Shared ownership leases

According to the Office for National Statistics, nearly one in a hundred households in England has a shared ownership lease. That is perhaps not surprising, in these dark days of unaffordable housing. But, following the recent decision in Richardson v Midland Heart Ltd (unreported, Jonathan Gaunt QC, 12 January 2007) and with the gathering downturn in the economy, shared ownership could turn out to have been a costly mistake for many occupiers.

The shared ownership lease is a concept that was developed by the Housing Corporation in the early 1980s. The aim was to help low income families into home ownership. The Housing Corporation explains the concept, in its guidance note, published in September 2005, like this:

“Through shared ownership you buy a share of the property and pay a rent on the remaining share you do not own. Gradually you may buy further shares and eventually own your home outright.”

The decision in Richardson, however, is that that description of shared ownership is badly wrong, or at the very least seriously misleading.

Legal structure

By and large, registered social landlords use a model form of lease which is published and revised from time to time by the Housing Corporation. The householder pays the registered social landlord a capital sum equivalent to half of what it would have cost to buy the property outright. The landlord then grants the householder a long lease, usually for a term of 99 years or more. The lease contains a rent, but the rent is half what it would have been in the open market, to reflect the capital payment the tenant has made.

The lease will also contain “staircasing provisions”. The nature of these varies from lease to lease, but generally they entitle the householder to make further capital payments to the landlord in order to buy further shares in the property. With each additional share that is acquired, there is a corresponding reduction in the rent. Once all the shares have been bought, the rent is reduced to nil and the householder has the option to call for a transfer of the freehold (or, in the case of a flat, to call for a grant of a new long lease at a peppercorn rent).

The problems

The problems occur if the tenant falls into arrears of rent and the landlord brings possession proceedings. If this occurs then there are, according to Richardson, two unhappy consequences.

The first is that, provided there are two months of rent arrears at the hearing, the court cannot refuse the landlord a possession order and, once the order has been made, the tenant has no right to pay off the debt and save the situation.

The second consequence is that the landlord is then entitled to retain for itself the whole of the tenant’s capital investment in the property.

The householder was not, it seems, the owner of a half share in the property, paying a rent on the other half share that the association still owns. There is no shared ownership at all. What the householder owns is the lease and nothing else, and once the lease has gone then so has the householder’s stake in the property. It is the way these two consequences intersect that makes the result so unpalatable. Once arrears have accrued, the tenant only has a short window of opportunity to pay the debt or lose the whole investment.

Rebecca Richardson acquired a shared ownership lease of a house in Tamworth in 1995. She paid half its then market value for it. In addition, for the next 10 years or so, she also paid half the market rent. Then, in 2003, her situation took a turn for the worse. Her husband was sent to prison. She started to receive threats from his criminal associates. In the end, she left Tamworth and went to live in Bournemouth to escape from them.

In the past she had been assisted with her rent by payments of housing benefit. But in February 2005 this was stopped, on the basis she no longer lived in Tamworth. She did what she could to try and have it reinstated, but without success. The result was that rent arrears developed. Her landlord, to its credit, gave her quite some time to sell the lease and pay off the debt.

But eventually, in October 2007, it began possession proceedings.