A new era for shared ownership
The new model leases for shared ownership properties are much more modern and user-friendly than their precedessors, write Philippa Morris and Bill Chandler. However, social landlords may think they are bearing greater risks.
It is over 30 years since the then Housing Minister John Stanley introduced the first national shared ownership programme in 1979 and shared ownership continues to fulfil a vital role in the housing market.
The joint guidance issued by the Homes & Communities Agency (HCA), the Council of Mortgage Lenders (CML) and the National Housing Federation (NHF) in April 2010 estimated that 115,000 properties are the subject of shared ownership, with 18,000 properties being purchased on shared ownership terms under the New Build HomeBuy banner each year. The average household income for shared ownership is £27,000 per annum, which in most areas would not be sufficient to allow a traditional house purchase.
Shared ownership operates on the basis that the buyer purchases a share of the property, usually between 25% and 75%, and pays rent on the remaining share. Over time the buyer can purchase additional shares through the ‘staircasing’ procedure, possibly up to 100% of the property.
Model leases and fundamental clauses
For a number of years, model leases were produced by the Housing Corporation, which was subsumed into the new HCA on 1 December 2008. It has never been compulsory to use the model leases, although if the model forms are not adopted then the six ‘fundamental clauses’ which are designed to facilitate lending to the sector and to preserve the supply and characteristics of shared ownership, must still be utilised. These cover:
- alienation
- mortgagee protection
- staircasing
- rent review
- service charge
- right of pre-emption
Following consultation with Government (DCLG), the CML, the NHF and mortgage providers in late 2009, the HCA developed a new suite of six model leases, which can be found online as part of the HCA’s Capital Funding Guide:
- shared ownership house lease
- shared ownership flat lease
- Social HomeBuy house lease
- Social HomeBuy flat lease
- protected areas house lease
- protected areas flat lease
The six leases are complemented by key information guides for tenants summarising the main terms and which are also replicated in Appendix 3 to each of the new model leases; there is also a model variation to remove keyworker restrictions from existing leases.
The new key information appendix is a new ‘fundamental clause’, in addition to the six clauses listed above.
The new leases are to be used from 6 April 2010, unless a contract already in place requires the use of the previous form. This means that a single development could end up with a mix of old and new leases if some properties have been sold (or at least exchanged contracts) before 6 April 2010 but some are only sold after that date.
The release date coincided with changes to the archaic laws on perpetuities and accumulations which affected leases, although the changes run much deeper than that.
Mortgagee protection clause
The most significant changes are to the mortgagee protection clause. Mortgagees have always enjoyed greater protection in shared ownership scenarios than on conventional lettings, to encourage lending to the sector and ideally without buyers having to pay for mortgage indemnity insurance.
The mortgagee protection clause has been reworked and now works on the basis of the ‘Mortgagee Protection Claim’, which is the mortgagee’s loss (which is in itself very widely defined) capped at the aggregate of:
- loans secured by a first legal charge
- 18 months’ interest on such loans
- any rents and/or service charges which the mortgagee has paid to protect its security, and
- any fees and costs incurred by the mortgagee in enforcing its security (but capped at 3% of the market value of the leasehold interest)
The Mortgagee Protection Claim is deducted from the premium payable on final staircasing, thereby allowing the mortgagee to sell the full interest in the property. No valuation is required on the final staircasing by the mortgagee, who can rely on the agreed sale price as being the market value of the property provided the sale is an arm’s length sale at the best price reasonably obtainable at the time of sale.
The Mortgagee Protection Claim will only apply if, prior to making the mortgage advance, the landlord has approved the lender and the terms of the mortgage advance and the lender has exercised the right to final staircasing prior to or at the same time as selling under the power of sale. Buyers’ solicitors will therefore be in breach of the CML requirements if they do not obtain the approval. In addition, although not currently within the lease requirements, the lender requirements in the CML handbook now typically require the landlord to give an undertaking requiring the landlord to notify the lender before taking steps to forfeit the lease. The procedure applies where any new mortgage funding is obtained; further advances on existing approved loans are covered by the initial approval.
