Shared Ownership Guidance

What is a Shared Ownership Lease

A) This is a Scheme which allows prospective house / flat owners, who are unable to buy a Property outright to acquire a share in the Property. The remaining share being retained by an Organisation which is “ A Registered Provider” (usually Housing Associations or Local Authorities)..

This can result in any of the following scenarios.

  • Owner owns 50%- Registered Provider 50%
  • Owner owns 25%- Registered Provider 75%

B) The Registered Provider will become your immediate Landlord. The terms of the Lease (explained in our accompanying Report) will regulate the legal relationship between the Registered Provider and yourself)  

C)    The Registered Provider will charge an annual Rent representing a percentage of the Open Market Rental Value, the percentage being the same as the stake which it retains in the Property. So on the above scenarios.

  • Owner owns 50% share will be charged a Rent based on 50% of the current Open Market Rent that could be charged on a Property of that type (50% stake retained by the Registered Provider).
  • Owner owns 25% share, will be charged a Rent based on 70% of the current Open Market Rent that could be charged on a Property of that type (75% stake retained by the Registered Provider.

D) Most Schemes allow the Owner to acquire further shares in a Property held by the Registered Provider. This is termed “Stair-casing” and is referred to further in the Guidance Note. Upon an additional share being obtained, the Rent payable will reduce to reflect the reduced share held by the Registered Provider. So building on the above scenarios

E) The Lease is a right to enjoy exclusive use and possession of the Property for a term of years. Our accompanying Report will set out the length of the Lease. Where the Property is a flat, you will continue to own a Lease, even after acquiring a 100% share in the Property, but with the provisions regulating the shared ownership, no longer applying. Where the Property is a house, upon acquiring a 100% share in the Property, the Lease will come to an end, and the freehold to the Property will be transferred to you, but subject to restrictions should you want to sell- explained below

F) The rest of this Guidance Note explains  important Clauses in the Lease

2. The Rent

A)    The Annual Rent paid to the Registered Provider is based on a percentage of the Open Market Rental Value. The Open Market Rental Value is a best rent that a Property of this type could be subject, where a Landlord retained a 100% stake in the Property. The percentage of the Open Market Rental Value is the same percentage in the ownership of the Property retained by the Registered Provider 

B)    The Rent charged is the subject of an annual review. It is usually set on the basis of Retail Prices Index (RPI) increase over the previous 12 months, either on its own, or RPI increase plus an additional percentage. Since March 2010, this additional percentage is capped at 0.5% . Our Report will advise on this.  This can be shown by the following example taken from the Homes and Communities Agency Web Site 

  • Owner has 45% stake in Property- Landlord 55%
  • The Open Market Rental Value is £100 per month so Landlord can charge £55.00 per month (55% of £100.00)
  • The Annual Review date is September in each year. Say RPI in September 2010 was 208 when the above rent was set.  September 2011 RPI is 218.4- so you would multiply the existing Open Market Rental Value by a figure representing 218.4 divided by 208. This results in the Open Market Rental Value increasing to £105.52 per month and the Owner paying 55% of £105.52= £58.04 

C)    Any Rent Review will set the Rent at the higher of either  

  • The existing rent for the previous 12 months or 
  • The Rent following the rent review.  

This means that unless that you acquire a further share in the Property by “Stair-casing” as explained at 1c on page 1, you will never pay less than the Rent referred to in the Lease. This is called “an Upward Only Rent Review”

3. Stair-casing

A) Stair-casing means the ability to buy at the then market price further shares in the Property retained by the Registered Provider. The Lease will normally allow such purchase to be in tranches (set percentages)

B) On occasions a Lease may prevent a final staircase (acquiring the entire 100% stake). This is because the Property comes within “a Protected Area” where a Property is always to be used by persons with Social

Housing Needs ( people seeking to get on to the housing ladder, but unable to afford to buy a Property outright). In such circumstances, an Owner would have to sell their stake in the Property (see Point 4 ) Our Report will advise you if this is the case.

