David Keighley looks at how shared ownership works in practice, including the key terms of shared ownership leases, extending leases and the second-hand market
Shared ownership (SO) was first introduced in the early 1980s. The aim is to assist individuals who are in housing need but have insufficient means to purchase a home outright.
In order to be eligible to purchase an SO property, applicants must meet income criteria. Outside London, this criterion is a household income of less than £80,000. For properties in London, the maximum household income is £90,000. In addition to meeting the income criteria, they must also be unable to purchase a suitable home on the open market.
When a property is sold for the first time, the minimum share of the equity which can be bought is 25%, and the maximum 75%. Applicants are primarily expected to be first-time buyers, though some applicants who own or have previously owned a home may be eligible.
Different considerations may apply in rural areas where SO properties are being built on a “rural exception site”. These are defined as small sites used for affordable housing in perpetuity where sites would not normally be used for housing. In such cases, the priority for allocations will be set out in the section 106 agreement relating to the development. In many cases, that will stipulate that priority be given to applicants with a connection to the local area.
An overview of the various schemes and eligibility criteria can be found on the GOV.UK website.
Funding and regulation
The money to build and renovate homes to be sold as SO is provided partly by public funding and partly by private capital. The public funding is administered by Homes England (HE). HE is responsible for producing the Capital Funding Guide. This sets out guidance as to how HE will operate its functions in relation to social housing.
The contents of the guide are, in the main, of use to providers of social housing rather than conveyancing practitioners. However, the guide is useful as a point of reference and the sections relevant to SO can be viewed on GOV.UK.
Sample (model) leases
The Capital Funding Guide includes sample SO leases, which are reviewed periodically. The most recent update was introduced in April 2015. It is not compulsory for a registered provider (RP) to use the sample leases, but it is a recommended format, and the sample leases do contain various clauses which are considered fundamental. These “fundamental clauses” must be included in an SO lease if the particular scheme is to qualify for public funding. The fundamental clauses cover alienation, pre-emption, mortgagee protection, staircasing and rent review.
The alienation clauses have changed significantly between various versions of the model lease. The provisions also differ between leases of houses and flats. On that basis, the issues to consider will vary according to the date of the lease and the nature of the property.
Provisions in the lease of a house or flat granted before 6 April 2010 but after 2005
This version of the model lease stipulates that assignment or other dealing with part is not permitted, and underletting of the whole is not permitted until after final staircasing.
It also stipulates that an assignment is authorised if, within eight weeks of the leaseholder notifying the RP that they wish to dispose of their interest in the property, it is made to a person nominated by the RP under one of the following:
- the provisions of a will or intestacy
- section 24 of the Matrimonial Causes Act 1973 (MCA 1973)
- section 2 of the Inheritance (Provision for Family & Dependants) Act 1975 (IPFDA 1975).
If an unauthorised assignment takes place, the RP can, within two months of receiving notice of that assignment, require the purchaser to undertake a final staircasing.
Provisions in the lease of a flat granted on or after 6 April 2010
These versions of the model lease stipulate that:
- assignment or other dealing with part is not permitted
- underletting of the whole is not permitted until after final staircasing
- no assignment of the whole is permitted prior to final staircasing without the prior written consent of the RP
- consent to assign is deemed withheld if the pre-emption provisions (see below) are not complied with.
Provisions in the lease of a house granted on or after 6 April 2010
These versions of the model lease stipulate that:
- assignment or other dealing with part is not permitted
- underletting of the whole is not permitted
- subject to the exceptions set out in the lease, no assignment of the whole is permitted without the prior written consent of the RP
- if an unauthorised assignment does take place, the RP can, within two months of receiving notice of that assignment, require the purchaser to undertake a final staircasing.
Provisions in leases granted before 2005
Alienation provisions in leases granted prior to 2005 may differ significantly from those used in leases granted after 2005. The precise provisions contained in these leases will need to be reviewed as part of the conveyancing process.
