1 THE SALES PROCESS

1.1 It is not the Housing Corporation’s intention to be prescriptive as to the sales  process, administration and timescales involved but to identify serious  purchasers and minimise unnecessary administration and costs we would  suggest that RSLs consider a two stage sales process to determine the tenant  and property eligibility together with the sale price and the discount payable. 
 
Stage 1
1.2 The first stage will confirm the tenants’ eligibility to proceed with the    purchase of their home and provide ‘broad brush’ information to enable them    to make an informed choice as to whether to proceed or not with their    application based on affordability and sustainability criteria.
 
Stage 2
1.3 Stage 2 involves the calculation of the sale price, the equity to be purchased,    and the discount entitlement based on the formal mortgage offer, together with   the associated costs and provisions that will be the basis of the formal offer   and will appear in the contract documentation. 
 

2 THE TENANT’S APPLICATION

2.1 Tenants must make a formal written application to purchase their property.  The application must be completed by the tenant(s) and returned to the landlord.
 
2.2 RSLs must formally respond to all applications. RSLs may wish to restrict the number of application forms sent out, if demand is such that it may not be possible to keep within its allocation of funds. In these circumstances tenants should be told of the waiting list arrangements and whether the RSL intends to apply for additional funds.
 

3 ACTION BY THE RSL

3.1 On receipt of the application the landlord RSL will determine the tenant's eligibility by checking:

• the application form has been correctly completed and signed and dated by the tenant(s);
• the tenant(s) are secure or assured (assured shorthold or long leaseholders are excluded from the SHB scheme);
• the property is not in an exempt category;
• the tenant(s) has been a public sector tenant for the appropriate two or five year qualifying period;  See Social Homebuy 06 .
• where the property is charged to a private lender the lender is willing to release their charge;
• whether there is an effective possession order;
• whether the tenant is the subject of a suspension order, (see Social Homebuy 04  para  10).
• the tenant has certified in the application that he/she is not an undischarged bankrupt;
• whether the tenant or co-purchasers have previously received a discount to purchase a property from a public sector landlord e.g. a cash incentive through the Tenants Incentive Scheme or Cash Incentive Scheme by a local authority, a discount under the Right to Buy/ Preserved Right to Buy , Right to Acquire or Voluntary Purchase Grant.  Where a tenant has previously received a discount to purchase a property from a public sector landlord, the amount of discount due under SHB is reduced by the amount previously received.  This is not applicable to cases where the tenant repaid the whole of the discount on disposal within a repayment period.
   

Example:
Tenant lives in an area where the discount is currently £16,000. The tenant previously purchased a property through the Right to Buy and say received a £10,000 discount.
 
Discount due for SHB  £16,000
   
Previous discount/grant to be deducted  £10,000
   
SHB discount reduced to
 
(and then pro-rata to the share purchased).  £6,000 
 
3.2 On completion of the checks the RSL should respond to the tenant either  confirming or denying eligibility stating reasons. A standard response letter  should be used (for example see Social Homebuy 13 ) detailing the terms of the sale. The  stage 1 information must contain the following:

• an open market guide valuation of the property to be sold.  At this stage a formal valuation is not required but can be based on comparative house price details from appropriate websites, such as Hometrack, Up my street or local estate agents’ particulars. By using a web based assessment tool to determine the actual, or an approximate, house price valuation, costs can be confirmed or minimised at this point for both the RSL and the potential purchaser should they decided not to proceed.
• the total cost of purchasing a share  and how it is calculated;
• the total amount of discount applicable at that time in that location;
• the total rent payable on the property;
• an estimate of the annual service charge/including sinking fund contributions (see Social Homebuy 12 for further guidance).

3.3 The letter and information should be sent to the tenant within 4 weeks from  receipt of the initial application.  See Social Homebuy Annex 1 for an exampled matrix.

3.4 The RSL should tell the tenant that where a mortgage is to be obtained, this  must be from a ‘qualifying lender’. The RSL may wish to direct prospective  purchasers to nominated Independent Financial Advisers (IFAs) to  assist with  affordability checks and securing appropriate mortgage finance.

3.5  Using the standard multiple of 3 x joint income or 3.5 x single, the purchaser will be able to judge what entry level would be realistic given their mortgage potential together with the likely discount entitlement and their anticipated monthly outgoings.

3.6 RSLs should encourage tenants to buy as large a share as they can afford and sustain.  The RSL should ensure a rigorous affordability check is carried out which includes looking at savings and outgoings, to assess the sustainability of  the purchase. The FSA’s rules require lenders to take into account a borrower’s ability to repay a loan and the sustainability of the particular loan being considered.  Further guidance is available to lenders and mortgage intermediaries when assessing a borrower’s ability to repay a loan, and can be found by accessing the FSA’s website http://www.fsa.gov.uk

4 QUALIFYING LENDERS

4.1 Under current arrangements a mortgage can only be secured as a first charge if it is provided by a “qualifying lending institution”. 

4.2 A qualifying lending institution is defined by the Social Landlords (Additional Purposes or Objects) Order 2005 (SI 2005 No.2863)

4.3. Qualifying lending institution includes the Housing Corporation as well as institutions who are authorised under the Financial Services and Markets Act 2004, and who have permission to enter into regulated mortgage contracts. The FSA keeps a register of authorised firms on its website along with a list of “permissions” i.e. activities an authorised firm has permission to undertake. The register can be found at www.fsa.gov.uk/register and accessed via the lenders reference or postcode. 

