Shared Ownership Resources has long argued that entrants to the shared ownership scheme aren’t given all the facts they need in order to make informed purchase decisions.
So I was pleased that Homes England invited me to review their draft new Key Information Document for sales and resales of the ‘standard shared ownership model’. (The standard model relates to homes conforming to the requirements of the Shared Ownership and Affordable Homes Programme (SOAHP) 2016-2021. There’s a different Key Information Document for the Affordable Homes Programme (AHP) 2021-2026).
The Key Information Document (2016-2021) is divided into three parts:
- Part 1 – Key information about the home
- Part 2 – Summary of costs
- Part 3 – Key information about shared ownership
Shared Ownership Resources assessed this Key Information Document in the context of Homes England’s claim that:
‘This Key Information Document is to help you decide if shared ownership is right for you’.
In summary, the new Key Information Document is a massive improvement on the previous version (a three page document entitled ‘Key information for shared owners’).. But it focuses on affordability in the first year of purchase, with little attention paid to ongoing affordability, or potential risks of the shared ownership model.
Does the new Key Information Document provide all the information people need to make informed decisions (in the context of government and marketing claims for affordability and a ‘realistic pathway to full ownership’)? No. Does it matter? Yes.
There is an onus on Homes England to ensure homebuyers are fully informed, in the absence of any independently funded source of advice and information on shared ownership, and given limits on the scope of advice provided by conveyancers
Shared Ownership Resources made a total of 34 recommendations which are provided below, with notes on whether they were implemented or not. (Full report submitted to Homes England available on request).
Key Information Document – Scope of review
Extend the scope of the review to test the draft Key Information Document with long-term shared owners and former shared owners, in addition to those new to the shared ownership scheme.
Implemented? Not known. According to Homes England the new Key Information Documents were tested with “people who are considering shared ownership as well as some who have already purchased”. It is not known whether this group included long-term owners and former shared owners.
Prior to carrying out an assessment of the draft new Key Information Document, Shared Ownership Resources carried out an informal spot survey on social media, asking: “Is there anything you didn’t know when you bought your first % share that you wish your housing association had told you? Or your solicitor? And, if so, what?”
Broadly speaking, the spot survey suggested that shared owners’ concerns fell into four categories:
- Insufficient information about future costs and long-term affordability.
- Problems arising from complex ownership structures (including head and superior leases) which weren’t apparent from information provided at the point of sale.
- A lack of consistency between the lease contract and other sources of information (including housing association websites).
- Issues around due diligence and trust.
Spot survey responses, and previous casework, were taken into account in formulating the following recommendations.
A pathway to full ownership?
Include information on different pathways to ‘full ownership’ (staircasing and/or gain on sale) explaining factors to consider on each pathway.
Given that a key claim for shared ownership is that it offers ‘a realistic pathway to full ownership‘ the absence of any information on navigating the two different pathways available (staircasing to 100% and/or full ownership in a subsequent property via a gain on sale) is problematic.
Include information on the significance of the purchase decision for future life opportunities, and explanations of risks.
The Key Information Document states: ‘Failure to pay your rent or service charge or your mortgage could mean your house is at risk of repossession’. This is an essential risk to be aware of. But it is far from the only risk associated with the shared ownership scheme. Yet this is the only reference to risk in the entire Key Information Document.
“This type of home ownership brings with it particular risks and limitations, so it is particularly important that prospective buyers are well-informed”.The Law Society
“Not so much that we didn’t know… more that we didn’t understand….”Shared owner
Shared Ownership Resources’ full report includes a benchmarking exercise with the pensions and prescription medicine sectors.
Risk is highlighted, where applicable, in the following recommendations.
Detailed information about the shared ownership scheme, including risks, should be provided prior to viewings.
Homes England say:
‘It is a condition of grant funding that these documents are completed and provided to the customer no later than at reservation stage… The ‘Summary of costs of the Shared Ownership home’ and ‘Key information about Shared Ownership’ documents should be explained to the customer who should be given the opportunity to ask questions before reserving the home’.Capital Funding Guide, Sections 11.33.-11.3.4
Is the question of whether the shared ownership scheme in general is ‘right’ for someone sufficiently differentiated from the question of whether a specific shared ownership home is ‘right’ for them? It’s essential that homebuyers are provided with information to assess whether the scheme is ‘right’ for them prior to viewing properties, not afterwards.
The following recommendations relate specifically to Parts 1, 2 and 3 of the Key Information Document.
