Shared ownership consultation – It is out of the bag (sort of) – the ten year maintenance period will start from…

The key changes

Updated comments

Devonshires Comment

Reduction in the minimum initial share from 25% to 10%

It is acknowledged, in the consultation, that there is a risk that by offering greater access to these products, it may encourage new third party entrants in to the mortgage market with the potential for unfavourable lending terms to be offered.

The consultation asks: What steps could we take to prevent shared owners from being exposed to unfair lending terms?

The mortgage market is vital to the success of the housing market. Whilst the role and performance of housing providers, developers and stakeholders regularly attracts attention, it can seem as if the housing mortgage market is largely left to its own devices.

We are seeing the lending terms of current mortgage providers tightening and new hurdles to draw down being introduced. There is a question mark over the appetite of these providers to increase their exposure.

Whilst one response to the question could  be along the lines of encouraging housing providers to maintain a list of approved mortgage lenders (nothing really new in this), the reality must be that providers will need to be prepared to engage with new entrants to help to ensure the terms offered to the market are fair.

The mortgage protection clause in the standard form lease has always been an area of interest. Where there is a lower level of equity (provided with the benefit of the mortgage) being provided by purchasers is it right that the mortgage protection clause should still be capable of being levied against those investing in delivering shared ownership?

Introduced a new gradual staircasing offer, to allow people to buy additional shares in their home in 1% instalments with heavily reduced fees

The Consultation states that Landlords will be required to serve an updated statement on owners at least once a year with the revised value for their consideration.

The 1% right is to last for the first fifteen years. However, there is no ability to roll over for owners.  This means that in year two, for example, if no staircasing right was exercised in year one, the purchaser cannot require the landlord to allow it to staircase by 2%.

The purchase of larger increments (down from 10% to 5%) is allowed.

Landlords will be prohibited from charging administration fees on shares bought as part of this gradual staircasing model. Buying in 1% tranches will make it much easier to staircase without additional lending, enabling shared owners to avoid mortgage fees.

In  addition, the question is posed as to whether HPI will always be relevant.

There can often be challenges in relation to the relevance of HPI from timing of the data to the lack of relevance particularly in heavily regenerated areas. It would be fair that a reference point will be required and we understand that various different approaches have been debated for example looking at the basis that the balance of the rent is assessed.

From a charity law perspective, if Government dictates that this right is provided on these terms, we see no reason for charitable housing providers to be concerned.

The consultation states: The model is designed for cash purchases, avoiding further mortgage fees. The Mortgagee’s charge shall be secured over the additional 1% purchased and the buyer will be required to notify the Mortgagee in the event of completion of gradual staircasing.

The key question this raises is whether lenders will be willing to change their terms in light of the benefit of them receiving a charge over a larger share (ignoring the protection point already touched on above). Will they be looking to impose notification obligations (and for charges to be levied in connection with those notifications?). Whilst landlords are not allowed to charge fees there is no indication in the consultation that Government intends to prevent lenders from doing so.

There is also the wider consideration of the views that lenders to housing providers will have, arising out of these changes, and the security value of shared ownership property. This will no doubt develop over time.

Technology – in line with our previous comments in this area, the on-boarding of appropriate technology platforms to allow for a an accurate processing and recording process in relation to any changes in purchasers interests with their property is going to be essential.

More IT contracts and bespoke software products feel a strong possibility for providers. The use of technology may also help to alleviate concerns over the potential impact of these changes on investors’ appetite as access to the reporting of accurate information seems to be one of the biggest considerations.

Introduced a 10-year period during which the shared owner will receive support from their landlord to pay for essential repairs

• The “10 year, repair free period” will apply to new build homes for the first 10 years of the property’s life or until the shared owner reaches 100% ownership (whichever is sooner).
• If the home is resold (as Shared Ownership) within this 10-year period, then the remaining years will be transferred over to the new shared owner. For example, if the home is resold at year 6 then the on resale the home will have a “4 year, repair free period” remaining.
• Where a resident has accessed Shared Ownership through the Right to Shared Ownership, they will have access to the “repair free period” providing that the property is still less than 10 years old. For example, if a resident accesses Shared Ownership through Right to Shared Ownership at year 6 of a property’s life, then the home will have a “4 year, repair free period” remaining

The potential repair obligation:

Shared Ownership landlords will be responsible for the cost of essential repairs required to the external fabric of the building and structural repairs to walls, floors, ceiling and stairs inside of the home – but only where the repair is not covered by the new build guarantee. There will be an expectation that any work required that is covered under the new build guarantee will be claimed by the policy holder at first instance.

