Buying a property – any property – will be the largest item of expenditure any of us incur in our lifetimes. Buying a shared ownership property adds layers of expenditure, which other types of properties do not attract – some of which are not obvious at the point of purchase.
Shared ownership was designed to be a cost-effective form of ownership to help first-time buyers get onto the market. Whilst the concept in theory works, it has not been without financial difficulties for owners in practice.
This article does not delve into the general problems with shared ownership, which are covered elsewhere on this website. Instead, we focus on how the reforms may or may not assist leaseholders in the future.
Types of expenditure
Ongoing costs
Currently, many shared ownership leaseholders pay some or all of the following categories of regular expenditure:
- Ground rent (payable to the landlord or freeholder);
- Rent (payable to the shared ownership provider);
- Service charges (including building safety charges where relevant);
- Estate charges and rentcharges (or a contribution toward those through service charges on estates);
- Mortgage ;
- Help to buy loan (Help to Buy ISA bonus); and
- Household bills.
One-off, or infrequent, costs
Staircasing
In addition, during the lifetime of ownership, a shared ownership leaseholder may pay to “staircase” (purchase part of the equity which the leaseholder does not currently own). This involves paying a lump sum of money to the shared ownership provider.
Lease extension
Separately, a shared ownership leaseholder may need a lease extension in order to sell or remortgage (where the term of the lease becomes so low that it is not possible to deal with the asset without first extending the lease). This involves paying a premium to the landlord or freeholder for that extension.
The totality of these costs can be considerable, and often overwhelming for leaseholders. There are also criticisms with the current law, which seemingly offers little protection for shared ownership leaseholders.
Current law
Landlord and tenant law is complex, with not only the terms of the lease to understand, but a long list of statutory provisions to contend with. The vast majority of laws apply to all leasehold properties. But is it is common for shared ownership leaseholders to be expressly excluded from the benefits of these laws, which causes injustices within the shared ownership community.
The problems with the laws are documented elsewhere on this website. But, for the purposes of this article, the following key points are noted:
- Service charges – Liability for 100% of the service charges even if you do not own the entire flat (ie have not yet fully staircased). This includes liabilities for major works, including building safety where relevant.
- Lease extension – No right to a statutory lease extension (unless fully staircased). Elsewhere, the law permits leaseholders (excluding shared ownership leaseholders who have not fully staircased) the right to mandatorily claim a lease extension from their landlord. The process is prescribed and gives the leaseholder certainty on the terms (a 90-year extension on top of the residual term plus a peppercorn ground rent). If shared ownership leaseholders require a lease extension currently, this must be negotiated privately with the relevant landlord or freeholder, who can decline to grant a lease extension if so advised.
- Right to buy the freehold – No right to buy the freehold of the house (unless fully staircased) or block of flats. Elsewhere, the law permits leaseholders (excluding shared ownership leaseholders who have not fully staircased) to buy the freehold using a prescribed process.
There are other rights which shared ownership leaseholders do not benefit from in the same way as non-shared ownership leaseholders, such as the right to appoint a manager or right of first refusal.
The reforms: overview
Since 2016, the Government has been reviewing various issues with landlord and tenant laws. The review has been extensive ranging from ground rents, service charges, regulation of managing agents and commonhold to name but a few. The task has involved multiple agencies such as the Financial Conduct Authority, Law Commission and the Competition and Markets Authority.
The reform process is very much still underway, but we have already seen some changes. This includes:
- Fire Safety Act 2021
- Building Safety Act 2022
- Leasehold Reform (Ground Rent) Act 2022
In addition, the Government continues to consult and progress their policy in key areas, including:
- Restricting ground rents for existing leases (see here)
- Reforming the leasehold and commonhold systems (see here)
The majority of the reforms apply to leaseholders generally, although we are now starting to see some shared ownership-specific reforms come to fruition. This includes, notably, proposed amendments to the Leasehold and Freehold Reform Bill (“the LFRB”), which is currently progressing through Parliament (see here).
The Leasehold and Freehold Reform Bill
The LFRB proposes to make substantial changes to the law to improve the position for leaseholders. The Bill has six parts to it:
Part 1: Enfranchisement – Changes to the laws relating to the right to buy the freehold or extend the lease. These changes make it more cost-effective for leaseholders.
