The Homes & Communities Agency has selected house builders PJ Livesey Group and Story Homes to develop nearly 40 acres at Lancaster Moor Hospital in a deal worth £67.8m.
The grade 2-listed building on Quernmore Road in Lancaster will be restored and up to 440 homes built on the landmark site visible from the M6.
There is already outline planning consent in place for the new housing and conversion of the former hospital annexe and adjoining Campbell House, into apartments and houses.
The conversion work will be carried out by Manchester-based restoration specialist PJ Livesey, which has a track record of transforming listed buildings for residential use.
PJ Livesey will be responsible for obtaining listed building consent for the development.
Carlisle-based Story Homes will lead the development of the masterplan for the wider site, including parking, green space and mature woodland covered by a Tree Preservation Order.
The HCA has worked with Lancaster City Council and English Heritage to prepare the site for the development of the new homes. The HCA is investing £3m through its Accelerated Land Disposal Programme to support a programme of enabling and infrastructure works that will include new access arrangements; upgrades to the main access road; demolition of outbuildings and asbestos removal; and further survey works linked to the planning requirements.
Designed by architect Arnold Kershaw, Lancaster Moor was built in 1882 as an annexe to accommodate mental health patients.
It was used by the NHS before closing in 1999. Work is expected to start on site this month.
Deborah Mclaughlin, North West executive director of the HCA, said: "Unlocking publicly-owned sites to speed up the delivery of housing developments is a key priority for the HCA. Selecting preferred development partners for this major public sector site marks a significant milestone in the ongoing regeneration of Lancaster. Having lain empty for a number of years, it's great that we can now begin to make this an attractive place to live.
"I know that the developers are keen to deliver a scheme that meets the needs and aspirations of local people, creating much needed affordable homes that will have a positive impact on the local community."
Andrew Dobson, Lancaster City Council's head of regeneration and policy, said: "The city council has worked hard to find the flexibility to help the HCA restructure this development opportunity and we are delighted that development partners have been found to move the scheme forward.
"The hospital annex is an important Lancaster landmark alongside the M6 corridor and its renovation, together with a high quality new build housing scheme alongside, will make a valuable contribution to implementing the council's Local Plan."
Georgina Livesey, director of PJ Livesey, said: "As a company we are used to working with listed buildings and can see the potential of Lancaster Moor to become a thriving community in a truly beautiful setting.
"The building is a local landmark of great presence and scale and has some wonderful features which will be incorporated during the conversion."
Steve Errington, managing director of Story Homes, said: "This is an exciting project for us. It will see an area which is steeped in history brought back into use to create a quality, high specification development for which we are renowned. As well as regenerating the area and bringing affordable/quality housing, the development will boost the local economy not only in terms of jobs but also the procurement of materials and services from local companies."