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A big part of the conveyancing process is the conveyancing searches. This section tells you all about them. What they are, how and when to order them and how to interpret the results. Each search has its own guide and you'll see they are separated into Standard (should be done in every case), Regional (area specific) and Optional (not essential but often useful tools for the would be purchaser). All buyers should beware that when you buy a property, the law assumes that you have seen the information that would have been revealed by searches whether or not you have actually carried them out, so you buy the property subject to the results.
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Shared ownership is a scheme where a landlord, usually a Housing Association (HA) or other Registered Social Landlord (RSL) will sell a percentage share of a property to a purchaser and retain the remaining share. It is designed to help people get on the property ladder who otherwise couldn't afford it.
The organisations that run the schemes are almost always charities (though there are the occasional "for profit" schemes. It works by the HA granting a lease (either 99 or 125 years) to the purchaser. In return the purchaser pays a premium, which is a percentage of the market value of the leasehold interest, say 50%. The purchaser (tenant) then pays rent to the HA (landlord) on the remaining share.
The lease includes a right for the tenant to to buy additional shares of the leasehold interest until eventually he owns 100% (known as staircasing).
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This guide aims to explain the peculiar features of a shared ownership lease as compared to a standard lease and should be read in conjunction with the guide on dealing with a leasehold purchase. One key point that must be understood is that the registered proprietor of the leasehold interest created by a shared ownership is the tenant and only the tenant, just as in a standard lease.
It might be easiest to think of it as the tenant holding the leasehold interest on trust for himself and the landlord. Very limited case law, which we will cover further on in this guide, appears to suggest that this is not necessarily the case however for most ordinary purposes it does seem to fit.
The premium paid by the tenant for the lease is based on the market value of the property. The Housing Association will instruct a valuation and will agree with the tenant what percentage is to be purchased. The tenant then pays a percentage of the market value which is equal to the share being purchased. For example, if the property is valued at £100,000 and the tenant is taking a 50% share he will pay £50,000.
As well as calculating the value of the property, the valuer will calculate the market rent, that is to say the rent that the property might reasonably achieve if let on the open market. The landlord (if it is a Registered Social Landlord) will then charge the tenant 80% of the market rent and of that, the tenant will pay a share equal to the share of the property he has not bought outright. For example, say the market rent is Â£800 per month and the tenant has purchased a 25% share. The rent chargeable on the 100% interest would be 80% of £800, so £640. This is called the "Gross Rent". As the tenant already owns 25%, he only pays rent on the remaining 75%, so the actual monthly rent would be 75% of £640, or £480. This is called the Specified Rent. The rent will be reviewed annually and increased in line with the Retail Price Index.
A key feature of a shared ownership lease is the right of a tenant to purchase additional shares until eventually he owns 100% of the lease. The purchase of additional shares is known as staircasing and the purchase of the final share, which takes ownership to 100%, is known as final staircasing.
Housing Associations who take part in shared ownership schemes are obliged to use a model form of lease in order to qualify for state funding. The version in use at the time of writing this guide can be found using the following link:http://www.homesandcommunities.co.uk/cfg?page_id=7185&page=160
There are two versions of the model lease, one for houses and one for flats, both of which must contain certain clauses known as "Fundamental Clauses". These are terms which cannot be varied else the Housing Association will fail to qualify for grant funding. They are explained below.
The alienation provisions are the clauses in a lease which deal with the requirements on resale. In a shared ownership lease they are designed to ensure that the shared ownership tenants do not profit from an abuse of public funds.
While the tenant owns less than 100% the lease must contain an absolute prohibition against sub-letting.
If the tenant sells his leasehold interest while ever his acquired percentage is less than 100% then hem must, within 2 months of the new owner serving notice of assignment on the landlord, pay to the landlord a sum equal to the market value of the unacquired percentage. For example if he owns 25% and the property as a whole is worth Â£200,000, he will have to pay to the landlord Â£150,000. Incidentally there is no obligation on the landlord to transfer its remaining interest to the new owner in these circumstances.