Part 2: Right to manage and a new right to buy the ground rent – Changes to make right to manage more accessible, and a new right to allow certain leaseholders to buy out their ground rents without doing a full lease extension.
Part 3: Service charges – Extending protections to allow leaseholders more transparency over their service charges, and greater protection on legal costs (including a right for leaseholders to claim costs from the landlord where successful in certain situations)
Part 4: Estate charges – Giving freehold home owners new rights to challenge estate charges
Part 5: Rentcharges – Better protections for those who pay rentcharges
Part 6: definitions, general and ancillary
The LFRB is progressing quickly with government having previously advised that they are aiming to complete the legislative process by May.
The reforms: process
Before getting into the detail of shared ownership reforms, it is first important to explain the legislative process. It is slow!
The following sets out a very broad overview of what generally happens.
Stage 1 – The Government first decides to investigate and review a specific area of law. This might include calls for evidence, consultations, or outsourcing investigations or the work to a third party, such as to the Law Commission or Competition and Markets Authority.
Stage 2 – Following a comprehensive review, recommendations will materialise, whether from Government themselves or from the outsourced third party.
Stage 3 – The Government will then decide whether or not to act on some or all of those recommendations.
Stage 4 – If the decision is made to implement some or all of the recommendations, it then progresses to draft legislation. This stage can take months, and sometimes even in excess of a year, as the Parliamentary process is slow. During this period, the draft legislation can be added to, removed, or amended significantly.
Stage 5 – At the end of the Parliamentary process, the draft legislation is given Royal Assent, meaning the bill has been approved (in the final version of the bill as drafted at that stage)..
Stage 6 – The act is then commenced, either all together or different parts at different times. This is the final stage when the law then changes.
It is very difficult to give timeframes on the process, start to finish, as there are many factors that play into it. This can include, for example, political appetite or a general election.
The reforms: shared ownership changes
The shared ownership reforms are very much in three distinct stages:
- The past – legislation already introduced
- The present – in the process of being introduced
- The future – still under investigation
In the table below, we outline reforms relating to:
- Ground rent
- Rent
- Service charges
- Mortgages, Help to Buy loans, and household bills
- Staircasing costs
- Lease extension
- Right to Manage
| TYPE OF EXPENDITURE | CURRENT STATUS | LINKS TO FURTHER INFORMATION |
| GROUND RENT | This relates to the ground rent payable to the landlord for the part of the property owned by the shared ownership leaseholder. | |
| New leases (Stage 6) The Leasehold Reform (Ground Rent) Act 2022 limits the ground rent payable on the grant of a new lease to a “peppercorn”. It also limits the ground rent payable on the extended term of an informal lease extension. Shared ownership leaseholders benefit from this for the part of the property which they own. | Leasehold Reform (Ground Rent) Act 2022 | |
| Existing leases (Stage 1) There is a proposal to limit ground rents on existing leases. This is in the consultation phase only, so very early on in the process. It is not clear if shared ownership leaseholders will benefit from this, as it is too early to say. | Closed consultation: Modern leasehold: restricting ground rent for existing leases | |
| RENT | New leases On 12 October 2023, the Government published a series of reforms to annual rent review terms in model shared ownership leases. The reforms include a new formula for calculating annual rent increases. The formula is now based on the Consumer Price Index (CPI + 1%), rather than the Retail Price Index (often RPI + 0.5%, or RPI + 2% on older leases). However, these reforms are not retrospective. Additionally, there are transitional arrangements in place, meaning that not all new leases will include these provisions. | Shared ownership rents reform |
| Existing leases The Government has committed to phasing out RPI by 2030. It is not yet clear how this commitment will be actioned as regards existing shared ownership leases. | ||
| SERVICE CHARGES | The current laws allow all leaseholders to challenge their service charges and benefit from various protections (Landlord and Tenant Act 1985 ss18 – 30). | |
| The LFRB (Stage 4) will introduce a raft of new transparency rights for all leaseholders. Currently, it is intended that shared ownership leaseholders will also benefit from these rights. (Please note that this can change as the bill progresses through Parliament). This will give shared ownership leaseholders a better understanding as to where their money is going, rights to request key information, new year-end reports and then better powers to challenge service charge costs if needed. | Leasehold and Freehold Reform Bill | |
