Or, why does it cost so much to extend the lease on an ‘affordable’ shared ownership flat?
Most shared owners (most people!) won’t have heard of Zucconi. And many won’t be aware that the Zucconi precedent considerably increases the cost of lease extension, where there are fewer than 80 years remaining on a lease. Read on to find out why this is, why it matters, and reforms that would benefit existing and future shared owners.
Why does lease extension matter?
- Once there are fewer than 80 years remaining on a lease, the value starts to go down.
- This can make it harder to obtain a mortgage and, consequently, harder to sell your home. Or more difficult to staircase.
- Even if you’re planning to stay in your home, a short lease may create problems for the beneficiaries of your will.
What is Zucconi?
- When people talk about Zucconi they are referring to a legal case in 2019. (The full title of the legal case was Trustees of the Barry and Peggy High Foundation v Zucconi and Anor).
- The case is relevant to shared owners because the outcome substantially increased the likely cost of lease extension, and most shared owners were sold a short lease (either 99-years or, more recently, 125-years for flats).
How does Zucconi increase the cost of lease extension?
- The charge for lease extension (the premium) is made up of several different components. One of these is marriage value. (This only applies to lease extensions where there are fewer than 80 years remaining on the lease. Marriage value doesn’t doesn’t form part of the calculation prior to the 80-year threshold).
- Marriage value refers to any increase in the market value of a home following a lease extension.
- To put a figure on marriage value it’s necessary to calculate the value of the remaining years left on the lease (the unextended value). This is done using relativity graphs. Relativity graphs are inevitably subjective so there are various different graphs in circulation.
- The Zucconi case changed the default relativity graph previously used to calculate the marriage value component of lease extension premiums.
- The new approach to calculating marriage value makes it a lot more expensive for shared owners (and leaseholders in general) to extend their lease (albeit much more lucrative for the freeholder/housing association). The Zucconi precedent pretty much doubles the cost of lease extension in many cases. The example below is for a flat with a market value of £375,000, and 78 years remaining on the lease, as at 2020.
- Housing associations were slower than commercial freeholders in taking advantage of the Zucconi precedent. But now at least some housing associations appear to be doing so. Maybe most or all.
Is it reasonable for housing associations to take advantage of Zucconi?
- An obvious problem with housing associations taking advantage of the Zucconi precedent is that they sold first-time buyers flats with short 99-year or 125-year leases with a promise of affordable home ownership, yet without providing essential information on lease extension, the 80-year threshold or marriage value. Homes are much less affordable if shared ownership buyers have to pay for lease extension before they’ve even finished paying off a 25-year mortgage term on their initial share.
- Some shared ownership buyers could have extended more cheaply had they known about lease extension issues earlier.
- In this context it doesn’t seem fair or reasonable to move the goalposts yet again, pushing lease extension even further out of reach by taking advantage of the Zucconi precedent.
- One housing association, MTVH, instructed valuers not to take advantage of Zucconi in at least one case to ensure fairness and parity with shared owners who extended prior to Zucconi. But this example appears to be far from the norm.
Is it reasonable for housing associations to charge a premium for lease extension on a shared ownership flat?
- There is a strong moral argument that housing associations shouldn’t charge any premium at all for lease extensions on flats. Firstly, because of the lack of relevant information about short leases and lease extension at point of sale. And, secondly, because shared owners purchasing houses obtain the freehold without any premium whatsoever when (if) they staircase to 100%; something which is enshrined in law.
- Why are first-time buyers sold short leases on shared ownership flats penalised with increasingly expensive lease extensions, and not afforded rights similar to those purchasing shared ownership houses?
- At the very least, housing associations should cease taking advantage of Zucconi, and offer recompense to shared owners who’ve already been penalised by application of the precedent. And, if they are serious about providing affordable housing, housing associations should stop charging marriage value immediately to give current shared owners parity with future shared owners who will benefit from proposed reforms to prohibit marriage value.
- There is also a strong case for lease extension to 990-years with ground rents reduced to peppercorn as standard for all shared owners; with retrospective application for legacy shared owners with short leases (perhaps for an affordable, nominal, flat fee ).
Richard Murphy, MRICS Director, RJC Valuers, says: “Government and housing associations shouldn’t wait for legislation to introduce reforms to ensure that nominally ‘affordable’ shared ownership homes are more affordable in real life. They should act without delay by recommending marriage value is not charged to these flat owners”.
Lease extension and staircasing
- Shared owners who can’t afford both to staircase and to extend their lease currently face a dilemma. If they extend their lease before they’ve staircased, it will make future staircasing more expensive because lease extension increases the value of their home. But the cost of lease extension increases with each passing year (at least until/if proposed Government reforms are finalised and implemented).
Lease extension and proposed reforms
- Proposals to reduce the cost of lease extension and eliminate ground rents create a headache for shared owners who are approaching or have already breached the 80-year threshold. Do they wait for reforms which may or may not be implemented, or be watered down? Or do they extend now given the cost otherwise increases year on year?
Any thing else I need to know….?
- The other legal case you won’t have heard about is Treskonova (Deritend Investments (Birkdale) Ltd v Ms Kornelia Treskonova). This creates a precedent for yet another approach to relativity making shared ownership lease extension even more expensive than the charges enabled by the Zucconi case.
- Housing associations have very different policies on lease extension generally. Inside Housing report that: ‘Optivo charges shared owners a premium based on 100% of their home’s value, while MTVH’s shared owners pay a percentage based on the share of their home that they own.’
Updated 27 March 2021 to take account of the Treskonova case and to examine in closer detail the moral argument for not charging marriage value, or indeed lease extension premiums, on shared ownership flats at all.