Legal Overview Guide – Shared Ownership Leases

The Government backed ‘Leasehold Advisory Service’ has recently released an advice note detailing the law relating to shared ownership leases. In light of this, we have created a short document to act as your guide to the subject.

What is leasehold?

Leasehold ownership of a flat or house is simply a long term version of a tenancy agreement; allowing the holder the right to occupy the building for a long period of time, detailed in the lease. This is usually 99 or 125 years and the property can be bought or sold during that period. At the end of the period, the flat or house reverts back to the landlord (the freeholder).

The details of leasehold on a flat or a house are different. Obtaining the leasehold on a flat grants the holder ownership of everything within the flat, for example floor boards, plaster and decorations, but not usually the external or structural walls. These are most frequently retained by the freeholder/landlord who also bears the cost of maintaining them. This cost is usually recouped via service charges and billed to the leaseholder.

For a house, leasehold ownership usually relates to the whole building and possibly a garden and/or driveway.

In both cases, the landlord (freeholder) can be a person or a company, including a local authority or a housing association.

What is a shared ownership lease?

This is a form of home ownership introduced to assist first time buyers and purchasers stuck in rented accommodation without the funds to take the first steps on the property ladder in the conventional way.

In a shared ownership lease, the leaseholder can purchase a share of the property (house or flat) and pay rent on the part of the property retained by the landlord. As time goes on they have the right to buy further shares in the property until they own 100% of the equity, at which point the property is no longer a shared ownership lease building.

What are the key differences between a shared ownership lease and traditional leasehold?

1.   A shared ownership lease is not regarded as a long residential lease for the purposes of exercising a statutory collective right to purchase the freehold of a building containing flats (see Section 7(1) (d) Leasehold Reform Housing and Urban Development Act 1993) or for exercising a statutory right to manage a building containing flats (see Section 76(2) (e) Commonhold and Leasehold Reform Act 2002).

2.   A shared ownership lease of a house does not qualify for the right to purchase the freehold, under the provisions of the Leasehold Reform Act 1967, if there is a provision in the lease for the freehold to be transferred on purchase by the leaseholder of the remaining share in the property (referred to as the final staircasing). Other exemptions apply if the leasehold house was provided for the elderly or within a designated area referred to as a protected area (see Schedule 4A Leasehold Reform Act 1967).

3.   As rent is paid on that part of the equity not owned by the leaseholder a landlord can take action to repossess the property for rent arrears in the county court in the same way that a landlord of an assured shorthold tenancy can under the provisions of the Housing Act 1988. If the property is repossessed in these circumstances no compensation is payable to the leaseholder to take into account the balance, between the leaseholder’s debt and the market value of the leaseholder’s share in the property.

4.   HCA (Homes and Communities Agency) approved shared ownership leases must contain 8 core clauses. These are:
a. restrictions on sales and prohibition on subletting (alienation clauses).
b. rent review clause
c. service charge clause
d. mortgage protection clause
e. purchasing additional shares
f. right of first refusal
g. clawback for Key Worker Shared Ownership Clauses
h. stamp duty clause

The shared-ownership scheme was recently highlighted by John Cridland, Director General of the Confederation of British Industry, as one that should be revamped and pushed by the government in order to ‘jump start’ the economy. To read more about his speech at the CBI North East Annual Dinner, click here.

More information on shared ownership can be found on the Leasehold Advisory Service’s website here and on the Department for Community and Local Government’s (DCLG) website here.

28-09-11

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