C) Where a further share is acquired in the Property, this will be documented by what is termed “A Memorandum of Staircasing” which is attached to the Lease. This sets out the additional percentage share acquired and the sum paid.

D)    Where the Share Ownership  Lease allows, buying out the remaining share in the Property held by the Registered Proprietor can result where the Property is a house, for the freehold held by the Registered Provider being transferred to the Owner, subject to terms referred to at Point 5. Where the Property is a Flat, the Lease will remain, but with terms referring to the shared ownership being varied.

E)    The Lease will set out the machinery for determining the price to pay for a further share in the Property. We will advise on this in our Report, but generally we seek a system whereby

  • There are Arbitration Provisions where no agreement to a price
  • There is discounted the value of any authorised improvements made by the Owner, or a failure by the Owner to keep the Property in good state of repair

F)   Dependent upon the price paid for the Property and whether the original Lease contains an election that Stamp Duty Land Tax (SDLT) is to be assessed on the market value of the property and initial rental at the outset, will determine whether SDLT becomes payable. Again we will advise on this

G)    A Notice specifying the new Rent must be sent by the Registered Provider to the Owner

4. Selling Your Share in The Property

A)    Where you want to sell your share in the Property, you will only be able to do so with the consent of the Registered Provider. The Lease refers to this as “an Alienation Clause”. The only exception to the need for Landlord’s Consent is where the share in the Property is transferred pursuant to.

  • The death of the Owner –passing under a Will or Intestacy Laws 
  • Divorce Proceedings 

B)    You cannot sell only part of the Property, nor can you grant a Lease to a third party of either part or all of the Property. 

C)    Where the Lease is transferred without the Landlord’s Consent, the Registered Provider may insist that that the Purchaser acquires at the then market value the remaining share held by the Registered Provider within     

D)    To obtain Landlord’s Consent to sell your share in the Property, you will need to serve a written notice upon the Registered Provider. The latter then has a period of time (usually eight (8) weeks) {called a Nomination Period} to find a Nominee to buy your share in the Property at the then market value. Here market value will take account of the improvements made by you. Once a market value has been fixed, and a Nominee found, the nominee has twelve (12) weeks to exchange contracts to buy your share. Where either a Nominee is not found or cannot proceed,then the Landlord may either permit the Lease to be transferred to a third party who satisfies their requirements or take back (accept a surrender) the Property by paying a sum equivalent to the then market value of the Property 

5. Selling the Property Once Owned Outright

E)    Where you have bought out the remaining share owned by the Registered Provider, there will remain restrictions on you being able to sell. These restrictions are called “Pre-Emption Rights” which are owned by the Registered Provider and last for Twenty One (21) years {“the Pre-Emption Period”} from the final staircase. These Rights provide that where the Owner wishes to sell the Property within the Pre-emption Period, he/ she must FIRST offer to sell the Property back to the Registered Proprietor at the then open market value. pursuant to  

  • The death of the Owner –passing under a Will or Intestacy Laws 
  • Divorce Proceedings 

A)     Where the Property is a House, it will be contained in the Land Registry Transfer transferring the Freehold to the Owner. Where the Property is a Flat, it will be in the Lease. This is to ensure that the Property first remains available for persons who are in need of social housing. Only where the Registered Provider does not wish to exercise such rights can the Property be sold on the open market

B)    The above Pre-Emption Rights do not apply where the Property is transferred  pursuant to  

  • The death of the Owner –passing under a Will or Intestacy Laws 
  • Divorce Proceedings 

6. Mortgagee Protection Clauses

A)    To be able to buy a share in the Property, you are likely to need Mortgage Finance. In order that this special type of lease is capable of being mortgaged, special clauses called Mortgagee Protection Clauses have evolved to cover the risk that you may default under the Mortgage and the Lender is faced with having to re-possess and sell the Property 

B)    For the Clauses to apply the Registered Provider must have approved your Mortgage both in respect of the amount borrowed and the other terms  BEFORE, the Mortgage commences. We will not be able to proceed until we have the Registered Provider’s approval to your Mortgage. The reasoning will be apparent from reading paragraphs C and D below 