PART 1 – KEY INFORMATION ABOUT THE HOME
Include an explanation of differences between schemes (new-build, resale, OPSO, rural exception sites, Designated Protection Areas).
The updated Key Information Document explains that there are variations in shared ownership models depending on:
- what rules were in place at the time the home was funded or planning permission was granted
- where the home is located, and
- whether the home is for a specific group of people.
Outline key differences between Affordable Housing Programmes (AHPs) – SOAHP 2016-21, AHP 2021-26, etc.
The updated Key Information Document explains some key differences between the ‘older model shared ownership’, the ‘standard model’ and the ‘new model ‘following recent reforms. Though it would be helpful to be more specific in referring to Affordable Homes Programmes. The problem with the approach in the Key Information Document is that it isn’t precise enough; the ‘new’ model will rapidly become the ‘standard’ model!
7. Full market value
Include an explanation of full market value methodology (eg. RICS valuation, commercial valuation) with reference to any new-build premium (if applicable).
The Key Information Document does not make any reference to new-build premiums in the calculation of market value. This is useful information for homebuyers who are inexperienced in property markets and who are placing reliance on the gain on sale pathway, Improved awareness of new-build premiums could assist homebuyers in assessing any risk of not achieving sufficient gain on sale to enable transition to full ownership in a subsequent property.
Explain the time period taken into account for affordability assessments (year-one income and expenditure) and that affordability of additional shares in the future is not guaranteed.
The Key Information Document requires the housing provider to specify the maximum percentage share the shared owner can staircase to, in acknowledgement of equity caps on some schemes. However, there is no explanation of the current market value policy for purchasing additional shares, or that affordability of staircasing in the future is not guaranteed.
As recommended by the Law Society, homebuyers should be provided with statistics on numbers staircasing to 100%.
‘Consumers need to be given full information about the statistics on ownership, the continued liability for ground rent and service charges and the past evidence indicating that very limited numbers of buyers have vastly increased their shared holding since their initial purchase’.The Law Society
Explain ‘upwards only’ RPI plus a percentage annual rent reviews, and signpost to Parts 2 and 3 for further information.
A misleading ‘year-one’ approach to affordability persists in the updated Key Information Document. Stating that rent is calculated as 2.75% of unsold equity is inadequate in the the absence of meaningful explanations of the contractual requirement for ‘upwards only’, RPI plus up to 0.5% annual rent reviews. The year-one approach to rent costs greatly understates potential risks associated with the shared ownership scheme; something that the current decoupling of wage inflation and RPI is bringing to the fore.
10. Monthly payments to the landlord
Explain 100% liability for all repair and maintenance costs, and the uncapped nature of service charges. Provide more detailed information about reserve fund payments and future liabilities.
The section on monthly payments to the landlord ignores the complexity of many shared ownership arrangements, with many shared owners liable for payments to more than one party. There is no reference to 100% liability for service charges (something that is not explicitly referenced in the model lease itself either), nor to the uncapped nature of charges for maintenance and repairs.
“I was not clearly advised that my responsibility will be 100% for the major building works rather than actual share of the approved 25% affordability. That’s the whole reason shared owners would enter the agreement, to have the protection cap of what they can actually afford”.Shared owner
There is also no requirement on the housing provider to specify sinking fund levels and anticipated expenditure against those funds (for resales).
These omissions result in considerable understatement of potential risks associated with the shared ownership scheme.
11. Reservation fees
Provide information on any circumstances in which a reservation fee would be refundable.
There is no mention of the circumstances in which the reservation fee is refundable in the event of the sale not proceeding. For example, the seller withdrawing (resales). Or the buyer changing their mind after discovering the Key Information Document understates risks associated with the shared ownership model!
Explain the timescale and assumptions used to assess financial sustainability in applying eligibility criteria.
Homes England’s Key Information Document states that: ‘your finances and credit history will be assessed to ensure that you can afford and sustain the rental and mortgage payments‘. However, the entire focus of the Key Information Document, and affordability calculators, is on ‘year one’ costs. The claim to assess ongoing financial sustainability of the purchase lacks any credibility.
Specify whether an assured tenancy, or an assured tenancy, and why (with reference to ground rent terms).
The Key Information Document states that the tenure is ‘leasehold’. This is the truth but not the whole truth. Shared ownership takes the legal form of an assured tenancy or an assured shorthold tenancy. As such, shared owners bear greater risks and have fewer rights than leaseholders more generally.
