The long-awaited new form Shared Ownership model lease has finally been released via the updated Capital Funding Guide. Not only are there changes to the Lease but the CFG has also been updated to reflect these and some minor changes to affordability and sustainability.
The CFG Affordability changes….
These are all minor and seek to clarify points which have been unclear in previous versions of the CFG. Affordability assessment must now be carried out by a Mortgage Advisor with a suitable level of experience. This was previously only an option. It is now clear that when registering with the Help to Buy Agent that they only assess eligibility and not affordability.
Maximising shares is further clarified with the aim of a rate of 45% debt to income being the “standard.” RP’s can clearly use their discretion if they feel in certain circumstances this is not sustainable for any applicant.
In relation to resales it makes it clear that shares can be sold at the existing level even where a buyer can afford more. If they can afford a higher share, RP’s should facilitate where possible, bringing resales in line with new build sales.
Unsecured lending is not prohibited under the new model however, this would not benefit from the mortgagee protection provisions in the lease. This is clearly aimed at people buying very low shares using finance from other sources (e.g. personal loan). Such applicants would still be subject to the same affordability and sustainability criteria.
The New Model Lease:
Following much discussion and review of Leasehold regulations generally, new leases will be granted for a term of 990 years. This will avoid future lending issues when lease extensions are required and also brings Shared Ownership in line with the private sale market.
It has been well publicised that the minimum share will be reduced to 10%, at such a low initial share it will be even more important to ensure affordability and sustainability of long-term ownership. Much debate has been held around this point and it will remain to be seen how many applicants qualify to buy at this level.
The resales (or alienation) clause has been amended to reflect the change from an 8 week nomination period to 4 weeks. The reasoning is to prevent leaseholder from being “stuck” in the resale process and able to sell on the open market sooner.
The first major change to the lease is the introduction of 1% shares. Traditional staircasing still exists in the “old” form however an additional Schedule has been introduced allowing owners to buy a 1% share each year for the first 15 years of ownership. This right passes to new owners following a resale. To minimise costs for the leaseholder the valuation is undertaken by the RP making
reference to the original valuation of the property and the HPI (House Prices Index). Each party will also cover their own costs. A memorandum will still be required to record each additional share and the corresponding decrease in the level of Specified Rent.
The second major change relates to repairs. Historically the Shared Ownership Lease has been a full repairing lease with all responsibility for repairs lying with the leaseholder.
The new lease introduces an initial repair period which ends after 10 years or on final staircasing, whichever is first. Costs are covered up to £500 in any year, any unspent amount from the previous year can roll over to the next.
Such repairs do not cover wear and tear, and anything covered by buildings insurance or the warranty.
The model house lease has always included a draft Transfer to be used on final staircasing (when the freehold title is transferred to the owner). The new model requires this Transfer to specifically exclude the provisions of Section 121 Law of Property Act 1925 which brings this drafting in line with current lender requirements in relation to Estate Rent charges, such unacceptable rent charge provisions have caused lots of delays in recent years.
Two tiers of Shared Ownership?
Whilst RP’s are able to use the new lease for all sales going forward there will be a considerable period where properties will be available for sale with both forms of lease (indefinitely if we include resales).
RP’s will have to use the new lease on a plot sales which are grant funded under the 2021-2026 programme or in relation to section 106 units currently in planning.