C)    To give the Mortgage Lender  maximum opportunity to sell the Property, your approved  Mortgage Lender will acquire the remaining share retained by the Registered Provider and then sell a 100% share in the Property at the best price reasonably obtainable. The sum paid to the Registered Provider for its share by the Mortgage Lender is calculated on the basis that the aggregate of  “Mortgagee Protection Claim” does not exceed the eventual sale price of the Property 

D)    The “Mortgagee Protection Claim” is the aggregate of five sums namely

  • Sum A- The amount (“the Principal Borrowing”) lent by the Lender with the approval of the Registered Providerwhich is secured against the Property as a First Charge
  • Sum B- A maximum of 18 months unpaid interest charged against the Principal Borrowing at the time of default under the Mortgage (used to be 12 months)
  • Sum C- Costs associated with the acquiring of the remaining share and selling a 100% stake in the Property. Note that Legal Fees and Estate Agents fees are now capped at 3% of the Property Value for Leases dated after 6th April 2010
  • Sum D- Amounts advanced in protecting the Lender’s position such as paying arrears in rent, service charge and Insurance
  • Sum E- the amount payable to acquire the remaining share retained by the Register Provider  

Where this aggregate would exceed the selling price secured by the   Lender, thereby creating a shortfall, Sum E (the sum paid to staircase) will be reduced  to ensure that there is no shortfall suffered by the Lender. Let us show this further by way of the following examples

Examples

  1. Mr Thrifty buys a 50% stake in a Property for £75,000.00, part funded by a Mortgage of £65,000 from The Shark Bank in 2009. This Mortgage was approved by “The We’ll Help You Housing Association”
  2. Mr Thrifty defaults under the Mortgage in 2011, still owing £65,000 as the Principal Sum (Sum A) and  £10,000 in unpaid interest (Sum B). The Shark Bank incur costs of £15,000 (Sum C) in acquiring the remaining 50% stake selling the Property and a further £5,000 in unpaid rent, service charge and insurance (Sum D)
  3. The We’ll Help You Housing Association obtain a Valuation that their 50% stake is worth £85,000 (Sum E). The Shark Bank can sell the 100% share in the Property for £170,000
  4. The Mortgage Protection Claim total is £180,000- against a Property which can only be sold at £170,000.
  5. To meet the shortfall Sum E is reduced by £10,000 so simultaneously with the sale by The Shark Bank, the Bank pays £75,000 rather than £85,000 to the We’ll Help You Housing Association. The ‘We’ll Help You Housing Association’ can seek to recover the £10,000 shortfall from Mr Thrifty
  6. The consequences for Mr Thrifty could be even worse if Property Values fall. Taking the above example, but say the Property is only worth £120,000 making a 50% share £60,000, The Mortgage Protection Claim total is £155,000- against a Property which can only be sold at £120,000. The Shark Bank will pay £25,000 for the 50% share owned by the Housing Association and the latter will seek to recover £35,000 from Mr Thrifty

E) The Mortgage Protection Clause will only operate whilst the Registered Proprietor retains a share in the Property.

F)     In addition further protection is given to a Mortgage Lender whereby if the Property is destroyed or damaged beyond repair, making continued use of the Property impossible, and ending the Lease, the monies due to the Property Owner under a Buildings Insurance Policy is first applied to paying all monies owed to the Mortgage Lender

7. Service Charge

A) In addition to the Rent referred to at Point 2 of this Guidance Note, the Owner of the Property will be required to pay a contribution towards the costs incurred by the Landlord in providing services. Where the Property is a Flat, this would cover costs of upkeep of the main structural parts of the building, such as roof, foundations, external walls, load bearing walls and services, and our accompanying Guidance Notes on Leasehold Flats explains this in further detail. Where the Property is a house, the services will be limited to those of a communal nature on the Estate. In both a house and a flat it will include the costs of Buildings Insurance

B) Service Charge will be paid monthly in advance on account to meet on an ongoing basis the costs incurred by the Landlord

Published
Categorized as Blog