Discounted Market Sales Policy Statement

Published July 14, 2023 An accessible strategy document from southtyneside.gov.uk

Introduction

This policy statement provides guidance on Discounted Market Sales in South Tyneside. It provides additional guidance to the Affordable Housing Policy set out in the South Tyneside Local Plan.

What is a Discounted Market Sales Home?

To help local residents in affordable housing need achieve their home ownership goals the Council operates a Discounted Market Sales (DMS) scheme to manage the sale of low-cost home ownership properties secured through Section 106 planning obligations.

DMS is a form of Affordable Housing that is recognised in national planning policy. It falls under the ‘affordable housing’ definition in the National Planning Policy Framework. Homes are sold at a discount of at least 20% below local market value. Eligibility is determined with regard to local incomes and local house prices. Provisions should be in place to ensure housing remains at a discount for future eligible households.

DMS means that the properties are sold to eligible households for a percentage of their open market value. The discount available varies between areas of the Borough.

DMS homes are of the same type and quality, and meet the same standards, as other properties in the same development. DMS homes will look exactly the same as homes sold on the open market.

DMS is a form of affordable housing and offers an alternative to other low-cost home ownership initiatives. Unlike some other forms of low-cost home ownership (e.g. shared ownership) with DMS properties the purchaser owns their home outright – no other party retains a share of the equity, but the initial price and each subsequent resale is subject to the same percentage discount. The owner is responsible for all repair and maintenance costs.

Residents who currently own the property they live in are not excluded from the DMS scheme, however, a DMS property must be their main residence.

Why Discounted Market Sales homes?

South Tyneside Council is committed to enhancing the quality of life in the Borough. Housing is a key enabler in delivering improved wellbeing and driving economic growth. Mixed-tenure development has the potential to help the Council maximise the delivery of these benefits for all sections of society. Whilst South Tyneside is generally considered an affordable Borough, new housing is not always within the reach of those on low incomes or without capital for deposits.

Mixed tenure housing development is residential development which combines a range of tenure options, which can include owner-occupier housing, affordable home ownership (including DMS homes) and rental properties (social, affordable, intermediate, and private).

The focus of mixed-tenure housing development is fostering greater social, economic and community mix to support thriving and sustainable communities.

The Council supports the delivery of DMS homes as part of a range of low-cost home ownership products that can help residents get onto the housing ladder.

The Council recognise that providing a wider range of products within the local housing market will encourage mixed communities and reduce the number of households needing to move out of the Borough to find a home. The provision of DMS homes will therefore support a more balanced housing market that offers greater choice and complement several existing South Tyneside Council Strategies, including the Local Plan.

Section 106 Agreements

The provision of DMS homes and the restrictions on their sales are secured through Section 106 planning obligations (Agreement under the powers of section 106 of the Town & Country Planning Act 1990). A section 106 Agreement will be required for each development to secure the necessary restrictions on the use and sale of the homes, and a legal restriction on the titles of the homes to ensure that these restrictions are applied to the homes at each future sale.

A Section 106 Agreement is registered as a local land charge. This means that when a proposed purchaser undertakes a local search on the property the purchaser will become aware of the Agreement. They are entitled to request a copy of the Agreement from South Tyneside Council to make themselves aware of its terms.

This policy statement establishes the detailed terms and conditions of the Section 106 Agreements, which are binding upon the owner of any DMS home, and upon any other party with an interest in the land i.e. a mortgagee.

The developer will be required to enter into a Section 106 Agreement, setting out the numbers of units to be involved in the DMS home scheme, the affordable housing discount, and the qualifying criteria.

The Council must be notified of any sale of a DMS home. If the Council are not notified of a sale and the appropriate Officer became aware, attempts would be taken to secure that the Council’s interests and the Agreement’s terms were protected and preserved, however the restriction at the Land Registry ultimately ensures the property cannot be sold without the planning obligations being complied with. If anyone buys a DMS home (or subsequently uses/permits occupation of it in a way that is) in breach of the section 106 planning obligation the Council can enforce the terms of the agreement by way of an injunction.

Percentage discount, sales, and valuations

This policy seeks to ensure DMS homes remain within reach of people on local incomes but without making schemes economically unviable. This is achieved through a percentage discount.

South Tyneside Council negotiates with developers during the planning process to provide several new homes at discount price.

DMS homes will be typically sold at a discount of 30% from the open market value. However, in higher value areas of the Borough (within the Ward boundaries of Cleadon and East Boldon, plus Whitburn and Marsden) DMS homes must be discounted by a minimum of 40% against the market value.

