inbrief
Shared
Ownership Leases
Inside
What is a shared ownership lease?
What statutory protection does a SOL have?
Rent control
Obtaining a possession order
inbrief
Introduction
Shared ownership leases are one
method by which housing providers
can provide affordable housing. This
inbrief will outline some of the legal
issues surrounding this type of lease.
What is a shared ownership lease?
A SOL is a lease, “granted on payment of
a premium calculated by reference to a
percentage of the value of the dwelling or of
the cost of providing it, or under which the
tenant (or his personal representatives) will
or may be entitled to a sum calculated by
reference, directly or indirectly, to the value of
the dwelling”.
In most cases a leaseholder will initially purchase
a 25% share, usually via a mortgage, and will
pay rent on the share that they do not own.
They will also have the right to purchase further
shares, and ultimately be able to own 100%.
This initially appears attractive to those who are
not able to afford to buy a property outright,
and can only afford to buy a percentage of the
full value of a property.
What statutory protection does a
SOL have?
The statutory protection afforded to a SOL, and
therefore the landlord’s ability to obtain an order
for possession is dependant upon when the
SOL was granted, and there are three distinct
periods to consider due to the different statutory
provision in force at the time: the Rent Act 1977
and Housing Acts 1985 and 1988. In certain
circumstances a SOL may also be subject to rent
control under the Rent Act 1977 leading to the
leaseholder having the right to register a Fair Rent,
and restrict the rent that can be charged by the
landlord.
Shared ownership leases granted
prior to 11 December 1987
There are two Acts to consider in relation to a SOL
granted prior to 11 December 1987 – the Rent
Act 1977, which generally provides for protection
for tenants in the private sector (including housing
associations) and the Housing Act 1985 for Local
Authority tenants. A SOL is exempted from the
Rent Act 1977 by:
i)
Section 14 if the landlord is a Local
Authority; and,
ii)
Section 15 if the landlord is a Housing
Association.
The other Act to consider is the Housing Act 1985.
As SOL’s are granted for more than 21 years they
cannot be secure tenancies.
It should also be noted that if granted before
15 January 1989, a SOL cannot be an assured
tenancy, because it was granted prior to the
commencement of Housing Act 1988, which
introduced assured tenancies.
As a result, SOLs granted prior to 11 December
1987 are outside statutory protection (save for the
Protection from Eviction Act 1977) but are subject
to the Fair Rent Scheme under the Rent Act 1977.
Shared ownership leases granted
between 11 December 1987 and 14
January 1989
A SOL, granted after 11 December 1987 and prior
to 15 January 1989, is excluded from the Rent
Act 1977 and the Fair Rent Scheme (Section 5A
of that Act) provided that certain conditions were
met when it was granted. The main one is that
the SOL was granted for a minimum term of 99
years.
Shared Ownership Leases granted
after 15 January 1989
If granted after 15 January 1989, a SOL granted
by an RSL, is an assured tenancy under the
Housing Act 1988 (the “1988 Act”) provided the
1988 Act’s requirements are fulfilled. However, a
SOL may be an excluded tenancy under Schedule
1 of the 1988 Act, e.g., if the Housing Association
is fully mutual or where there is a low rent.
A low rent in the case of a SOL granted before
1 April 1990, is a rent of less than two thirds of
the rateable value on 31 March 1990. In cases
of leases granted after that date, a low rent is
£1,000 a year or less in Greater London or £250
a year or less elsewhere. Most SOLs are therefore
subject to the assured tenancy regime as the rent
will be above the relevant level. If and when a
leaseholder has staircased up to 100% then they
will pay a rent below this level, and will therefore
be removed from the assured tenancy regime.
inbrief
Rent Control
As already indicated, where a Registered Provider
of Social Housing (RP) has granted a SOL it may
be subject to rent control restricting the amount
of rent that can be charged. The provisions
only apply to Housing Association Tenancies. A
Housing Association Tenancy is a tenancy that
would be a protected tenancy under the Rent Act
1977, but for section 15 (exclusion of RSL’s – see
above).
Whether a SOL is subject to rent control depends
on when it was granted. The provisions are as
follows:
a)
A SOL granted prior to 11 December 1987
is subject to rent control.
b)
A SOL granted between 11 December
1987 and 14 January 1989 is not subject
to rent control provided that it complies
with Sectio 5A of the Rent Act 1977. If
the provisions are not met the SOL will be
subject to rent control.
A SOL granted after 14 January 1989 is an assured
tenancy is not subject to rent control.
Obtaining a Possession Order
Where a SOL was granted prior to 15 January
1989, and therefore not subject to any statutory
protection, possession is obtained by commencing
forfeiture proceedings as with any other lease.
No prior notice to the leaseholder is required if
possession is claimed on the basis of rent arrears.