The exceptions to this rule are where the assignment of the tenant's interest takes place under the terms of a will or intestacy, under a court order made in connection with divorce proceedings, under an order resulting from a claim under the Inheritance (Provision for Family and Dependents) Act or where the assignment is to a Nominated Purchaser.
A tenant may, if he wishes to sell his interest, serve notice on he landlord of his intention to do so. On receipt of this notice the landlord must then nominate a purchaser within 8 weeks. The purchaser will have to qualify for shared ownership housing, i.e. he will need to be a person in housing need and meet certain income criteria as well as potentially other criteria. He will have to pay the market value of the tenant's share to the tenant as determined by the valuer appointed by the landlord.
If the landlord fails to make a nomination within the 8 week nomination period, or if contracts are not exchanged within 12 weeks (subject to the tenant and his solicitors taking all reasonable steps to facilitate the sale) then the tenant may sell his share on the open market.
Following completion of final staircasing and with the object of preserving the property for use as public housing the landlord will have a 21 year right of pre-emption. This means that if the property is sold within 21 years of final staircasing it must first be offered back to the housing association. They are not obliged to buy it and if they do they must pay full market value. The right of pre-emption is equally binding on mortgagees selling under a power of sale as it is on the tenants themselves.
Each shared ownership lease must have a rent review clause which allows for the gross rent (and by extension the specified rent) be increased in line with increases in the RPI. It will never decrease.
The mortgagee protection clause (MPC) exists to encourage mortgage lenders to lend to potential purchasers of shared ownership properties. It comes into effect if the property is repossessed and the lender, when selling the property, exercises its right to staircase to 100% simultaneously with the sale.
In ordinary circumstances when staircasing takes place the landlord will receive payment representing the market value of the acquired share, i.e. if the property is worth £100,000 and the tenant buys a 25% share he will need to pay the landlord £25,000. Where a lender chooses to make a claim under the MPC however it can, in addition to the outstanding debt, recover certain losses from the landlord's share including:
Arrears of rent and service charges that it has paid on the tenants' behalf;
The maximum claim is the lesser of the total outstanding mortgage debt or the total of the landlord's share. A claim can only be made where the mortgage offer was approved by the landlord prior to completion of the mortgage. It is therefore essential that the offer is submitted, by the lender's conveyancer, to the landlord for approval. The same applies to any subsequent remortgage.
The current version of the mortgagee protection clause (though not previous versions) obliges the landlord to give reasonable notice to a mortgage lender of which he has been given notice before commencing forfeiture proceedings against a tenant in order to allow the landlord to rectify the breach and avoid forfeiture.
The Mortgagee Protection Clause can only be used to recover sums lent for the purposes of acquiring the initial share or subsequent shares. Money lent for any other reason must be ignored when calculating a claim as must any further loan subsequent to the initial loan unless it was approved in advance by the landlord and was used to purchase an additional share.
The landlord is entitled to recover whatever loss it suffers as a result of a claim under the MPC from the tenant.
Staircasing is the process of acquiring additional shares in the property. Usually the minimum purchase is 10% with no maximum. A tenant cannot staircase within 12 months of purchasing the initial share. If he wishes to staircase the tenant approaches the landlord who must then value the property as a whole and advise the tenant of the cost of the share he would like to purchase. Following the purchase of a share tenant and landlord will execute a memorandum evidencing the purchase and confirming the new Specified Rent. The rent will be reduced to reflect the reduced share owned by the landlord.
Final staircasing occurs when the tenant buys the final share so that he owns 100% of the leasehold interest. When that happens, the Specified Rent is reduced to zero. What happens next depends on the terms of the particular lease. Where the property is a house the lease will generally provide for the landlord's freehold interest to be transferred to the tenant. In this case the "tenant" will acquire both the freehold and leasehold interests, so that the lease is in effect defunct and if the tenant so wishes the leasehold title can be closed.
