In our guide to shared ownership property we look at various aspects; from some frequently used phrases to more less understood technical explanations and definitions.
Be sure to check out our other similar articles de-mystifying property conveyancing.
What is ‘Shared Equity’ ?
Shared ownership / shared equity is a way of getting a foot on the property ladder for people who are not in a position financially to buy a property outright. The properties are owned by housing associations, which are funded by the Homes & Communities Agency (formally the Housing Corporation) and subject to satisfying the association’s criteria they will sell you a percentage interest in the property for a proportionate part of the total value.
How does shared ownership work?
The housing association will own the freehold interest in the property. If you successfully apply, they will value the property you are looking to purchase and will grant you a lease, for a term of 99 years. Unlike an ordinary lease, a shared ownership lease will specify that you own a given percentage, which will be the share you agreed to purchase. The purchase price you pay will be a percentage of the market value which corresponds with the share you will receive. For example if the market value is £150,000.00 and you agree to buy 25%, the price you pay will be £37,500.00. You will then pay rent, known as “specified rent”, on the remaining 75% share.
The lease will contain a provision which will allow you to buy additional shares throughout the term as and when you are able, until eventually you own 100%. This is known as “staircasing”.
What is ‘Specified Rent’ ?
This is the rent you pay to the housing association for the share of the property you do not own. The association will calculate what is a fair market rent, i.e. the amount that could be expected to be achieved if the property were to be let on the open market, for the 100% share and this will be stated in the lease as the “gross rent”. Of this, you will pay a proportionate based on the share you don’t already own, so if the gross rent was £6,000 per annum and you owned 25%, you would pay £4,500 per annum in specified rent. It will be collected monthly, along with any maintenance charges you have to pay.
The rent will be reviewed annually and may increase in line with the Retail Price Index or some other index.
In common with the majority of leasehold properties, you will be obliged to pay a share of the landlord’s expenditure incurred in satisfying its obligations under the lease, such as cleaning and lighting communal areas, insurance, external decoration, structural repairs etc along with the other leaseholders. In the case of a house (as opposed to a flat) there will usually only be the buildings insurance premium to pay.
What is Staircasing?
This term is used to describe the process of purchasing additional shares in the property. Under the terms of the lease you will be entitled to buy an additional share at any time except within the first 12 months of the lease. You will usually have to buy a minimum of 10%.
If you wish to purchase an additional share you’ll need to serve notice on the landlord who will then have the property valued. The price you pay will be the percentage of the market value as per the valuation which relates to the percentage you are purchasing. The landlord will sign a memorandum of staircasing which acts as your receipt and which will need to be attached to the original lease. They will also attach a copy to the counterpart lease. The memorandum does not need to be registered at land registry.
The specified rent will reduce so that you are only paying a percentage of the gross rent which equates with the percentage share still owned by the landlord.
You can if you wish purchase the entire remaining share so that you own 100% of the lease. This is known as “final staircasing”. If you do this, the specified rent reduces to £0. If the property is a house the lease will usually provide that the landlord will have to, at your request, transfer the freehold interest in the property to you for free. The lease may then be determined (cancelled).
If the property is a flat you will not acquire the freehold (it would not be in your interests to have a freehold flat). Depending on the lease you may be required to surrender it and enter into a new lease or else the landlord may just execute a memorandum of final staircasing, which operates in the same way as any other memorandum of staircasing except that it will contain a statement that certain clauses which are only relevant while the housing association retains an interest, such as the mortgagee protection clause (see below), the staircasing provisions and usually the restriction letting.
Why buying the property you can elect to pay stamp duty on either the initial market value or on the share you purchase. Obviously if you pay duty on the initial market value you will pay more, however this will mean you will not need to pay any duty on the purchase of additional shares. ~On the assumption that the market value will increase over time and that you will eventually staircase up to 100%, paying duty on the initial market value will work out cheaper in the long run.
Pay Your Rent!
The courts consider a shared ownership lease to be a tenancy agreement rather than a long lease until it has been staircased to 100%. Terminating a tenancy is much simpler than forfeiting a lease since all the landlord has to do is prove that the rent is in 3 months’ arrears. The formalities are much stricter when a landlord applies for forfeiture and there is more of an opportunity to prevent the action. Even after forfeiture it is possible to apply for relief but this is not the case for a terminated tenancy.
The case which decided that that a shared ownership lease was not a long lease was due to be appealed earlier this year however the tenant decided not to proceed at the last minute. Further appeals in similar cases are expected in the near future which may overrule this precedent but for now, you are at serious risk if you don’t keep up the payments of specified rent.
Can Anyone Buy a Shared Ownership Property?
Before buying a shared ownership property (unless it is to be staircased to 100% simultaneously with the sale) you will need to apply to the housing association. Housing associations are charities and are set up to help meet the housing needs of those who otherwise might not be able to purchase their own home, so your income will be assessed as well as your needs. Your income will need to be high enough that you can reasonably afford the rent and mortgage payments but low enough that you do need assistance. Shared ownership homes must be used as your only or main residence and cannot be let.
For more information on who can qualify, have a look at the Homes and Communities Agency’s website.
Selling a Shared Ownership Property
Sometimes you’ll want to sell, rather than staircase. You can do this in two ways. First, you can sell just the share you own, in which case the buyer will need to apply to the housing association to be approved as a shared owner (see above). Second, you can staircase to 100% simultaneously with the sale, in which case the buyer will not need to be approved as when completion takes it will no longer be shared ownership. If the property is a house you can direct the housing association to transfer the freehold to the purchaser.
In either case you will need to serve notice on the association of your intention to assign the lease and you will not be able to exchange or complete on any sale until a period specified in the lease (known as the “nomination period”) has expired. This varies from lease to lease but is usually between 4 – 12 weeks. During the nomination period the housing association has the right to nominate a purchaser, to whom you must sell your share. The housing association will have the property valued and the sale price must be no more than the value of your share. If the association doesn’t nominate a purchaser you will be free to sell to whoever you choose.
Whether you sell only your share or you staircase simultaneously with the sale, the housing association will have the property valued. The sale price for your share only must be no more than its value because to sell it at above market value would be against the principles of social housing however if you staircase then the price can be more than market value but must not be less. This is because the housing association will have to sell their share as well as you selling yours and they will expect to receive market value for it.
A shared ownership lease will contain a clause known as a “mortgagee protection clause”. This allows a mortgagee who repossesses the property and exercises its option to staircase simultaneously with a sale, and who suffers a loss, to recover some or all of that loss from the money paid to the housing association for its share. The reason for this is to make shared ownership properties a more attractive prospect for lending purposes. For the lender to be able to take advantage of this clause the mortgage offer must have been approved by the housing association prior to to the mortgage completing. The offer document should be passed to the housing association by the solicitors acting in the purchase or remortgage.
If a claim is made by a lender under the mortgagee protection clause then the housing association has the right to pursue the tenant for its loss, so the clause benefits lenders only and not the property owner. If the maximum amount a lender could theoretically claim would lead to it receiving more from the sale than it is actually owed (after deducting the costs of sale) then the claim must be reduced so that it will only receive what it is owed.