On their first sale, DMS homes will have a restriction registered on the title at HM Land Registry to ensure this discount (as a percentage of current market value) and certain other restrictions are passed on at each subsequent title transfer.

New build homes – establishing open market value

The Open Market Value of any DMS home being sold by a developer shall (provided it is being sold under normal market conditions) be determined by the developer. On the initial sale, the mortgage lender’s valuation confirms the valuation is accurate.

Resales – establishing open market value

Upon each subsequent re-sale the owner will need to provide the Council with a valuation from a valuer qualified by the Royal Institution of Chartered Surveyors (RICS).

Process

Upon the prospective disposal of a DMS home the owner must:

  1. Inform the Council’s Housing Strategy Team in writing of their intention to sell by emailing Housing.StrategyTeam@southtyneside.gov.uk
  2. (For resales) submit a RICS valuation to the Council’s Housing Strategy Team by emailing it to Housing.StrategyTeam@southtyneside.gov.uk

Further to an agreement on the valuation, the owner may then market the property for sale, ensuring their estate agent cites the terms and conditions of the Section 106 agreement in the marketing. An estate agent must:

Prompt application is encouraged to avoid delays and unnecessary complications.

Before exchanging contracts, the prospective purchaser(s) conveyancer must agree to act for the Council in connection with the DMS obligations in accordance with documentation produced by the Council for this purpose, and (amongst other things) verify as part of this that the prospective purchaser(s) is/are eligible purchasers – see Section 5 below.

Once the sale contract has been prepared and a mortgage offer received, the purchaser’s conveyancer will request approval to exchange contracts by submitting a solicitors’ undertaking to the Council (in accordance with the Council’s instructions documentation). The undertaking confirms that the sale meets South Tyneside Council’s requirements as to purchaser eligibility and value have been complied with. Prospective purchasers/sale prices that do not meet these requirements cannot proceed and the conveyancer will not submit their undertaking.

Eligibility Criteria

A purchaser (or, if a joint purchase, all the purchasers) should be at least 18 years old. This must be evidenced by providing photographic identification - a passport or driving licence.

The three main eligibility criteria relate to:

  1. Affordable housing need.
  2. Local connection.
  3. Only residence of the purchaser.

Affordable Housing Need

DMS homes are for those who are in housing need and unable to afford to buy a home on the open market. We work out whether an applicant qualifies by looking at their household’s circumstances – income and potential mortgage.

A purchaser (or, if a joint purchase, all the purchasers) should have a combined annual household income not exceeding £80,000.

Income can be evidenced by providing P60s.

Purchasers must use a mortgage or home purchase plan (if required to comply with Islamic law) to fund at least 50% of the discounted purchase price.

If the applicants have total available funds (income/assets/savings) that would allow them to purchase the DMS home at the open market value, then the household will not be certified as eligible to purchase the DMS property i.e. an applicant should need a mortgage/home purchase plan to part fund the purchase.

A mortgage in principle offer will be evidence of this. The mortgage in principle offer should be on headed paper from a mortgage advisor or lender regulated by the Financial Conduct Authority (FCA).

Local Connection

The local connection criteria in respect of DMS homes are detailed within the relevant Section 106 Agreement for the property:

A person who:

  1. needs to be housed locally by virtue of their local connections, being a person within at least one of the following categories:
    • A person who has had their main place of residence locally for at least 6 months of the preceding 12 months.
    • A person who has had their main place of residence locally for at least 3 of the preceding 5 years.
    • A person who is employed locally or is to be employed locally or has retired from employment locally and wishes to remain in the local area.
    • A person whose work provides local services and who needs to live locally.
    • A person who is a former member of the armed forces who is returning to live in the local area upon discharge.
    • A person who has long standing connections with the local area, such as the child of a local resident or elderly person, who needs to move back to the local area to care for or be cared for by relatives or other carers.

Evidence of a local connection includes:

  • Rent books.
  • Landlord references.
  • Utility bill.
  • Council tax bill.
  • Bank statement.
  • Driving Licence.

Only residence of the purchaser

Except in the circumstances set out in the Appendix (‘lettings’), purchasers (or, if a joint purchase, all the purchasers) must use the home as their only residence.

If prospective purchasers currently own the property they live in, they are not excluded from the DMS scheme. However, a DMS property must following completion become their only residence. Given the mortgage and income eligibility restrictions, it is expected that the current home will have to be sold to enable the purchase of the DMS property.

DMS home applicants are not required to be first-time buyers.