“The fact that a shared ownership lease is an assured or assured shorthold tenancy means that until the shared ownership leaseholder has fully staircased, he or she has much more limited security of tenure than most ordinary leaseholders”.The Law Commission
The ongoing refusal by Homes England, to explain the legal nature of shared ownership exposes shared owners to risks they may not be aware of until (if) they crystallise.
14. Lease type
Signpost to Part 3 for information on house and flat leases. Provide information on any head lease/superior lease arrangements (if applicable) or any other relevant complexities.
No information or signposting has been provided on the significance of whether the property is a flat (leasehold, possibly with multiple interests in the lease) or a house (potential to purchase the freehold).
“Regarding head/superior leases, lots of shared owners don’t know about these even though it’s a common model for shared ownership properties where the HA leases the property from a developer who in turn leases it to a shared owner. Our superior lease between the HA and the developer contains a lot more detailed information on things like service charges liabilities compared to our actual lease. So you think you’re signing up to the terms of your own lease but, actually, there can be lots more onerous provisions in the superior/head lease which are only referred to in the small print of your actual lease, and are easily missed or not understood”.Shared owner
15. Lease term
Explain implications arising if there are fewer than 90 years remaining on the lease. Signpost to Part 3 for information on the 80-year threshold and marriage value.
Part 1 of the Key Information Document signposts to Part 3 for information on lease extension and the 80-year threshold.
16. Equity caps
Signpost to additional information in Part 3 on risks arising at different share percentages.
There is anecdotal evidence that it can be harder to sell shares above 50%, or a part-share where the ‘upwards only’, RPI plus a percentage annual rent review has caused rents to rise higher than comparable local properties. One solution – a simultaneous sale and staircasing transaction – may not be available if an equity cap is in place.
Entrants to the shared ownership scheme require transparent and comprehensive information on the potential implications of purchasing shares above 50%, and risks arising from equity caps, in order to make informed decisions, both at the point of purchase and thereafter.
17. Transfer of freehold
Provide information on any charges that may still apply subsequent to transfer of freehold. For example, rent charges, or estate charges.
18. Landlord’s nominations period
Provide details of fees chargeable. Signpost to Part 3 for additional information on risks and costs arising during the sales process.
Provide greater clarity on subletting restrictions, and fees for subletting subsequent to staircasing to 100% (if applicable). Signpost to Part 3 for information on the statistical probability of staircasing to 100% (at which point the generic prohibition on subletting falls away).
Although Part 1 signposts to Part 3, the latter largely duplicates the information provided in the former. Part 3 provides one example of when subletting could be permitted: ‘if you’re a serving member of the armed forces, and you’re required to serve away from the area where you live for a fixed period’.
The Key Information Document fails to make clear risks arising from the prohibition on subletting: for example, not being able to relocate for a temporary work contract in another part of the country; not being able to temporarily take up family caring responsibilities; or not being allowed to temporarily relocate to a cheaper home if income falls during maternity leave.
RECOMMENDATIONS: PART 2 – SUMMARY OF COSTS
20. Year-one costs/monthly payments
The year-one approach should be supplemented with an explanation of long-term costs and liabilities.
21. Deposit and reservation fee
Provide an explanation of the deposit and reservation fee, including whether it forms part of the purchase price, and whether refundable.
This section duplicates the same information provided in Part 1. The same comments apply as above (Recommendation 11).
22. Stamp Duty Land Tax (SDLT)
Provide details of SDLT options and whether or not a full market value election has been made on the property (for resales). Signpost to Part 3 for further information.
SDLT is complex. Whilst it is clearly not reasonable to expect Homes England to provide detailed advice, it is reasonable to expect the ‘Summary of costs’ document for a resale to include information on whether or not a market value election was made by the original purchaser, as this would ‘run with the lease’.
It is also reasonable to expect Homes England to provide some basic information on the two SDLT options available to purchasers of new-build properties, and to signpost to more detailed information in order that entrants to the shared ownership scheme are enabled to have informed discussions with their conveyancers.
23. Reserve funds
Information on purpose, level of funds, amount and timing of planned expenditure, risks and potential future liabilities.
Whilst the ‘Key Information Document: Summary of Costs’ includes an estimate for the monthly contribution into the reserve (sinking) fund (if applicable), this is less meaningful in the absence of any information on the current value of the sinking fund, anticipated future value at the time the fund is likely to be drawn on, and the budgeted expenditure at that point.
