, where social rent would. The third is the policy squeeze, because where national policy expects a quarter of the affordable provision to be First Homes, discounted market sale has to fit in the remainder alongside whatever the local plan prioritises.

If you are proposing discounted market sale as a substitute for rented units on viability grounds, the appraisal will be examined hard, and rightly so, because the revenue difference is material. The discipline set out in independent review of a viability appraisal applies to the tenure assumptions, and a Viability Assessment that presents the substitution without showing the effect on the residual value will be sent back. The presentation conventions in viability appraisal submission format are worth following to the letter here.

This is general guidance, not legal advice. Affordable housing definitions and national policy on tenure change, and section 106 drafting is a matter for a planning solicitor, so check the current framework and your authority's adopted policy before relying on anything here.

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