Purchasers may already have an amount of equity in an existing property which they wish to sell. This could include people needing a larger home as their family has increased but are unable to afford market prices or, conversely, older people looking to downsize into more manageable accommodation.

Some owner occupiers may also be ‘equity rich but cash poor’ so rely on equity from the sale of an existing residential property, more than current income to secure a low-cost home – this is particularly prevalent in the case of retired people.

In accordance with the Section 106 Agreement, purchasing a DMS property solely for the purpose of renting it to another household will not be allowed.

Summary of eligibility criteria

  • A purchaser (or, if a joint purchase, all the purchasers) should be at least 18 years old.
  • A purchaser (or, if a joint purchase, all the purchasers) should have a combined annual household income not exceeding £80,000.
  • Purchasers must use a mortgage or home purchase plan (if required to comply with Islamic law) to fund at least 50% of the discounted purchase price.
  • Purchasers must have a local connection to South Tyneside (or in the case of a joint purchase at least one of the joint purchasers meets the Local Connection Criteria).
  • The discounted market sale property must be the purchaser’s sole residential property.

Please note that for resales, any eligibility/local connection restrictions that apply will be based on our policies at the time of sale, and not at the time of the initial purchase.

Applications

All applications for DMS homes must be made through the developer or owner. The Council will only accept applications referred by a developer or owner.

Referrals are at the discretion of the developer or owner. The developer is responsible (not South Tyneside Council) for ensuring that only fully completed and evidenced applications are submitted to the Council.

If there is more than one applicant for a property that meets all the eligibility criteria, applicants with the earliest application date/time will usually be prioritised.

Monitoring and Review

Application referrals and future sales of DMS homes will be monitored by the Housing Strategy team. This team will also review the eligibility criteria at least annually to ensure it is reflective of current circumstances/need.

The Planning team will ensure that any further government guidance or ministerial statements and best practice is reflected in this policy statement and Local Plan.

The Council will charge a planning obligations monitoring fee of £500 per unit on granting planning permission of each unit to support monitoring the sales of the Discounted Market Sales homes.

Appendix

Process for buying a DMS home on first sale by builder/developer

In summary, the following steps should be taken to purchase a new build Discounted Market Sales (DMS) home from a house builder:

  1. Visit the house builder selling DMS homes to see what is available to purchase.
  2. If there is a DMS home that you would like to buy, the house builder will initially check your eligibility to buy against the local and national criteria.
  3. If you have not already done so, it is strongly recommended that you seek financial advice about mortgage availability from a mortgage advisor. You should also have a solicitor/conveyancer to advise you on the purchase. The builder may suggest some names for you to try but you are free to choose your own advisors.
  4. If it looks like you could be eligible, the builder will assist you to complete a DMS application to South Tyneside Council. The house builder is responsible (not South Tyneside Council) for ensuring that only fully completed and evidenced applications are submitted to the Council.
  5. The builder will need information and evidence from you to:
    1. Check eligibility.
    2. Check household income.
    3. Determine whether you are likely to be able to obtain a mortgage, through for example a “decision in principle” from a mortgage bank or building society.
  6. Once the application information has been completed you will then:
    1. Sign the legal declarations on the application form.
    2. Reserve the home from the builder and pay a reservation fee to the builder (maximum of £500). This is refundable if you are found not to be eligible.

    It is very important that all buyers make this reservation commitment with their application. Applications cannot be considered by South Tyneside Council if you have not reserved your DMS home, or if any required information is missing.

  7. The completed application is then sent by the builder to South Tyneside Council for our consideration.
  8. South Tyneside Council will check your application. If you meet the eligibility requirements, we will issue a DMS Authority to Proceed and Eligibility Certificate to you, the builder and your conveyancer. Your conveyancer will also receive instructions from the Council. You can usually expect South Tyneside Council to issue the certificate within five working days of application receipt (if applicants are deemed to meet the eligibility criteria). It is very important that your application is completed in full before being submitted to South Tyneside Council because we will not be able to consider partial applications, and this will cause delay.
  9. You can now apply for your mortgage. It is very important that you do not submit your full mortgage application until you have the Authority to Proceed. Securing a ‘decision in principle’ can be done before this but submitting a full mortgage application will incur cost and you must not do this until you know you are approved to buy.
  10. Your conveyancer will work on your purchase and follow South Tyneside Council’s instructions. You will have to make a further legal declaration that you are eligible and understand the terms of the DMS scheme and that you can only resell the home in the future to another eligible DMS home buyer.
  11. Once your mortgage offer is made and the contract agreed with the builder, your conveyancer will request approval to exchange contracts from South Tyneside Council.
  12. South Tyneside Council will check the conveyancer’s request and, if it is a compliant sale, will issue an Authority to Exchange and Compliance Certificate to your conveyancer. It is very important that you keep the Compliance Certificate. This shows you are eligible and entitled to be a DMS home owner.
  13. With the Authority to Exchange, you should now pay your deposit and exchange contracts to buy. At this point you are legally committed to buy.