Leases granted after 2004/05 contain a right of pre-emption in favour of the RP which applies during the pre-emption period. In pre-2015 leases, the pre-emption period starts on the commencement date of the lease, and ends 21 years after final staircasing. The 2015 lease amends that by defining the pre-emption period as the period starting on the commencement date of the lease, and ending on the date of final staircasing.
Although the pre-2015 versions of the model lease will define the pre-emption period as expiring 21 years after final staircasing, the right ceases to apply on final staircasing. The deed of variation on the HE website should be used to update the lease when it is sold.
The impact of the pre-emption provisions is that if the leaseholder wishes to assign the whole of the premises before final staircasing, they are required to serve written notice on the RP offering a surrender of the lease.
Following receipt of the notice, the RP has a period of eight weeks to serve written notice on the leaseholder either:
- declining the offer of a surrender but nominating a purchaser to take an assignment of the whole, or
- stating that it will accept a surrender of the lease.
If the landlord does not serve a notice within the eight-week period specified, the leaseholder may assign or underlet the whole of the premises. This is subject to the proviso that the assignment or underletting must occur within 12 months of service of the leaseholder’s notice. If no exchange of contracts or completion has taken place within the 12-month period and the leaseholder still wishes to assign or underlet, they must serve a fresh notice on the RP offering a surrender of the lease, and the whole procedure must be repeated.
The right of pre-emption does not arise if a lease is assigned under:
- a will or intestacy
- section 24 or 24A of the MCA 1973 or section 2 of the IPFDA 1975
- section 17 of the Matrimonial and Family Proceedings Act 1984
- paragraph 1 of schedule 1 to the Children Act 1989, or
- part 2 or 3 of schedule 5, or paragraph 9 of schedule 7 to the Civil Partnership Act 2004.
A feature of the model lease is the mortgagee protection clause (MPC). The MPC is designed to indemnify a lender if the proceeds of sale following a default and repossession are insufficient to cover all of 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 costs of final staircasing and legal, valuation and estate agency fees (for leases dated on or after 6 April 2010, this is capped at 3% of the property’s market value)
- any amounts advanced by the mortgagee used to discharge any arrears of rent and/or service charge
- the price payable on completion of the final staircasing.
There is no obligation on a lender to undertake a final staircasing following repossession.
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.
Lenders also typically require the RP to enter into an undertaking. The purpose of the undertaking is to require the RP to notify the lender before taking steps to forfeit the lease.
Staircasing is the right to purchase additional shares in the property. The model lease provides that the leaseholder can staircase to 100% of the equity. There are, however, some leases which limit the maximum equity available by staircasing to less than 100%.
Solicitors acting for buyers should ensure their clients are advised that the price to be paid for further shares is based on the market value of the property at the time of staircasing. The assumptions used in assessing the market value are set out in the model lease. Improvements carried out by leaseholders are disregarded in assessing market value.
Stamp duty land tax may be payable if a staircasing transaction results in the leaseholder owning more than 80% of the equity.
In certain limited circumstances, an RP is permitted to offer the leaseholder a downward staircasing and to repurchase equity from the leaseholder. Downward staircasing is not a right, and any offer of downward staircasing is at the total discretion of the RP. The ability of an RP to offer downward staircasing does not arise if the leaseholder has already staircased to 100%, or the property has been repossessed by a mortgage lender. Any downward staircasing must be acceptable to a mortgagee.
A rent will always be payable on the equity retained by the RP. The rent review provisions were amended by the 2010 lease. It is therefore important to determine which provisions will apply.
The review provisions in the model lease used prior to April 2010 are linked to any increase in the Retail Price Index (RPI). Because of the way in which the review provisions in these leases are generally worded, it is possible for the rent to be reviewed downwards.
Post-April 2010 leases provide for the rent to be reviewed by reference to a formula linked to the RPI. In contrast to the pre-April 2010 lease, the review is stated to be upwards only.
Other characteristics of an SO lease
The other clauses commonly found in SO leases are broadly similar to those found in leases in general, but there are some differences.
