Shared ownership schemes are sometimes delivered via complex ownership arrangements. In this 3-part series consultant solicitor (and Shared Ownership Resources sponsor), Zahrah Aullybocus, explains some potential pitfalls homebuyers need to be aware of when the housing association isn’t the freeholder – including ground rent and lease extension.
In Part 1, we discussed landlords and some typical ownership structures. We looked at why there might be fewer benefits and more risk when the housing association is not the freeholder.
Here, in Part 2, we’ll cover the following potential pitfalls:
- Liability for ALL the housing association’s costs, including payments they make to their own landlord
- Weak accountability for repairs and maintenance, and duplicate management fees
- Ground rent might be payable in the housing association’s lease, and charged on to the shared owner
- The housing association’s own interest in the lease might be too short to offer meaningful lease extension to shared owners
In Part 3 we’ll provide a checklist of questions to ask the sales team and your solicitor if you’re considering purchasing a shared ownership home.
Potential pitfalls if the housing association is the landlord, but isn’t the freeholder
Pitfalls: Liability for costs of other parties with an interest in the building
I’m going to get quite technical here, but bear with me. It’s essential to understand the costs you could be liable for where complex ownership structures exist.
Your solicitor will, of course, advise you about your own shared ownership lease. However, if there is a head lease in place, there is normally a ‘catch all’ clause within the shared ownership lease requiring you to repay the landlord (i.e. the housing association) for ANY AND ALL COSTS AND EXPENSES they incur under their own lease.
For example, if the ground rent paid by the landlord increases, that increase is passed onto the shared owner. The same applies with any service charges that are billed to the landlord. (This is one reason that some shared owners have been hit with bills for cladding remediation and/or insurance costs). Shared owners are also liable for the costs if the landlord extends their own head lease, and/or the costs of any legal action undertaken by the landlord.
Pitfalls: Repairs and maintenance can be more costly
If the housing association owns the freehold of the building, they have control over maintenance and repairs. However, if the housing association does not own the freehold then they are also a leaseholder like you, subject to demands for the costs of managing the building (costs which will be passed onto you). This can cause delays and other problems if you need to query or challenge service charges.
Some shared owners report paying management fees to both housing associations and third party management companies, and problems with finding out who is accountable for what.
Pitfalls: Ground rent may be charged on top of monthly rent
Specified rent is the amount you pay every month on the % equity share still held by the landlord. Ground rent is an additional charge on top of the monthly specified rent.
Historically, shared ownership homes were generally sold with a peppercorn (i.e. zero) ground rent. However, this has changed in recent years, and some shared owners report being charged ground rent. (It is not clear why. Is this a new business model to maximise income from shared ownership properties? Are housing associations not concerned about ground rent terms in head leases, given the costs will be passed on to shared owners? Or has the emergence of complex ownership structures resulted in housing associations failing to understand of the implications of ground rent terms for shared owners?)
The amount of any ground rent due will be stated in the head lease. But this is not normally re-stated in the shared ownership underlease. So entrants to the shared ownership scheme are very reliant on their conveyancing solicitor checking for ground rent terms in superior leases, and explaining the issues and implications clearly prior to purchase.
However, in practice, conveyancing advice may be limited to ‘one lease’; i.e. the shared ownership lease. Unfortunately, the shared ownership lease in isolation may not provide clarity on ground rents. It is also possible that solicitors may fail to explain the risks in a manner that is clearly understood by inexperienced buyers to whom the concept of ground rents could be challenging. Or, indeed, that solicitors fail to explain the risks at all!
How is ground rent calculated?
Ground rent can be fixed or escalating. A fixed annual ground rent won’t change during the course of the lease. But an escalating ground rent will increase. The lease will specify how often the ground rent is reviewed, and how much it will increase by. There are lots of different methods for calculating ground rent increases. For example, the calculation may be based on RPI, or on the increase in value of the property.
Onerous ground rent
You may have come across the term ‘onerous ground rent’. An onerous ground rent is one that increases to such an extent that it results in a very high ground rent over time. This can make it difficult to extend the lease, or buy the freehold (where applicable). An onerous ground rent term can deter potential buyers if you decide to sell your home.
(For example, lenders may be reluctant to provide a mortgage once the ground rent is more than 0.1 per cent of the value of the property).
Ground rent may be charged after staircasing to 100%
In some cases the shared ownership lease may include a right for the housing association to charge a ground rent when the shared owner staircases to 100%.
However, adverse financial consequences may not be apparent at the point of purchase, if the sales team and solicitors have failed to point out and explain ground rent terms. This is particularly important if the ground rent term is onerous (see above).