| New leases In 2020, the Government consulted on a new model for shared ownership, recognising the injustice of shared ownership leaseholders paying 100% of the service charges. The new model was introduced for shared ownership homes delivered under the Affordable Homes Programme 2021-26. One of the changes introduced under the new model was a 10-year initial repair period, which makes the landlord responsible for some repair costs for the first 10 years. The new model lease is not retrospective. | New model for Shared Ownership: technical consultation | |
| Existing leases There are currently no proposals to reduce existing shared ownership leaseholder contributions from 100%. | ||
| MORTGAGE, HELP TO BUY LOAN, HOUSEHOLD BILLS | This is beyond the scope of leasehold reforms, but is being addressed as part of the Government’s general cost of living proposals. | |
| STAIRCASING COSTS | Currently, the law is very limited in respect of protecting shared ownership leaseholders when staircasing. The lease will typically set out how, what and when leaseholders can staircase, with the shared ownership provider retaining much control over the amounts paid. | |
| The new model for shared ownership homes delivered under the Affordable Homes Programme. 2021-26 makes some changes to staircasing terms. Previously shared owners had to increase their existing share by a minimum of 10% each time they staircased. Reforms allow them to staircase in 1% increments each year for 15 years. The new model lease is not retrospective. | New model for Shared Ownership: technical consultation | |
| The Government has separately set up a designated shared ownership committee who is investigating whether or not shared ownership is an affordable programme (LUHC Committee inquiry into shared ownership). This is in the very early stages (Stage 1). | Levelling Up Committee launches inquiry on shared ownership | |
| LEASE EXTENSION | Currently, shared ownership leaseholders can only extend their lease by consent, or informally, with the relevant landlord. This process is unregulated, and offers little protection to leaseholders. Further, this has been known to cause difficulty in more complex, but common arrangements, where the landlord holds a lease over the flat but does not own the freehold interest. | |
| The LFRB (Stage 4) provides that qualifying shared ownership leaseholders (there are four new conditions relating to the existing lease) will have new rights in future to extend their leases using the statutory, or formal, process which the majority of other leaseholders currently benefit from. The detail can be found in the bill itself but broadly the conditions (A to D) are as follows: A. The lease allows for staircasing by 25% increments or less (whether or not also by larger increments). B. The lease provides for the price payable for staircasing proportionate to the market value at the time and, if increased, the rent payable for the landlord’s remaining share to be proportionately reduced. C. The lease allows for staircasing up to 100%. D. The lease provides for the falling away of the shared ownership, without any further payment, when staircasing up to 100% has occurred. If this does, as appears is intended, benefit a large number of shared owners, this is a significant and very positive change. As set out above, however, all of this has yet to be tested. Further, the position in more complex title arrangements will likely lead initially to complications, whilst the law is being tested/evolving. The LFRB also introduces similar provisions in respect of leasehold houses and the right to buy the freehold of that house. | ||
| RIGHT TO MANAGE | A recent case has confirmed that shared ownership leaseholders may be able to acquire right to manage of their building if they qualify the general right to manage qualification criteria. This is a powerful tool for shared ownership leaseholders as it allows leaseholders to control the management of their buildings. It is proposed within the LFRB (Stage 4) to relax one of the qualifying criteria to enable more leaseholders to apply than they can currently (to do with non-residential areas in mixed-use buildings). | |
| OTHER | As advised, the reforms are far-reaching and far from being concluded. There may well be other reforms to follow which benefit shared ownership leaseholders. |
SUMMARY
The law is constantly evolving, not just as a result of the legislative changes, but also due to case law. We will bring you fresh updates as and when changes happen to keep you informed.
The Team at Commonhold and Leasehold Experts Limited
29 February 2024
THESE NOTES ARE INTENDED FOR GENERAL GUIDANCE ONLY – YOU MUST OBTAIN SPECIFIC LEGAL ADVICE and not rely upon these notes solely. Commonhold and Leasehold Experts Limited accepts no liability in the event that these notes are relied upon for a specific set of circumstances.
Featured image: Annie Spratt on Unsplash
Be First to Comment