The HCA considers that the new clause gives greater certainty to all parties following a number of disputes over ‘repossession staircasing’. That may be true, but the resulting certainty is that the landlord is assuming the risk and effectively indemnifying the mortgagee from their own or (where applicable) grant resources.
Pre-emption right
The pre-emption clause applies for 21 years from final staircasing and requires the buyer to offer the property back to the landlord prior to any subsequent sale, thereby giving the landlord the opportunity to preserve its supply of affordable housing.
On houses the right is contained in the transfer to the buyer following final staircasing rather than in the shared ownership lease; indeed, it is not possible to include such a right in the house lease since the lease would then no longer satisfy the conditions in Schedule 4A of the Leasehold Reform Act 1967 which exclude qualifying shared ownership leases from the enfranchisement rules which would otherwise allow the buyer to purchase the freehold and effectively bypass the staircasing provisions.
But where flats are concerned there will be no transfer following final staircasing (although the more restrictive lease provisions will fall away) and so the right is contained in the lease. Previously the right only took effect on final staircasing, but this has now been amended so that the right of pre-emption applies throughout the term of the lease.
Alienation
The change to the pre-emption clause protects the landlord from assignments of flat leases to unauthorised assignees and thereby allows the removal of ‘back-to-back’ staircasing (the landlord’s right to require an ‘unauthorised’ assignee to conduct final staircasing following assignment) from the alienation clause in the flat lease.
The same amendment cannot be made to the house lease due to the statutory restrictions mentioned above which prohibit the inclusion of a pre-emption right in the house lease.
Rent review
The new rent review clause retains the link to RPI (with 0.5% uplift) but, following instances of rents falling during the recession, is now expressed to be upwards only. The clause has also been made clearer by including the calculation as a formula rather than explaining it verbally and by including at Appendix 2 a proposed notice from landlord to tenant setting out the calculation, and which includes a worked example.
The clause has also been extended to deal with any possible abolition or rebasing of the Retail Prices Index, and to include provisions to deal with any delay in agreeing the new rent, which includes an option for base rate interest to be payable by the tenant on any balancing payment due once the new rent is agreed.
Making good
The tenant is no longer given the ability to make good damage which it has caused to common parts. In practice, few landlords would wish to have the tenant interfering with common parts and most would instead prefer to rely on the tenant’s indemnity to pay the landlord’s costs of making good.
Frustration
The leases now clarify that if the lease is frustrated following damage, then the landlord must pay over the tenant’s share of the insurance proceeds and also the Mortgagee Protection Claim.
Other changes
The remaining changes are mostly in terms of format and language rather than content.
Headings and sub-headings are now used and all definitions are now grouped together in a schedule (Schedule 6 in the house lease and Schedule 9 in the flat lease) rather than the previous scatter-gun approach. The Land Registry restriction has also been updated to reflect the current standard form wording.
The HCA accepts that there remains scope to improve the service charge provisions, which have been ‘translated’ only with no intention of making any substantive change, which suggests that the service charge clauses may be first in line for consideration when the leases are next reviewed.
Conclusion
The new leases are generally to be welcomed. Since April we now have a more comprehensive suite of documents which are far more modern and user-friendly in their format, language and content than the leases they replace.
Social landlords may feel that the new leases impose greater risks on them, particularly through the new mortgagee protection clause. This will increase the importance of the initial tenant selection process and mortgage approval process to minimise that risk.
Final word
As well as the new model leases, April 2010 also saw the publication by HCA, CML and NHF of a new edition of their Shared ownership: Joint guidance for England, together with the HCA’s Procedures for varying shared ownership leases – background information which replaces TSA circular 03/08 and confirms that consent to vary the fundamental clauses will only be granted to correct errors or else only in ‘exceptional circumstances’.
Philippa Morris is an Associate and Bill Chandler is a Legal Director at leading national law firm Hill Dickinson LLP. They can be contacted on 0151 600 8000 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..