Complex ownership structures and lease extension
Shared owners do not have the same rights as other leaseholders to lease extension via the statutory route. If a shared owner wants, or needs, to extend their lease they are obliged to undertake an informal lease extension. This is the same for any shared owner.
But complex ownership structures, where the housing association is not the freeholder, can create additional headaches and cost.
If the housing association owns the ‘freehold’ of the building, they have control over the length of the shared ownership lease sold to the shared owner in the first place. And they will have discretion to offer better terms when it comes to lease extensions.
By way of example, in April 2021 one large housing association announced new policy commitments:
- to offer an option for shared owners to extend their lease to 990-years from June 2021 at a cost based on the share they own; and
- not to consider marriage value when calculating the cost of a lease extension.
However, these benefits are only available where they are the freeholder. Which makes sense. If the housing association holds an underlease with a 125-year term, clearly they couldn’t offer a lease extension that is longer than their own term. But this example illustrates how shared owners may lose out where their housing association isn’t the freeholder.
Of course, different housing associations have different ownership structures in place and different policies. In the table below, we examine a number of different scenarios and some potential pitfalls in each case.
TABLE: POTENTIAL PITFALLS ARISING IN DIFFERENT SCENARIOS
|LEASE LENGTH – Housing association has a short lease||If the housing association has a short lease, say 125-years, and has sold a shared owner a 99-year lease, the housing association will be unable to offer the 90-year extension that would be available via a statutory lease extension.|
This is because the difference between the housing association’s interest in the lease and the shared owner’s interest in the lease is only 26 years.
(See below for how such a situation might be resolved, although usually at the shared owner’s expense).
|LEASE LENGTH – Housing association offers a short lease extension via the informal route||If a housing association can only offer a very short lease extension, via the informal route, this should be reflected in a reduced lease extension premium.|
However, the shared owner will still have to pay 100% of all the usual valuation and legal fees.
And a short lease extension doesn’t solve the underlying problem that the property will become much harder to sell once the number of years remaining on the lease approaches, or drops below, 85 years.
|LEASE LENGTH – Housing association proposes that the shared owner extend their own lease AND the landlord’s lease||Where both the housing association’s interest in the lease, and the shared owner’s interest in the lease, are extended together leasehold legislation allows the housing association to charge BOTH sets of fees to the shared owner: legal fees, valuation fees and lease extension premiums.|
Worse, shared owners may be required to pay a premium based on the total value of the property, even if their share is as low as 25%.
|GROUND RENT – Housing association proposes an informal lease extension to the shared ownership lease||Informal lease extensions to shared ownership leases do not eliminate onerous ground rent terms. This is because housing associations can’t change ground rent to zero on the shared ownership lease if it’s payable on the head lease.|
A lease extension under the statutory route would eliminate ground rent. But shared owners do not have the right to the statutory route to extend their own lease.
|GROUND RENT – Housing association proposes an informal lease extension to the head lease||Informal lease extensions to head leases do not completely eliminate onerous ground rent terms. Under new legislation (from 30 June 2022) if the head lease is extended by informal agreement between the shared owner and the housing association any ground rent will continue for the term of the original lease.|
In other words, if you have a 125-year lease which is extended by informal agreement by another 89 years, the ground rent will continue for the first 125 years and will only go to zero once the 125 years has expired.
Therefore an extension ‘by agreement’ is not ideal unless the freeholder is willing to agree to other terms reducing the ground rent (for which additional legal fees may be chargeable, and charged on to the shared owner).
|GROUND RENT – Housing association proposes a statutory lease extension to their own lease (the head lease) to eliminate ground rent||There is an option for the housing association to undertake a statutory lease extension so that their ground rent becomes a peppercorn (i.e. zero).|
In fact, the statutory route is the only way to bring the ground rent to zero, meaning the cost won’t then exist for the housing association to pass it onto the shared owner.
But this could be a costly and time-consuming exercise, with the shared owner legally liable for ALL costs. The process requires a specialist expert in order not to swap one onerous term for another.
There is a strict timetable to be followed, and it can take around six months to go down this route. Additional work is required to ensure that the head lease would be agreeable to any lender providing a mortgage the underlease.
What do I need to ask the sales team?
Whilst it may not be realistic to expect sales teams to provide detailed legal information, nonetheless, consumers are entitled all the information they need in order to make an informed decision whether to proceed with a purchase. This does not mean, of course, that homebuyers should place undue reliance on sales teams, marketing materials and verbal assurances!
In Part 3 we provide a checklist of questions to ask the sales team, and your solicitor.
Zahrah Aullybocus is a Consultant Solicitor with Nexa, and a Shared Ownership Resources sponsor.
Mobile: 07740 775 345 | firstname.lastname@example.org
This article is the personal opinion of the author and without any liability to Nexa. Any concerns should be checked with the solicitor that is acting for you.
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