Splitting the difference

In February, the Homes and Communities Agency announced fundamental changes to the model shared ownership lease, to be used by all housing associations offering homes through New Build Homebuy from 6 April 2010.

The changes make the terms of the lease clearer, and it is intended that this transparency will encourage buyers because they will be able to clearly understand what they are buying. It will also make lending on shared ownership properties more attractive. This is good news for housing associations who have invested heavily in the development of shared ownership properties. 

What are the key changes?

1. The terms under which the right of pre-emption exists has been simplified. This will benefit both buyers and lenders as it will be clearer under which circumstances the housing association will be entitled to buy the property back. The new, simpler process for exercising the right of pre-emption will help keep shared ownership units available for qualifying buyers.

2. The protection offered to the lender has now been extended to include a wider definition of what losses can be claimed under the mortgagee protection clause. The MPC or ‘compensation provisions’ benefit lenders in the event that they have to repossess the property for non-payment of the mortgage and there is a shortfall arising upon resale.

Historically, the sums recoverable by the lender have been limited to only the original loan, 12 months interest and any ‘reasonable costs’ incurred in connection with the enforcement of the charge and subsequent sale of the property. Under the new provisions the claim for interest has been extended to 18 months and any amounts paid to discharge arrears of ground rent and service charges are also recoverable. This may increase significantly the amount recoverable, in particular where interest rates are rising. This would increase the loss to housing associations on 100 per cent staircasing.

Costs of enforcing the mortgage, including the sale of the property, are capped at 3 per cent of the market value. Prior to this there was no such cap, so this provides certainty to housing associations.

The extension to the ‘loss’ definition has received praise as it will mean greater certainty for housing associations as to the level of cost recoverable by the lender. Whilst the effect of this has been to widen the definition of those losses recoverable, there is the 3 per cent limit on the amount which can ultimately be claimed.

3. The new lease dispenses with the need for a lender to conduct a valuation when exercising a claim under the MPC. The lender is not now entitled to make a claim on the MPC unless the sale price is the ‘best price reasonably obtainable’. This will inevitably speed up the sale process and reduce the administrative burden upon housing associations in approving the valuation.

4. The revised model lease contains new information to help buyers better understand the concept of a shared ownership property. This should help speed up the sales process as it should reduce the queries concerning the nature of the shared ownership lease for buyers’ solicitors.

Conclusions

The changes to the model lease provide clarity for homeowners, housing associations and lenders. It will reduce the administration involved in dealing with the MPC and valuation provisions that currently exist. This will mean that sales can be progressed quicker so that housing associations are repaid for their remaining share as early as possible.

The aim has been to strike a balance between the interests of the major stakeholders, which has largely been achieved. It has been endorsed by the Homes and Communities Agency, Council of Mortgage Lenders and the National Housing Federation, as having a positive impact and it hoped that this will increase availability of mortgages to those wishing to purchase a shared ownership property.

For more information please contact Graham Walters on 0117 917 7577. Graham manages a large and experienced team of residential property development specialists capable of managing a residential development site from acquisition to the successful sale of the plots.

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