Shared interest

Shared ownership leases were first introduced in 1980. To qualify for shared ownership, the buyer(s) must have a combined household income of less than the current limits and be unable to purchase without assistance. 

A shared ownership buyer buys a share of a property on a leasehold basis and pays rent to the registered provider (RP) on the share remaining in the ownership of the RP. Further shares can be bought by staircasing. Following staircasing, the rent payable to the RP is reduced to reflect the revised percentage owned and will reduce to nil if 100% ownership is achieved. With some limited exceptions, all publicly funded shared ownership leases must allow staircasing to 100%.

Homes England (HE) is responsible for providing grants and public funding to an RP. As indicated below, the date on which a grant was approved may impact on the version of the shared ownership lease used on the grant of that lease. 

Recent reform

In June 2021, a revised version of the model lease was introduced, making significant changes to previous versions. Use of the fundamental clauses within the 2021 version is compulsory for homes delivered through the HE grant programme 2021 to 2026 and which received grant confirmation on or after 1 April 2021. 

The changes do not apply retrospectively to existing shared ownership leases nor to new leases completed after 1 April 2021 which were funded by grants confirmed before 1 April 2021. 

Capital Funding Guide

HE is responsible for producing the Capital Funding Guide which sets out guidance as to how HE will operate its functions in relation to social housing. The guide is useful as a point of reference and the sections relevant to shared ownership can be viewed on the GOV.UK website.

Model leases

Within the Capital Funding Guide are sample shared ownership leases known as the “model leases”, which are reviewed periodically. It is not compulsory for an RP to use a model lease, but most RPs will do so. Different schemes have been used over the years and practitioners dealing with resales as opposed to new-build sales are likely to encounter leases which differ from the current model lease.

Fundamental clauses

The model leases incorporate what are known as fundamental clauses. As these clauses must be included in a shared ownership lease if public funding is used, the majority of shared ownership leases will incorporate them. Leases of property built without recourse to public funding by, for example, a developer which grants the shared ownership lease itself (not via an RP), will also need to incorporate the fundamental clauses in order to meet lenders’ requirements.  

All leases

The fundamental clauses in a lease will differ according to the date on which HE agreed to grant funding for the specific property. Although the exact terms of the clauses will differ in leases granted after 2004/05, the fundamental clauses will always cover:

• alienation
• a right of pre-emption
• mortgagee protection
• staircasing, and
• rent review.

2021 leases

Leases of property built using funding granted after 1 April 2021 will in addition include fundamental clauses relating to:

• annual 1% staircasing 
• initial repair period
• mortgagee forfeiture notification proviso, and 
• the creation of an estate rent charge on final staircasing of a house (as opposed to a flat).

Changes to fundamental clauses

Alienation/pre-emption in 2021 model lease

These leases stipulate that:

1. Assignment of or other dealing with part is not permitted.
2. Underletting of the whole is not permitted without prior consent of the RP. The clause specifically provides that it is reasonable for consent to be withheld if underletting does not comply with guidance or grant funding conditions issued by HE.
3. No assignment of the whole is permitted prior to final staircasing without the prior written consent of the RP who has a period of four weeks to either nominate a buyer or take a surrender of the lease.
4. Consent to assign is deemed withheld if the pre-emption provisions are not complied with.

Staircasing

There are two changes to the staircasing provisions:

1. The minimum share capable of being purchased is reduced from 10% to 5%.
2. In addition, owners may exercise the right to staircase by 1% each year.

Lease term

Leases are now required to be granted for a minimum term of no less than 989 years. Guidance to RPs is that where a standardised commencement date is required for multiple leases, the commencement date in the leases should ensure that the first lease is granted with at least a 990-year term from the date of the lease and that no lease is granted with an unexpired term of less than 989 years. 

Where sales are expected to span longer periods and a standardised commencement date is required, the first lease should be granted for a term of more than 990 years to facilitate the intended sales period.

Initial share

When the lease is granted by the RP to the first owner, the minimum share of the equity which must be purchased has been reduced to 10%. The maximum share available on the initial grant of the lease remains at 75%.

Stamp duty land tax (SDLT) market value election

A market value election (MVE) is made in the SDLT1 and cannot be revoked once made. If the SDLT1 does not incorporate a market value election, it is possible to make one within 12 months of the original return. This is done by amending the return.

The making of an MVE must also be recorded within the lease. The practical aspects of this differ as between leases granted using the 2021 lease and those granted using earlier versions. 

In the model leases prior to the 2021 version, the only options were to include the clause contained in the model lease, thus indicating that an MVE had been made, or to delete the clause from the draft lease if an MVE was not being made. For leases granted before the 2021 lease, if an MVE is not made, best practice would be to replace the deleted clause with a declaration to the effect that no market value election had been made. The SDLT certificate contained in the model lease is not a fundamental clause. As a result, there is no restriction within the Capital Funding Guide preventing an RP from agreeing to incorporate an alternative clause in the lease. The consent of HE will not be required.

The process of recording whether an MVE had been made differs in leases granted using the 2021 lease. The 2021 lease includes two alternative clauses, one for use if an MVE is made and the other if an MVE is not made.

Initial repair period

The provisions relating to the “initial repair period” apply only to leases granted using the 2021 lease and do not apply retrospectively to leases granted using earlier versions. The provisions are the same in leases of houses and flats.

