It is fair to say that the Ministry of Housing, Communities and Local Government is not letting world events slow them down. It recently disclosed further details on its proposed New Model for Shared Ownership.
Their technical consultation is now open and runs until 11:45pm on 17th December 2020. In line with our previous webinars and commentaries we would strongly recommend that those engaged in the sector continue to engage in the process to ensure that the years of hard work invested in bringing shared ownership forward as a stable tenure basis are preserved.
Please click here for the scope of the consultation.
The consultation reinforces previous announcements (including those in the Social Housing White Paper) whilst providing some of the additional clarity that the sector has been seeking:
The key changes
Reduction in the minimum initial share from 25% to 10%
|The message is clear: the Government’s desire is to provide greater access to its home ownership products.|
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 consultation states that providers should encourage purchasers to buy the maximum share that they can afford.|
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
|Under the new model, in addition to being able to staircase in larger amounts, shared owners will have the option to buy 1% each year with heavily reduced fees. The price of each 1% share will be based on an estimated valuation linked to the original purchase price, adjusted each year upwards or downwards in line with local House Price Inflation (HPI).|
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.
|One of the questions posed in the consultation is whether the use of HPI is acceptable from a charitable perspective and how long should the HPI calculation be valid.|
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
|Straight form the consultation:|
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.
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):
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
|So, Government has confirmed that the 10 years runs from the beginning of the “life” of the property. We interpret this as being the date upon which the building is certified as having reached practical completion. This is helpful clarity.|
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:
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
|The consultation reaffirms the commitment to a reduction from eight weeks to four weeks for owners to be allowed to look to sell the property on the open market.||While the other sections follow up with questions this part does not. It would be fair to translate this part potentially as a done deal…|
Section 106 reference – the consultation states that:
As previously confirmed, we will be setting an expectation that all Shared Ownership homes secured through s106 developer contributions will be based on the new model. The Secretary of State for Housing, Communities and Local Government will be laying a Written Ministerial Statement setting this expectation for all Shared Ownership homes that receive planning permission from April 2021. This will align it with the delivery of the new model in the Affordable Homes Programme 2021 to 2026.
For those properties not utilising the new grant programme there is a reference to adopting transitional arrangements similar to First Homes: “Where significant work has already been undertaken to progress a planning application, including where there has been significant pre-engagement with a local authority on the basis of a different tenure mix of affordable housing, the local authority should have flexibility to accept alternative tenure mixes, although they should consider whether First Homes could be easily substituted for another tenure.”
For the new planning world there is a reference to any new shared ownership secured through developer contributions under the proposed new CIL arrangements should adopt the new model. This would reinforce the ambition for the Planning for the future white paper to realises changes soon however we are afraid no further clues on timings but they are planning for during this new affordable funding programme.
The message is clear that the old model will not be applied to the new programme and the tone would seem to be that the aim is for the market place to adopt, wholesale, the new model only going forward
For those looking to partake in the consultation then you can respond by completing an online survey. Alternatively, you can email your response to the questions in this consultation by clicking here.
The consolation documents also contain a good old post address. Please do not hesitate to contact us with any queries, we look forward to the outcomes and the drafting of the new form of lease (it is the lawyers in us).