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Golden Brick Development Contracts

What is a Golden Brick Arrangement?

A golden brick arrangement is a method of structuring the sale of development land to mitigate the VAT exposure for a seller and a buyer. It is widely used where land is being sold by a developer to a housing association, who would otherwise be unable to recover VAT on costs. Where this scheme is used, the sale is zero rated for VAT purposes meaning a housing association will not have to pay VAT on the purchase, whilst a developer can continue to recover VAT on development costs.

How does it work in practice?

A housing association acquires the land plus partially constructed dwellings in order to avail of the favourable VAT treatment, completing a transfer of the land once construction has reached ‘golden brick level’.  This term is not defined in legislation, but HMRC guidance outlines that it occurs once a property is “clearly under construction”.  In practice this means the construction of a building’s foundations plus one level of bricks above ground level –  the ‘golden brick’.

Risks for Housing Associations

Golden brick arrangements can be beneficial for both developers and housing associations from a VAT and cashflow perspective, however they are not without risk. It is of vital importance that the agreement sets out clearly the parties’ obligations and liabilities.

From the point of view of the housing association, buying partially completed dwellings means that they will require the developer to commit to detailed construction provisions, including obligations to provide collateral warranties or structural guarantees.

To guard against adverse consequences on developer insolvency, stage payments should be based on valuations and the housing association should benefit from contractual step in rights, to enable them to nominate an alternative contractor to complete the development in the event of a breach of the agreement.

Risks for Developers

From the developer’s perspective the agreement should where possible include a buy- back mechanism in the event of a material breach of contract or insolvency of the housing association.

Careful consideration needs to be given in the drafting to the payment structure and the specific sums, including ancillary sums for complying with planning etc. which will become payable at each stage.

Darwin Gray’s development experts have a wealth of experience in acting for both housing associations and developers on golden brick schemes including those involving mixed use developments.

If you need any advice on golden brick arrangements, please contact a member of our commercial property law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.

To speak to one of our experts today, please contact us on 02920 829 100 or by using our Contact Us form for a free initial chat to see how we can help.

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