Mar 23

Shared Ownership – The saviour for ‘generation rent’ or a ticking time bomb?

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Shared Ownership has been held by national politicians as a way for young adults to grasp the first rung of the property ladder without the requirement of providing what are, for many, unrealistic deposits.

 

On the face of it there appears to be substance to this argument. As a purchaser is only required to purchase a portion of the property (usually between 25% and 75%), the initial up front cost, and therefore the required mortgage deposit, is significantly reduced. This has brought property ownership within reach of many young adults.

However, prospective tenants are not being made fully aware of the potential implications of Shared Ownership Leases as the law does not provide the same protections to tenants of Shared Ownership Leases as it does to tenants of regular long-term leases.

Right to extend a Shared Ownership Lease

Under the Leasehold Reform, Housing and Urban Development Act 1993 (‘the Act’), standard Long-term leasehold tenants have a right to extend leasehold flats by 90 years (and a specific statutory formula codifying the cost to do so) if they have owned the property for two or more years. This provides a high level of protection to the tenant as it protects their interest in the leasehold property and provides them with certainty of the cost for an extension which can also be passed on to any potential purchaser.

Shared Ownership Leases are not included within the Act however, as Parliament omitted to include Shared Ownership Leases within the definition of Leases which benefit from the right to extend. As most Shared Ownership Leases are for a period of 125 years, it will not be long until the value of their ownership starts to decrease. The implications of this will be of interest to heirs and assigns of any Shared Ownership Tenant and will significantly affect legacy planning.

Restrictions on the Sale of a Shared Ownership Lease

When a Shared Ownership Tenant wishes to sell the lease to a new tenant, they are required to obtain a valuation of the property (at their own expense) and issue a first offer to the Housing Association prior to putting the property into the open market. The tenant can also be required to forward a percentage of the sale price to the Housing Association which, with property prices rising at their current rates, is a large cost which would otherwise not be necessary with a more conventional lease.

Premium on percentage owned via Shared Ownership

A key point was raised in the courts in Richardson v Midland Heart. The Applicant owned a Shared Ownership and fell behind in rent and service charge payments and sought permission to sell her interest in the lease. Although this was granted, the Housing Association was made aware of the arrears the Applicant had fallen into and successfully issued possession proceedings.

Once possession proceedings had been issued, the Applicant would have been forced to forfeit the Premium she paid (in this matter it was £29,500) had the Landlord not made an ex-gratia payment. This shows how unprotected the tenant’s position is. It is extremely unlikely that all existing Shared Ownership Tenants are aware of their position in this respect and it could potentially result in negligence claims against their conveyancer if they have not been properly advised.

Unforeseen issue with Restrictive Covenants

Cases have occurred where a building development has been granted planning permission and Shared Ownership properties have been constructed as part of the builder’s obligations to produce a percentage of ‘social housing’ – with restrictive covenants being inserted to the property stating the property cannot be used as anything else. This is not an issue when there is still an outstanding portion which has not been taken up by the tenant. However, once the property is owned 100% by the tenant, the property then becomes owner occupier and therefore is considered to be privately owned. If the tenant’s conveyancer during the take-up fails to raise this, the tenant may be in breach of the above Restrictive Covenant and therefore unknowingly open to legal action.

Once 100% of the lease is owned

Even once the Lease has safely taken up 100%, the tenant still does not have the same rights as a tenant to a regular Long Lease. This is because the Housing Association as Landlord still has a right of first refusal which the tenant is required to comply with prior to putting the property up for sale, which would again result in a valuation being required.

Conclusion

Shared Ownership Leases are a new and inventive way for people to attain their goal of purchasing their first properties. Potential Shared Ownership tenants must be advised about the potential implications of purchasing a Shard Ownership Lease. Along with the assortment of Help to Buy schemes available to first time buyers, this is another factor tenants and their legal representatives must take careful consideration over to ensure that the tenant is not left out of pocket.

Only time will tell whether tenants are suitably protected or whether parliament will need to legislate for additional protection on Shared Ownership Leases to equalise the rights they infer with traditional long leases. Furthermore the Richardson v Midland Heart case was only a court of first instance case and was not appealed. The legal principles arising from it have not been tested in the higher courts and may be overruled. This makes it difficult for a legal adviser to pre-empt any overruling of this case.

 

If you wish to discuss any of the above or are considering entering a Shared Ownership Scheme, please contact Richard Webster & Co. for an initial no-obligation consultation.

 


Contributor Details:

James Folly is a paralegal in the Property Department of Richard Webster & Co. which a specialist in residential property and conveyancing and is accredited by The Law Society’s Conveyancing Quality Scheme (CQS). Please do not hesitate to contact the firm on 023 8000 4321 for any queries that you may have in relation to any residential property matters.

This article does not present a detailed statement of the Law and does not constitute as legal advice. This is a summary only and legal advice should always be sought on an individual case basis.

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