Merton Council will give up the right to millions of pounds in profits from homes sold by Clarion Housing.
The authority hopes this will fill a funding gap in the borough’s £1.3 billion regeneration plans for council houses managed by Clarion Housing Association.
The project will be carried out by Clarion over the next 15 years across the Eastfields, Ravensbury and High Path Estates.
But in April 2020, the housing association admitted to the council that work at Eastfields was behind schedule and there was a funding gap in the whole programme.
In just one year, the finances swung from being in the black to being in the red. The details of how much debt has mounted up have not been revealed by the council.
The shortfall has been blamed on increased construction costs and a worse economic outlook for developers.
Merton Council will surrender the right to receive five per cent of the value of properties sold by Clarion as part of the estate regeneration plans.
This means the authority could lose out on millions of pounds – depending on house prices and the final project costs.
But the council claims this will mean the new homes can be built without having to use council tax cash.
The council’s cabinet gave the green light to the change on Tuesday night.
The decision came after “disturbing” living conditions were exposed on the Eastfields Estate in Mitcham one of the three undergoing regeneration.
More than 2,500 homes will be built and almost 1,200 existing homes on the estates will be replaced.
Councillor Martin Whelton, the cabinet member for housing, said: “Rebuilding High Path, Eastfields and Ravensbury was first given the go-ahead back in 2014
“We recognised that the estates needed rebuilding as much of the housing had come to the end of its life, but also the amount of overcrowding.
“The regeneration is the largest regeneration scheme in the 56 years of Merton Council.”
Cllr Whelton added that if the project swings back into surplus, the council could have the chance to revive the right to five per cent of the money made from sales.
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The first stage of work at Ravensbury has been completed and the first stage at High Path is near completion.
Cllr Whelton added: “All of us are aware of disturbing insight that many residents in Clarion have been living in and the failure of Clarion to carry out basic repairs on the estate.
“We have been very clear that this is unacceptable and that the regeneration cannot be used as an excuse not to undertake basic work which has always been an obligation of Clarion.”
Clare Miller, group chief executive of Clarion Housing Group said: “We are very pleased that the cabinet has voted in favour of the regeneration plan. Clarion wants to work across the whole community to deliver our vision and this is a welcome and important decision.
“Work is already underway on the first two estates and the regeneration programme we deliver in partnership with Merton across Eastfields, High Path and Ravensbury will be one of the largest in the country.”