Notice may however need to be given to the
leaseholder’s mortgage company.
If the SOL was granted after 14 January 1989,
which is likely to be the majority of SOL’s then it
is an assured tenancy. This leads to the following
consequences:
As a SOL is granted for a fixed term e.g. 99
years, the landlord is prohibited from exercising
any contractual provisions to forfeit, i.e., end
the tenancy, due to the restriction contained in
Section 5(1) of the 1988 Act. Instead, during
the fixed term, the landlord is given a restricted
version of the ordinary procedure to claim
possession by serving a Section 8 Notice Seeking
Possession and proceeding to Court. The relevant
provision is Section 7(6). Under that Section the
Court will not make an Order for Possession of a
dwelling house to take effect at a time when it is
let on an assured fixed term tenancy unless:
The ground for possession is ground 2 or ground
8 in part 1 of Schedule 2 to the 1988 Act or any
of the grounds in Part 2 of that Schedule other
than grounds 9 or 16 and;
The terms of the tenancy make provision for
it to be brought to an end on the ground in
question (whether that provision takes the form
of a provision for re-entry for forfeiture or for
determination by notice or otherwise).
2.
The landlord will be able to serve a Notice
Seeking Possession based on Ground 8
(2 months rent arrears) and if the arrears
remain in excess of 2 months rent at the
hearing for possession the court will have
no discretion and must make an order for
possession.
3.
There is no right to claim relief from
forfeiture, for example by paying off the
arrears after an order for possession is
made, as a normal leaseholder would be
entitled to do. This puts those with SOL’s
in a worse position.
Who is entitled to the Proceeds of
Sale?
When a possession order is granted and enforced:
who is entitled to the proceeds of sale? Is the
leaseholder entitled to be repaid their initial
contribution and any increase in its value since the
premises were purchased? Following the decision
in the case of Richardson v Midland Heart ltd the
court said not.
The leaseholder does not “own” half of the
property; they have a long lease, subject to the
usual methods of termination. Once the lease is
ended the leaseholder is left with nothing, literally.
Many leaseholders will have SOLs that are assured
tenancies and as a result a possession order could
be obtained on the basis of two months arrears.
Guidance by the Homes and
Communities Agency (HCA)
Guidance given by the HCA, the Council of
Mortgage Lenders and the National Housing
Federation provides that RPs must give an
undertaking to any lender that they will give the
lender notice that they are taking legal action.
This is because, in the case of leases that are
assured tenancies, the lender will not be able to
claim relief from forfeiture should a possession
order be made and they will therefore lose their
security. As a result, a mortgage company will
often look to pay the arrears and costs prior to
the hearing to avoid a possession order being
made. However, this approach may change as
a result of the deteriorating housing market and
falling prices, and on the basis that the mortgage
company may have already cleared arrears on a
number of occasions in the past.
Sales by Mortgage Companies
If a leaseholder defaults under their mortgage,
and the mortgage company obtains possession,
they will usually exercise their right to staircase up
to 100% and then sell the lease. The mortgage
company has to pay the RP a percentage of
market value corresponding to the share being
acquired. With the value of properties falling,
when the mortgage company sells the lease, the
amount received may be less than the aggregate
of the outstanding loan and the costs of acquiring
the remaining share. Therefore the mortgage
company will be making a loss. The effect of the
standard mortgage protection clause (resulting
from discussions with the Council of Mortgage
Lenders) is to give the mortgagee’s claim priority
over those of the RP, by providing that in such
cases the payment to be made by the mortgagee
for acquiring the remaining share is to be reduced
by the shortfall to the mortgagee in repayment of
the loan.
Extending Shared Ownership
Leases
Leaseholders, including those with SOL’s should
always consider whether they should extend their
lease. The less time there is left to run on a lease,
the more likely it is that it will affect a leaseholder,
or purchaser’s, ability to obtain a mortgage. It is
considered that those who have not staircased to
100% may have the right to extend their lease.
HCA guidance also provides that RPs should
wherever possible grant an extension by varying
the current lease, although HCA Consent may be
required.
inbrief
Summary
SOL’s can be a tricky area of law dependant on a
number of factors particularly when the SOL was
entered into. Practice suggests that the mortgage
company will, on a limited number of occasion
want to clear the arrears of rent on behalf of the
leaseholder to avoid the making of a possession
order in favour of the RP. Those arrears will then
be added to the mortgage.
For further information
on this subject please contact:
Paul Hayes
Head of Housing Litigation
T + 44 (0) 20 7074 8119
[email protected]
5 Chancery Lane – Clifford’s Inn
London EC4A 1BL
DX 182 Chancery Lane
T +44 (0)20 7074 8000 | F+44 (0)20 7864 1200
www.lewissilkin.com
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expert advice should be sought in relation to
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© October 2012 Lewis Silkin LLP