A lot has been written about the problems that the young, and the not-so-rich, have in trying to get onto the property ladder. They don’t earn enough, and haven’t saved enough, to afford to buy a freehold, or long-leasehold property in the normal way, as they can’t put down the appropriate deposit and afford to pay the monthly mortgage payments. So they’re stuck in the rental sector, with all the problems that this entails.
Some considerable time ago, possibly in the 1970s (I haven’t yet been able to find out when), somebody had a bright idea. What about combining the two – buy a portion of the property, and rent the rest, with a right to increase your share as your financial position improves? This is, in essence, shared ownership, and it was taken up in a big way by the social housing sector.
The way it works is that the landlord grant a lease to the tenant, usually for 99 years, on payment by the tenant of a premium and a monthly rent and service charge. The premium represents a proportion of the value of the property, say 50% of the value. The rent payable is reduced accordingly, so the rent currently payable would be only 50% of the full rent. The tenant usually has mortgaged the lease to a building society in order to raise the premium.
The tenant is entitled to make further payments and ultimately to “staircase” his (or her) share up to 100% when he becomes a full leasehold owner. Up to that point there are various restrictions on disposition etc, and he technically only has an assured tenancy with a contractual right to be granted a full 99 year lease as set out above.
The tenant occupies the property and would receive any rent due from a sub-tenant (although sub-letting is normally prohibited by the terms of the lease).
The on-going rent is payable to the landlord. If it is not paid then they can take possession proceedings and end the lease, which will mean that there will be no equity for the tenant and nothing for the mortgagees, who only have a mortgage over the tenant’s interest, not the freehold interest of the landlord. Because of this the lease contains a mortgagee protection clause requiring the mortgagees to receive 28 days’ notice of possession proceedings and guaranteeing them a share of the proceeds of sale. The social housing regulator the Homes & Communities Agency (HCA) and its predecessors have a prescribed form for all this.
It is quite different from the normal concept of joint ownership when a lease is owned say by a couple in equal shares.
So far so good. However, there are a number of serious problems, which look likely to be more important as time goes on and their full significance is revealed:
- It was determined in Richardson v Midland Heart (2008) that as the lease is an assured tenancy until it is fully staircased it can be terminated under mandatory Ground 8 of the Housing Act 1988 if the rent is two months in arrears. This isn’t very much.
- As this is an assured tenancy the court’s wide powers to postpone, suspend and otherwise control possession claims under the legislation relating to long leaseholds, or mortgages, do not apply. The court cannot prevent making an order, and can only delay a warrant for up to 6 weeks.
- If the lease is terminated the tenant gets nothing, even if he has paid a significant premium – eg 75% of the value. Some Landlords will agree to repay this on sale, after the expenses etc have been paid, but they don’t have to.
- Although the tenant may only have a 25% interest he still has to pay 100% of the service charge, all the utilities, and his mortgage payments.
- If the mortgagee pays up to avoid forfeiture the debt, including the legal costs of the Part 8 Notice and the possession proceedings, if started, is added to the mortgage, with consequential effects on future payments.
- And the tenant can’t move out to somewhere cheaper and sub-let as this is prohibited and can mean losing the lease entirely as it ceases to be even an assured tenancy and can be ended by a plain notice to quit.
In a previous life I worked for solicitors who acted for a number of social housing providers and saw all this at first hand. There were a number of scenarios that need to be appreciated, as they were all too common.
Most people who go into shared ownership are financially stretched, otherwise they would buy outright in the normal way. So even small alterations in their earnings can be enough to put them into arrears with either their rent or their mortgage. Or one of them can lose their job, or have a baby, or a couple separate. Or their benefits are cut, or suspended. Two month’s rent may be only £750 – not very much. But the Landlords are strapped for cash and have to keep up to date with their rent payments so the process starts. Normally the tenants will have a couple of chances as the mortgagees will pay up to protect themselves, but after that many mortgagees lose patience and take mortgage possession proceedings to recover their debt. And so the process begins again.
It is worse though for people who don’t have a mortgage. Often they will have bought their interest with life savings, or a redundancy payment. There is nobody to bail them out, and possession proceedings are in earnest. To make matters worse, they will be treated as voluntarily homeless and future benefit is restricted. They lose everything.
And matters were made worse by the fall in the value of properties, especially in the Midlands, which gave the mortgagees and the landlords little margin for manoeuvre. As well as the mortgagees who just couldn’t understand the concept of shared ownership and didn’t pay up in time when possession proceedings were started.
When you add in additional service charges for say replacing the roof on a block of flats, or renewing the windows, especially in situations when there is mixed ownership, with rented properties, shared ownership and long leasehold, it is bound to go wrong in the end.
And although many people go into shared ownership as a way to build up some equity, with the idea of staircasing up to 100% in the end very few actually do. The figures that I have seen are little more than 10% and even here they may well be distorted by the fact that if mortgagees repossess they staircase up to 100% in order to sell. Few tenants will make much if anything on a 25% interest, once the mortgage has been paid off, especially given the restrictions on sales, the requirement to sell through the landlord, the costs of sale, and the continued slump in values. Remember, social housing tends to be built in groups, and you only need a few anti-social tenants to seriously depress the value of the other properties.
There’s an interesting piece on this subject in the Nearly Legal blog at http://nearlylegal.co.uk/blog/2013/09/shelter-and-shared-ownership/
It is clear that something needs to be done. But I’m not sure exactly what. Many of these people are never going to afford to own property, even a share of it. Perhaps the sooner that this is accepted the sooner somebody can find a real solution. Shared ownership, certainly as it stands, but possibly as a concept, is not the answer for them.