Illustrate the impact of ‘upwards only’ RPI plus a specified percentage annual rent reviews on initial year-one rent for this particular property through the use of indicative RPI assumptions (specified by the Government to ensure consistency across the sector) to indicate the cumulative impact of rent review terms. The illustrations should include ‘best’ and ‘worse’ case scenarios, including where RPI goes down.
The rent increase section has been amended to illustrate the differing impact of three rates of RPI: 3%, 6%, and 9%. This is a significant improvement on the previous iteration of the Key Information Document, which did not include any illustrations.
This section could be improved by:
- including an example illustrating the cumulative effect of RPI plus 0.5% over at least five years
- including an example illustrating the differential impact of cumulative rent increases on smaller and larger shares, and
- not assuming that RPI will stay in single digit territory (given forecasts of 17.7% RPI in 2022).
25. Service charge/estate charge/buildings insurance/management fee
Where monthly payments are due to more than one party, which payments are due to whom should be specified. Also that charges are uncapped, and that shared owners bear 100% liability. Provide the previous five years’ service charge (if applicable) and estimated service charges and rent over next five years.
“Naively I assumed service charge would remain at a reasonable level for the duration. Not increase from £100 to £300 in a few years”.Shared owner
26. Estate charge
Specify whether or not estate charges continue to be payable following purchase of the freehold (for houses).
Provide statistics on achievement of full ownership, including numbers staircasing to 100%.
Implemented? No. (See also Part 1, Recommendation 8).
28. Selling on
Provide information on implications if a shared owner accepts an offer either higher or lower than the RICS valuation, with signposting to additional information on simultaneous sale and staircasing transactions in Part 3.
PART 3 – KEY INFORMATION ABOUT SHARED OWNERSHIP
29. Pathway to full ownership
Prior to provision of information on specific properties, provide information on different pathways to ‘full ownership’ explaining factors to consider on each pathway.
As detailed in Recommendation 2, it is odd that a scheme whose stated rationale is a ‘pathway to full ownership’ provides no information about how best to navigate that pathway to achieve a positive outcomes. (See also Recommendation 8.)
30. Pathway to full ownership national statistics
Provide previous 5 years’ national statistics relating to achievement of ‘full ownership’ – absolute numbers and %s of shared owners staircasing to 100% or transitioning to full ownership via a gain on sale.
Implemented? No. (See also Recommendation 8).
Complex issues should be acknowledged and explained, including the potential future consequences of purchase decisions and the need to assess options against personal circumstances and intentions.
This updated version of the Key Information Document is considerably more comprehensive than the previous iteration (which was only two pages in length!). However, it falls a long way short of explaining the complexities of shared ownership to the degree required to enable informed decision-making, at the point of purchase and thereafter.
Shared ownership is complex in design and delivery. If it’s too complicated to explain, it’s questionable whether it’s a suitable as a pathway to home ownership for first-time buyers who are, by default, inexperienced in property markets.
A full life cycle cost approach should replace the current ‘year one’ approach in providing explanations of potential long-term benefits, risks and costs.
RECOMMENDATIONS: CONSUMER PROTECTION
Amend the shared ownership tenure from assured or assured shorthold tenancy to leasehold, This could potentially be achieved by making exempt all long leases (whether or not with a rent over the Housing Act 1988 threshold) from being assured tenancies via Schedule 1 of the Housing Act 1988.
Whilst it is presumably not within the gift of Homes England to deliver amendments to the Housing Act 1988, it is unclear why the current legal status of the tenure is omitted from a Key Information Document.
34. New Homes Quality Board (NHQB)
Bring shared ownership within the scope of the NHQB Code.
Again, it is not within Home England’s gift to determine when, or whether, shared ownership is bought within scope of the NHQB Code. But it is incumbent on Homes England to ensure that shared owners receive the same level of protection offered to other homebuyers by that Code. For example, sufficient information to make an informed decision about their purchase, and a ‘cooling off’ period in relation to reservations.
The new style Key Information Documents for the Shared Ownership and Affordable Homes Programme (SOAHP) 2016 to 2021 were published on 29 July 2022. Homes England state that providers should transition to using these as soon as possible for both new sales and resales (by 15th September 2022 at the latest). Prior to this date, providers may continue to use the documents previously provided to entrants to the scheme: Key information for shared owners of flats in England or Key information for shared owners of houses in England. Key Information Documents for the Affordable Homes Programme 2021 to 2026 have also been published.
Featured image: www.freepik.com