The second point however, is open to question as –  Responsibility for carrying out the structural repairs will remain with the building owner for flats or, in some cases, the shared owner for houses. Once again the drafting of the model form lease is essential to ascertain how the  potential split in obligations, in some cases, will be provided for.

Internal Repairs

The consultation states: Shared owners will remain responsible for repairs inside of the home but will be eligible to reclaim costs from the landlord for the essential repair or replacement of (if faulty and not covered by warranty):

• installations in the flat or house for the supply of water, gas and electricity and for sanitation (including basins, sinks, baths and sanitary conveniences, but not other fixtures, fittings and appliances for making use of the supply of water, gas or electricity), pipes and drainage
• installations in the flat or house for space heating and heating water

Shared owners will be able to claim up to a maximum of £500 in repair costs per year. Repair and maintenance costs in excess of this will be the responsibility of the shared owner. We have included a cap to prevent misuse of the scheme and to limit the landlord’s exposure.

Shared owners will have the flexibility to roll over a maximum of 1 years’ worth of unused repairs expenditure into the following year (i.e. maximum roll over amount will be £500). This will help to protect shared owners in circumstances where annual repair costs exceed £500 and they had claimed less than £500 in the previous year.

Shared owners will not be able to reclaim costs for a repair or replacement of any of the above due to improper use.

Shared Ownership landlords will be responsible for ensuring works carried out are essential and genuine.

The landlord will not be responsible for carrying out any cyclical works inside the home (e.g. pre-planned replacement/refurbishment of kitchen/bathroom).

Health and safety requirements (e.g. gas servicing, electrical testing) will remain the responsibility of the shared owner

However, then comes the reference to new build guarantee reliance.  The market has already seen a resurgence of the provision of 24 month defect periods (in line with the requirements of most warranty providers and offered on open market sales) in build contracts (and now a number of section 106 agreements).

There is a question as to whether the role of retentions (of appropriate value and duration) need to change and offer a route to enabling housing providers to manage the additional costs that providers will incur under this new scheme.

Service charges are to remain for general maintenance and shared owners will be responsible for these. Will the new standard lease allow certain repair obligations to be unenforceable if a tenant is in arrears with a landlord? Whilst the reality is that if the repair is essential a landlord is not likely to wish to withhold essential works, this is a further cost (in addition to the cost of the arrear) that would impact a landlord before any mortgagee under traditional arrangements.

A clue that the drafting of the new model form lease is still evolving is contained within questions 15 and 16:

15. What process should be put in place to enable shared owners to reclaim eligible repair expenditure from their landlord and resolve disputes?
16. What steps should be taken to ensure claims are genuine?

There must be a reasonable prospect of a rise in new potential actions in relation to the resolution and management of claims in relation to these arrangements.  That will involve  additional cost and resource for providers. In light of the new Residents Charter (and the introduction of a new and enhanced consumer standard regime ), providers will need to give careful thought as to how this will be operated, managed and reported.

In relation to the issue of internal repairs, question 12 of the consultation asks whether the proposed £500 limit is correct . There is the question too as to whether the introduction of the internal elements should be within the scope of the repairs (question 9) and one consideration is what will determine the need for a valid repair?

If the repair is due to damage caused by the occupant should they look to their insurance or own pocket? What will be the burden of proof required to ascertain if a warranty claim has been pursued? This will also attract a cost and management time for landlords.

Health and Safety compliance remaining the responsibility of the shared ownership lessee may be  welcome  – but landlords will continue to require assurance that procedures / regulations are being adhered to  – particularly given the forthcoming new  building and fire safety legislation. Will, therefore, the new model lease include more robust covenants, designed to protect the landlord, in relation to works procured by the lessee?

Given shared ownership leaseholders (shared owners) more control when they come to sell their home