Since it is necessary for flats to remain let on a lease rather than being freehold, final staircasing for flat leases are dealt with differently. Sometimes a new lease will be granted with the old shared ownership lease being surrendered. More usually, the original lease will continue and will include a clause stating that the clauses which make up the shared ownership provisions (restriction on sub-letting, nomination provisions etc) will no longer apply. Where the housing association is itself a tenant of the freeholder (for example where a block is made up of both shared ownership and non shared ownership flats) the housing association's head leasehold interest may be transferred on final staircasing.
When dealing with a shared ownership purchase in which the buyer is taking a mortgage, or with the remortgage of a shared ownership property, it is important to check and satisfy the lender's requirements. These will be set out in parts 1 and 2 of the CML handbook and also in any special conditions in the mortgage offer. The following are some of the common requirements:
Does the lender lend on shared ownership?
Starting with the obvious, not all lenders will be prepared to accept shared ownership property as security. If this is the case the buyer/borrower will need to find a different mortgage provider.
Report the Share Being Purchased/Charged
Unless the mortgage offer confirms the percentage share that will be charged, and it is correct, then the share should be reported to the lender.
Submit the Mortgage Offer to the Landlord for Approval
In order to be able to take advantage of the provisions of the mortgagee protection clause (see above) it a essential that the mortgage offer is submitted to the housing association for approval and that written confirmation of approval is obtained. Most offers from high street lenders will be ok but the HA may refuse to approve where, for example, the interest appears excessive or where the level of borrowing appears to be beyond the tenant's means. Borrowing that exceeds the amount paid for the share will not be protected under the MPC.
Assignment of right to staircase
Many lenders will want the tenant to sign an authority assigning the right to staircase to it in the event of repossession. Though not strictly necessary if the model lease is used, if the lender require this then it must be done.
Report right of pre-emption
Where the lease contains a right of pre-emption, giving the HA first refusal if the property is sold within a set period following final staircasing, this must be reported. It cannot be removed, even the lease is a brand new lease as it is one of the so called "fundamental clauses" (see above) but some lenders will not lend where the provision exists.
Is landlord obliged to give notice of proceedings?
The lease should require the landlord to give notice to any mortgagee who it has previously had notice of if it intends to take forfeiture proceedings against the tenant and then give the mortgagee reasonable time (say 28 days) to remedy the breach if possible. Is there is no such obligation on the landlord this should be reported.
Termination for non-Payment of Rent
Earlier in this piece we likened a shared ownership lease to the tenant holding the leasehold interest on trust for himself and the landlord. We mentioned that this view was not supported by case law. The case we are referring to is Richardson v Midland Heart . Here, the tenant ran into financial difficulties and couldn't pay the Specified Rent. The arrears continued to build and eventually the landlord (Midland Heart) sought an order for possession under Ground 8, Schedule 2 of the Housing Act 1988 (non-payment of rent). Where an application for possession is made under this provision, provided the landlord can prove that there are arrears of 2 months or more the Court must order possession and has no discretion to allow the tenant more time or to negotiate repayment terms.
This provision actually relates to assured tenancies, rather than long leases. Mrs Richardson argued that the provision should not apply since she held a 99 lease (so a long lease) but on balance the Court decided that it should. This was only a County Court decision and so is not a binding precedent and the Housing Association actually returned (voluntarily) the tenant's original premium before the case was appealed to a higher court. As it stands however this decision is a statement of the law as it stands and the purchaser must be advised of the consequences of a failure to pay the Specified Rent. Although Midland Heart voluntarily returned the tenants original investment it is likely that other associations will not be so generous.
When buying a new shared ownership lease the tenant can elect to pay rent either based on the initial premium paid for the initial share or based on the market value of the property as a whole. The advantage of the latter is that the tenant does not then have to pay duty on any further shares acquired. If the former option is chosen then once the tenant acquires shares beyond 80% duty has to be paid. This only applies to the original tenant however and where the original tenant elects to pay duty on the initial market value this does not reduce the liability of a subsequent purchaser to pay duty.