    Please take great care when it comes to paying your deposit to your conveyancer.

    Fraudsters can impersonate conveyancers and request payment. Follow your conveyancer’s instructions very carefully when you reach this stage.

  14. At the point of exchange your builder will have confirmed how long it will take to complete your home so that you can move in. This is usually done by agreeing a short period of notice that they will give you. In any event, the time between exchange and legal completion (when you move in) should be no more than six months.
  15. Once the builder has given notice of legal completion, your conveyancer will get your mortgage money from your lender to pay the builder. On the date of legal completion, you will get the keys and can move into your DMS home

Process for selling a DMS home / buying on resale

The process for selling a DMS home/buying after the first sale is broadly similar to the process for selling properties on the open market. However, there are some differences:

    If you are selling

  1. You must first notify South Tyneside Council that you wish to sell your DMS home by emailing Housing.StrategyTeam@southtyneside.gov.uk
  2. South Tyneside Council will issue you with instructions for marketing and confirming the eligibility requirements. These must be used by your estate agent to ensure they can market to eligible purchasers.
  3. You should then instruct your estate agent. Owing to the additional legal requirements involved in selling a DMS home, it is not advisable to attempt a private sale.
  4. Your estate agent will check potential purchasers and will support the prospective purchaser in completion of an application form (like the one you/the developer completed when you bought the DMS home):
    • The purchaser must meet all the eligibility criteria; be able to make an offer (subject to their eligibility); and be, in the estate agent’s professional judgement and advice to you, the most proceedable purchaser.
    • You must also submit at this point to South Tyneside Council a valuation demonstrating the sale is at a discount to the prevailing Market Value. The valuation must be from a valuer who is qualified by the Royal Institution of Chartered Surveyors (RICS) by emailing Housing.StrategyTeam@southtyneside.gov.uk. You must pay for this. The RICS surveyor will value the home’s 100% market value before the DMS home discount percentage is applied.
  5. The price of your DMS home cannot be negotiated upwards from the discounted value confirmed by your valuation. You can reduce the price, for example if you wish to secure a quick sale, but the price may not be increased even if there are several potential buyers.
  6. To ensure that other people can benefit from the discounted home, the same percentage reduction must be applied when you sell your DMS home as was applied when you made your purchase. For example, if you purchased your home at a 30% discount compared to the open market price, you must also sell it for a 30% discount compared to its open market value at the time of sale.

    7. If you are buying

  7. The steps in Paragraphs 2 to 15 above under the heading ‘Process for buying a DMS home on first sale by builder/developer’ apply except that, as there is no developer, you are generally responsible for completing and submitting the application to the Council to purchase the DMS home. The Council can provide general assistance but cannot act on your behalf. The estate agent is likely to provide assistance, but you should recognise that they will generally be acting for the seller, not you, unless they are giving you specific mortgage brokering/similar services. Once you have a conveyancer appointed, they can act on your behalf.
  8. South Tyneside Council will consider your application and the seller’s valuation. If eligible, South Tyneside Council will approve your intended purchase and issue instructions to your conveyancer, in the same way as described at paragraph 8 above under the heading ‘Process for buying a DMS home on first sale by builder/developer’. Your conveyancer will then follow the Council’s instructions and the sale will proceed in the same way.

What if I can’t sell it?

If you are unable to sell your DMS home to an eligible buyer, after six months, you should notify South Tyneside Council’s Housing Strategy team by emailing Housing.StrategyTeam@southtyneside.gov.uk which then has the option of:

  1. Requiring you to continue to market the property for a further period up to a maximum of six months.
  2. Buy the property itself at the discounted market value.
  3. Releasing the DMS home restrictions.

If South Tyneside Council does not wish to buy your home and any additional marketing period has come to an end without an eligible buyer having been found, you will then be able to sell it on the open market at the open market price; the discounted portion of the sales receipts would then be returned to South Tyneside Council.

In this situation, a further stamp duty return to HMRC may be required dating back to your original purchase. However, any additional stamp duty payable would be deducted from the amount that you are asked to return to South Tyneside Council, meaning you would not have to pay back more than the discounted value of the home. Should this situation arise, please seek advice from your conveyancer.