Consent to assign
The versions of the lease in use prior to April 2010 did not require the RP to issue consent to assign. Regardless of this, evidence of the RP having consented to the sale should be required by the buyer’s solicitor. If a buyer’s solicitor does not ask for such confirmation, the alienation provisions may not have been satisfied, leaving the RP the option of requiring an “unauthorised” purchaser to carry out a final staircasing.
The version of the lease to be used on or after 6 April 2010 does contain a requirement for the RP to consent to a disposal.
Service charge provisions
Until October 2010, the service charge provisions were one of the fundamental clauses. As a result of this change, the RP is free to determine the scope of the service charge provisions. While service charges are no longer a fundamental clause, including them in a lease is a condition of public funding. This means that leases will continue to contain such clauses.
There are differences between the provisions contained in the lease of a flat and the lease of a house.
Care should be taken in considering the service charge provisions, particularly if the RP does not own the freehold of the block, but instead holds a headlease of one or more flats in a block. In those situations, the lease is likely to pass on to the leaseholder the obligations contained in the headlease, and the SO lease may not set out the basis on which service charge provisions are payable.
The 2010 and 2015 versions of the lease of a flat set out how and when the service charges are calculated, and the heads of expenditure comprised in the service charge. In general, the RP will seek to recover all its expenditure on repairs, maintenance and insurance in the usual way. The precise provisions will to some extent depend on the circumstances.
Service charges collected in any one year will generally consist of:
- expenditure estimated to be incurred by the RP in connection with the repair, management, maintenance and provision of services to the building, including the costs incurred by the RP in carrying out its covenants in the lease during the current service charge year
- a reserve towards expenditure, likely to be incurred only once during the term or at intervals of more than one year.
Payments made in respect of reserves against future expenditure are held by the RP in trust for the leaseholder until those reserves are applied against future expenditure. Interest earned on reserves is added to the reserve. At the end of the service charge year, the RP is required to produce accounts and to certify the extent by which the actual expenditure for the year has exceeded or fallen short of the estimate. The RP is then able to recover any shortfall from the leaseholder or make an allowance against future charges if appropriate.
The 2010 and 2015 versions of the lease of a house do not contain any specific provisions relating to a service charge in respect of the premises themselves. However, the RP will in all cases seek to recover via a service charge the costs incurred in insuring the property.
If the SO lease of a house includes a requirement to pay a service charge relating to the maintenance and/or repair of shared areas, this may be ‘converted’ to an estate rentcharge in the transfer of the freehold on final staircasing. If that mechanism is being used, care will need to be taken, given many mortgage lenders’ attitudes to such rentcharges.
Repairing obligations are not dissimilar to those found in leases generally. The current model lease of a flat provides the following.
- The leaseholder is responsible for repair and maintenance of the interior.
- The leaseholder is required to indemnify the RP against the cost of repairs to common parts where the damage or disrepair is caused or contributed to by the leaseholder or the leaseholder’s family.
- The RP is required to repair and maintain the main structure and the common parts, and to light and clean the common parts.
The current lease of a house provides that the leaseholder is responsible for repairs and maintenance to both the interior and exterior of the property.
The model lease provides for the RP to be responsible for insuring the building against all the usual risks, and use the insurance money for reinstating or repairing the building. The tenant is responsible for insuring the contents, if they wish to take out such cover.
Extension of an SO lease
The statutory right of extending a lease does not apply to SO leases. However, the term on some earlier leases has now reduced to a level where extending the lease may be necessary or advisable.
HE’s guidance for RPs is that, wherever possible, an extension to the lease should be granted. The view of HE is that in most instances, it is likely to be the shared owner who will be required pay the RP’s legal and other costs in respect of the lease extension.
If the RP is not the freeholder, then of course the RP cannot extend the SO lease term beyond the end date of its own lease without first extending its own lease. This may have cost implications for the SO owner. When considering the implications of a reducing lease term, leaseholders should be aware of the nature of the superior title held by the RP.