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Shared ownership leases: Revolution or evolution?

02 July 2010

The last 18 months have seen significant changes in the affordable housing sector, with the prospect of more to come - not least because of the challenges facing the new coalition government.

Alongside the effects of the recession we now have the TSA, the HCA (with a broad regeneration mandate that extends beyond affordable housing provision) and a potential resurgence in council housing through direct provision and local asset-backed structures. The future may bring less funding and more competition.

Against this backdrop we now have new shared ownership leases since 6 April, following a period of HCA consultation with stakeholders including the Council of Mortgage Lenders and registered providers (RPs).

The changes are both evolutionary and revolutionary. Evolutionary because the leases are intended now to be easier to read while maintaining the earlier format; revolutionary because the changes reposition the product for life in a new, lender-friendly, housing market.

The new leases are mandatory for any new sale from 6 April 2010. The HCA acknowledges this means many grant-funded schemes will be 'mixed', with lettings under the old and new leases. The HCA takes the view the changes will not cause undue problems for RPs, as the changes largely redraft rather than alter the earlier leases. This is generally the case, although RPs will need to be mindful of the changes to the mortgagee protection clause (where the changes are more significant), rent review and the switch to a specified form of rent review notice, all of which will require action going forward.

Some of the changes clearly will benefit RPs and are to be welcomed. Any uncertainty over rent review has been swept away, with a clear statement in each lease that reviews are upwards-only, by the higher of the rent plus 0.5% and RPI plus 0.5%. This may always have been the intention, but the leases now clearly acknowledge that rents will not fall if RPI crashes.

Following on from this, the new leases include a specified form of rent review notice, and RPs will be required to follow this format on future reviews. Practically, this may become the form of notice for all shared ownership lease rent reviews, new and old, and RPs may need to review their internal processes to make sure that notices are produced quickly and accurately each year.

More problematic for many RPs is the new form of mortgagee protection clause (MPC), with a shift to allowing approved lenders to recover 18 months' interest (up from 12 months under the previous lease) and also a cap on costs in the lender's claim of 3% of property market value at the time the claim is made. This 3% cap is likely to become the norm on future claims by lenders.

The MPC is very much the 'nuclear option': lenders to defaulting shared owners may exercise their rights to step in and sell the lease while simultaneously staircasing to 100% and recovering their costs from the RP as a deduction against the final staircasing premium.

Recent months have seen significant numbers of these 'repossession staircasing' sales, and a significant number of large deductions claimed by lenders. Where RPs rely on staircasing receipts as part of their business model, these major claims can have a substantial and negative impact on finances.

Hopefully, with the new market conditions and signs of economic recovery, repossession staircasing claims will fall back to sustainable levels. However, the game has moved on with these changes to the MPC and it may be that RPs now adopt different strategies with defaulting shared ownership tenants, rather than just claiming against the lender, to protect against claims against future staircasing receipts if the lenders trigger the MPC.

Undoubtedly these changes will not be the last. However, they do require review and RPs will need to take action on a number of fronts, the most important being:

Overall, the latest set of leases represents an improvement for tenants and RPs as the new formats are easier to read and to use.

However, there are some areas that will cause concern for RPs and the effects of these changes should be actively managed.

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David Perry

Solicitor
T: 03700 86 4068
I: +44 (0)121 625 4068
E: david.perry@shoosmiths.co.uk