The initial repair period is the earlier of 10 years from the date of the lease or the date of final staircasing. There are separate provisions relating to external / structural repairs and general repairs / maintenance items.

External and structural repairs

The RP covenants to provide or procure, at no cost to the leaseholder, “external and structural repairs” (the meanings of which are defined in the lease). The leaseholder covenants to assist the RP in making a claim under any warranty or insurance and to report to the RP any required external or structural repairs of which they become aware. 

The provisions specifically state that no reserve fund contributions may be used towards the cost of external and structural repairs. This does not prevent the RP from collecting a contribution towards a reserve fund during the initial repair period, if allowed under the terms of this lease, provided it is not used or intended to be used towards external and structural repairs.

These provisions do not remove the obligation for the leaseholder to pay sums due to the RP under the terms of the lease during the initial repair period but do limit what items can be included in the calculation of the sums payable.

General repairs and maintenance

Carrying out general repairs and maintenance remains the responsibility of the leaseholder. However, during the initial repair period, the leaseholder may apply to the RP for a contribution towards the cost of “qualifying general repairs and maintenance” (as defined in the lease).

The maximum contribution available from the RP is £500 per year; contributions not claimed in any one year may be rolled over to the next year. “Year” is defined as a period of 12 consecutive months commencing on the date of the lease or an anniversary of the same.  

The leaseholder cannot claim any contribution towards the cost of work covered by guarantee or warranty, normal or annual cyclical work such as gas appliance servicing, decorating, improvements or work arising from a breach of the terms of the lease. 

Annual 1% staircasing

The 2021 lease introduced the right to acquire 1% of the equity each year. This is in addition to the general right to staircase. The provision is not retrospective so will only apply to leases granted using the 2021 version. 

The option to buy the 1% equity is only available in the 1% staircasing period. This is 15 years from the later of the date of the lease or the date on which the lease is assigned to a new leaseholder. 

The price payable on a 1% staircasing is set using a formula based on the HPI Index and not on the market value of the property. The RP is required to issue an annual notice specifying the price payable. The RP is required to pay its own costs in respect of 1% staircasing so may not pass those on to the leaseholder. The leaseholder is liable for the costs incurred by them.

The purchase of a 1% share is documented using the standard Memorandum of Staircasing. 

Mortgagee protection clause

A particular feature of the model lease is the mortgagee protection clause (MPC). The MPC is designed to indemnify a lender in the event that the proceeds of sale following a default and repossession are insufficient to cover the following:

• the capital outstanding on the mortgage, excluding any part of the initial advance which was in excess of the original purchase price paid by the leaseholder, and any further advances not used to buy additional equity by way of staircasing
• not more than either 18 or 12 months’ (depending on the date of the lease) unpaid interest due on the capital
• the reasonable costs of recovering or attempting to recover money owing under the mortgage including the costs of final staircasing and legal, valuation and estate agency fees (for leases dated after 6 April 2010 these are capped at 3% of the market value of the property)
• any amounts advanced by the lender used to discharge any arrears of rent and/or service charge, and
• the price payable on completion of the final staircasing.

The MPC will only apply if prior to the mortgage advance being made the RP has approved both the lender and the terms of the mortgage advance and the lender has exercised the right to final staircasing prior to or simultaneously with selling under the power of sale. It is therefore essential that buyers’ solicitors ensure that mortgage approval is obtained. Failure to do so will be a breach of the UK Finance Mortgage Lenders’ Handbook requirements.

The MPC does not apply if, prior to a default under the mortgage, the leaseholder has accomplished final staircasing. Lenders require the lease to incorporate an MPC. Lenders also typically require the RP to enter into an undertaking the purpose of which is to require the RP to notify the lender before taking steps to forfeit the lease. A model form of undertaking is set out in annex C to a guidance note published by the Homes and Communities Agency (now HE) in conjunction with UK Finance. (Note that this guidance note is expected to be replaced with a revised version during 2022.)

Notwithstanding the form in this guidance, some lenders will, within their mortgage instructions, specify a different form of undertaking. 

Notification

The 2021 lease introduced a new fundamental clause providing that:

“a) the RP is required to give notice to any mortgagee of whom the RP has received notice before commencing any proceedings for forfeiture or proceedings for possession of the Premises, and

b) if within a period of 28 days (or within such other period specified in the landlord’s notice as the notice period, if longer) the mortgagee of whom the RP has received notice indicates in writing to the RP that it wishes to remedy such breach, and/or is going to take such action as may be necessary to resolve the problem complained of by the RP, the RP shall allow 28 days (or such longer time as may be reasonable in view of the nature and extent of the breach) to remedy such breach and take the action necessary to resolve such problem.”

The Capital Funding Guide states that in view of these clauses a lender may not require a separate undertaking. Notwithstanding this statement, lenders instructions will prevail and will need to be observed.

Estate rentcharges

If following final staircasing of a house, an estate rentcharge is being created, the 2021 lease contains a clause which must be included in the transfer of the freeholder. This clause states: “The parties hereby agree that to the extent that clause […] creates an estate rentcharge under section 2(4)(b) of the Rentcharges Act 1977 the remedies contained in section 121 of the Law of Property Act 1925 are not available to the Transferor.”

In view of lenders requirements, where an estate rentcharge is being created, that statement ought to be included in all transfers on final staircasing irrespective of the version of the lease applicable to the property.