What if I can’t sell my Discounted Market Sales home quickly and this is likely to cause me hardship?

If having to market the Discounted Market Sales home for 6 months is likely to cause you hardship, such as bankruptcy, you can ask the Council to switch the property to an open market home. In such a case, the discounted portion of the sales receipts would need to be returned to the Council, net of any stamp duty.

Lettings

DMS homes should not be used as an investment opportunity. DMS homeowners may let out their DMS homes for a total of up to 2 years. This is to offer owners the ability to respond to changes in their circumstances, such as unexpected life events. The period of renting does not have to be continuous and can be to different tenants.

Owners may let their home at the market rate. However, before letting the DMS home, owners should first notify South Tyneside Council by emailing Housing.StrategyTeam@southtyneside.gov.uk.

The Council will maintain a record of letting periods so that individuals can be informed if they have reached the end of their 2-year allowance. This 2-year period is allowed for each span of ownership; if the DMS home is resold, or inherited, the 2-year period resets.

Owners are allowed to let out their DMS homes for longer than 2 years in exceptional circumstances. Our consent will not be unreasonably withheld in certain circumstances e.g. where the owner:

  • Is required by their employment to live elsewhere.
  • Is an active member of the Armed Services and is deployed elsewhere.
  • Is at risk of harm and so has to live elsewhere.
  • Has to let the DMS home due to the breakdown of a relationship.
  • Has to live elsewhere due to redundancy.
  • Has to live elsewhere to offer care and assistance to another person.

Even if South Tyneside Council agrees to an owner’s request for letting to take place, the owner will still be subject to the terms of any mortgage. South Tyneside Council strongly recommends that owners check with their mortgage lender to ensure that they allow the home to be let.

Please note that South Tyneside Council’s permission to let has no bearing on the restrictions that may be in place as a result of a mortgage agreement.

DMS homeowners can have one or more lodgers in their home without restriction if the home remains the owner’s only residence. If, however, the owner moves out during the letting period, then they would need to inform South Tyneside Council and the duration of letting would count towards the 2-year period as described above. Again, all such matters would also be subject to the rules of any mortgage agreement.

Changes in circumstances

The DMS home should be the owner’s only residence, and restrictions on lettings are in place as described above. Should either of these stipulations not be adhered to, South Tyneside Council can take steps to remedy the situation just as it would in any other breach of a section 106 agreement. This may, for example, involve issuing a warning and, if this is not heeded, an injunction.

Mortgage lenders typically place limits on lettings, which may help ensure that owners do not abuse the terms of the scheme.

There is no requirement on owners to continue adhering to the eligibility criteria under which they purchased the DMS home, and correspondingly there is no need for South Tyneside Council to try to monitor this. For example, if an owner’s household income increases above the cap after the purchase, there is no requirement for the Council to take any action, for you to inform South Tyneside Council or to sell the DMS home.

Inheritance

DMS homeowners can leave their DMS home to any recipient in their Will, subject to any outstanding mortgage or home purchase plan payments. The recipient does not have to meet any DMS home eligibility criteria in the section 106 agreement. The recipient could sell the home according to the resales process to an eligible purchaser. Alternatively, they could keep the DMS home, but would then have to abide by the terms of owning a DMS home.

This means it would need to be their only residence and they would not be able to let out the home for more than 2 years in total without permission from South Tyneside Council. If they do not abide by these conditions, they will be in breach of the section 106 and South Tyneside Council can act accordingly.

Mortgagee Exclusion

A regulated financial institution which has provided the finance necessary to support the purchase of a DMS home (the Mortgagee) is not bound by the requirement to sell the home under the DMS criteria to a person meeting the DMS home eligibility criteria in the event that they are enforcing their security against the property.

Once the Mortgagee has recovered the funds due to them under the security documentation, any remaining proceeds from the sale should be used to reimburse South Tyneside Council for the loss of the DMS home from our area. This reimbursement should be up to (but should not exceed) the value of the discount, as a percentage of the sale price and net of any additional Stamp Duty liability that may be incurred from the sale by the seller. If the remaining proceeds from the sale of the property are not sufficient to cover the total percentage value of the discount, then all of the remaining proceeds should be transferred to South Tyneside Council.

Once the Mortgagee has recovered their investment and South Tyneside Council has received the full amount owed to them as a percentage of the sale value of the home, any remaining profits from the sale should be returned to the homeowner from whom the Mortgagee took possession.