There has been much focus of late on leasehold residential property; perceived unfairness in the market; and potentially wide-ranging reforms . In a climate where leasehold houses are attracting a lot of bad press, Banking & Finance Litigation specialists Sandip Singh and Rachel Elgar look at where all this leaves the shared ownership model.
What is Shared Ownership?
Shared ownership is a means of property-holding or tenure which is designed to support and encourage low income home ownership. The customer pays a premium (using a mortgage if required) to purchase a percentage-share in the ownership of a property. The customer’s share is a leasehold interest. The co-owner, typically a housing association, retains the remainder of the property and becomes the customer’s landlord under the shared ownership lease. As well as having paid the initial purchase premium for its share in the property, the customer pays rent to the housing association/landlord in respect of the latter’s retained share.
Over time, and in line with ‘staircasing’ provisions in the shared ownership lease, the customer has the ability to buy increased shares in the property. Sometimes staircasing is permitted until the housing association/landlord is bought-out completely and the customer owns 100%. In other instances, staircasing is restricted to less than 100%, so that the housing association/landlord always retains a share and the property remains part of its social/affordable housing stock.
Shared ownership has traditionally been a sector in which smaller lenders, and in particular building societies, have been seen as the most active participants. However, as reported by Which?, shared ownership lending is now by no means limited to building societies. Figures from the first quarter of 2019 show that some 27 lenders now offer mortgages for buyers using shared ownership schemes, including some ‘big name’ high street banks. This compares with only 17 lenders in 2009, of which 15 were building societies. Shared ownership mortgages are also getting cheaper and there are now over 200,000 shared ownership properties in the UK.
Ongoing perception problems
There are, however, ongoing problems for shared ownership scheme offerings to overcome. For example, a survey commissioned by Leeds Building Society and carried out by YouGov has found that there is still relatively low awareness of the schemes within the UK housing marketplace generally, with only 20% of people aged 18 to 24 being aware of and understanding shared ownership.
Another YouGov survey, this one commissioned by Aster Group, found that only 10% of those in shared ownership properties had managed to staircase and increase their equity stake. The survey found that 73% of shared owners had heard of and understood staircasing, but this exposes a worrying trend, given the intention that all shared owners should be aiming to increase their equity share. Additionally, only 52% of the survey’s respondents didn’t know they could move from their current home to another shared ownership property.
There is also the potential for confusion as to the impact of imminent leasehold market reform on shared ownership schemes. The House of Commons briefing paper 8047 of 30 May 2019 indicated that shared ownership schemes would be excluded from certain aspects of proposed reforms and that the Government would ensure that any changes would not interfere with shared ownership or certain other schemes designed to support affordable ownership. The Government’s recent announcement, however, provides limited detail and is silent on shared ownership, and so some clarity and confirmation would be welcome.
Finally, there are some perceived legal and practical risks which some lenders still associate with shared ownership.
For example, in the 2008 case of Richardson v Midland Heart Ltd , the High Court confirmed that a shared ownership lease is an assured tenancy to which the Housing Act 1988 (the Act) applies, such that, if and when a shared ownership lease is terminated by enforcement of a court order for possession made under that Act, there is no option for relief for the leaseholder or its lender, with the latter’s security being irrevocably lost.
Whilst that is a somewhat draconian ‘worst case’ scenario, it is still discouraging some players from entering the market. In addition, some lenders also still associate the following potential issues with shared ownership:
- the perception of a higher risk of default (albeit this is unsubstantiated);
- lack of knowledge and understanding of staircasing arrangements;
- perceived complexity in arranging a shared ownership purchase;
- perceived risks and complexity associated with dealing with a housing association landlord if/when the customer falls into rent arrears;
- additional risks and complexity if/when the customer commits any other lease breach (and one which the lender cannot necessarily remedy (unlawful subletting, for example));
- the fact that a closer loan:value weighting on shared ownership arrangements can make such mortgages more expensive and therefore potentially less commercially attractive; and
- a potentially greater risk of exposure where there are high concentrations of shared ownership mortgages on any one particular site/housing development.
Effective risk management
1. Possession for arrears or breach of condition
In reality, the majority of the apparent risks which are mentioned above are not necessarily specific to shared ownership arrangements, and indeed are common to the majority of leasehold lending scenarios.
There are therefore a variety of options open to lenders to protect shared ownership leasehold security.
For example, as an alternative to recovering possession for mortgage arrears, Walker Morris’ Banking & Finance Litigation team has acted for a number of retail lenders who have adopted a different enforcement policy. This involves seeking possession of leasehold properties on the basis of repeated breach of mortgage conditions where the customer fails to meet its leasehold obligations.
There is a high rate of outright possession orders in such cases, which provide a resolution either due to recovery of possession or act as significant leverage to ensure customer compliance. This approach can work as a ‘wake up call’ for customers, resulting in them properly addressing lease and mortgage compliance, and affordability issues generally. As well as resolving the security risk for lenders, this has enabled customers to continue living in their homes. This innovative approach can be deployed as an additional protective option in shared ownership scenarios.
2. Notice and Mortgage Protection Clauses
Shared ownership leases typically include a provision which obliges shared ownership landlords to give any mortgage lender a certain period of notice prior to possession proceedings being brought, so as to give the lender an opportunity in which to take appropriate action to protect their security. That provision alone can, in some cases, place the lender in a better position than in other residential lease arrangements, where the giving of any notice to the lender (or not!) is likely to be entirely at the landlord’s discretion.
Furthermore, since 2010, housing associations’ shared ownership leases must contain a mortgage protection clause, which protects a lender from significant loss should it have to take possession of the property on default.
3. Practical steps
There are also practical steps which building societies and other retail lenders can take to protect themselves when dealing with shared ownership lending. These include, staff training; the use of standard documentation and instructing specialist solicitors. These measures can overcome any perceived problems associated with a lack of knowledge or understanding of how shared ownership schemes and ancillary staircasing and other arrangements work.
From a commercial perspective, lenders may also decide not to lend on too many shared ownership properties within any one housing development, or adopt maximum permitted staircasing percentages. It is also open to lenders to negotiate with housing associations to refuse or remove certain onerous or unnecessary eligibility or sale conditions; and to offer interest rates on shared ownership mortgages which take into account the relevant loan:value weighting. Of the lenders who have operated within the shared ownership market to date, many have reported that there are also corporate social responsibility (and related reputational) benefits to consider.
A key area for improvement, for housing association/landlords and mortgage lenders alike, is, however, the presentation/branding of shared ownership schemes. Reviewing marketing materials, and simplifying and streamlining the documentation and processes involved, should go a long way towards encouraging profitable engagement in the market at all levels and by all stakeholders.
 See Walker Morris’ earlier briefing, plus the UK Government’s announcement, on 27 June 2019, of various bold measures that will be introduced, including the abolition of leasehold for new-build houses, and the reduction of ground rents for new leases to zero.
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