5 TENANT’S RESPONSE

5.1 Following confirmation from their landlord that they are eligible to proceed the tenant has 4 weeks in which to confirm they wish to proceed to stage 2 of the purchase process. The RSL has discretion to extend the period for responding if there are reasonable grounds for doing so.

5.2 Where the number of stage 2 applications received exceeds the RSL’s allocations the RSL must operate a waiting list and should prioritise applications e.g. based on the tenant’s length of tenancy with their current landlord. The criteria to be used must be appropriate to the circumstances and indicated in the published policy statement.

5.3 Where the tenant and the property meets the eligibility criteria for the scheme the landlord may offer to sell an alternative property to the one the tenant occupies.  In such circumstances the tenant must be made aware there is no obligation placed on them to accept an alternative property and they may proceed to purchase their current property if they so wish provided it is included in the scheme.

5.4 There may be circumstances where the landlord wishes to offer an alternative  property where the tenant is eligible but the property they occupy is not.

5.5 The RSL should only consider offering an alternative property if the property is a naturally occurring void; the RSL is not permitted to deliberately keep properties vacant for sale under SHB or offer new grant aided properties built under any other programmes.

6   RSL’s RESPONSE

6.1 Following confirmation of the tenants intention to proceed the RSL will need  to initiate actions to provide them with the following:

• Formal open market valuation of the property to be sold (see Social Homebuy 08 );
• The total rent payable on the property;
• An estimate of the annual service charges /sinking fund contributions;
• Details of any known structural defects;
• The provisions which, in the opinion of the landlord should be contained in the conveyance or lease
•  A suitable identification plan showing the boundaries of the property including the land to be sold;
• Details of any discounts received by the tenants in respect of a previous purchase. 
    

6.2 The RSL may decide to undertake a survey to determine the future need for   repairs and improvements. Where the RSL does commission a survey, the    survey costs may be deducted from the sale proceeds. 
 
6.3 On receipt of the tenant’s mortgage offer or other evidence of the means to purchase, the RSL will be in a position to instruct its solicitors and determine both the discount to be made available and total share the tenant is purchasing (if doing so on part buy/part rent terms), so that a formal offer can be made.
   
6.4  We would expect that the financial checks via the lender would determine the   realistic borrowing potential of the purchaser, based on the commercial    affordability and lending criteria.
 
6.5 The RSL should carry out the following checks before it exchanges contracts:

• the tenant is not in rent arrears;
• a possession order has not been served during the period the tenant's application has been processed;
• is not the subject of an ASB suspension order/status, (see Social Homebuy 06 );
• the mortgage offer is from a qualifying lender (see Social Homebuy 09 );
• where a mortgage is not required by the tenant, evidence of funds to finance the purchase;
• the RSL's private lender is prepared to release the property from its security.

6.6 The tenant has 3 months from the date of the formal valuation to exchange contracts and a further month in which to complete the purchase. Where the tenant fails to exchange contracts on the property within the period the application may be deemed to be withdrawn (except in circumstances where the delay is as a result of the landlord’s inaction). The landlord may extend the 3 month period at its discretion, mindful of the validity period of the valuation and the potential need for revaluation if the period is significantly extended.  It is expected that the RSL will keep in regular contact with the purchasers to ensure that the sale proceeds in a timely fashion.

6.7 Instructions to the RSL's solicitor must include the requirement to secure the repayment of discount if sold within 5 years by way of a covenant in the conveyance/transfer. Subject to the RSL being satisfied with the details provided by the tenant and the solicitors, it will then be in a position to complete the sale.  See paragraph 8 below.

7  DISCOUNT CALCULATION

7.1 The discount is only available on initial purchase so, we would expect it to be   unusual that a purchaser would do anything other than maximise their    mortgage, the share that they can buy and the discount entitlement.  However,   it must be recognised that there may be purchasers who do not do so.  It is    essential therefore that the implications are clearly spelt out to them, i.e. that   no further discount is payable, but they should be able to exercise choice as to   the level of indebtedness they wish to incur and that they can sustain.

7.2 The discount is based on the RTA discount applicable in that locality and the   current levels are listed in Annex 1. If the tenant buys a 50% share of the    property the discount they receive is 50% of the applicable RTA discount.  The   purchase price is funded as follows:

  Property Value £200K
  Share purchased  £100K
  Mortgage/deposit £  92K
  Discount  £    8K (ie 50% of the RTA discount)

7.3 The mortgage offer/deposit and applicable level of discount are added together   to determine the share that can be purchased. Worked examples are included   as Annex 2  to this chapter.

8 REPAYMENT OF DISCOUNT

8.1  All leases/ conveyancing documentation must contain a repayment of discount clause, as the discount is repayable in certain circumstances. RSLs are encouraged to use the Corporation’s model SHB lease which includes a discount schedule.

8.2  The discount is repayable if the property is sold or the share is assigned within 5 years from the date of initial purchase. The amount due to be repaid is calculated as a percentage of the resale value equivalent to the percentage of the discount when compared to the purchase price and reduced by a fifth each year as follows;

• sale within year 1, repay an amount equal to the % that the discount bore to the purchase price
• sale within year 2, repay 80% of the amount calculated as in 1) above
• sale within year 3, repay 60% of the amount calculated as in 1) above
• sale within year 4, repay 40% of the amount calculated as in 1) above
• sale within year 5, repay 20% of the amount calculated as in 1) above
• no repayment is required after year 5.

Example: if the property value at purchase was £160,000 and the discount received was £16,000, the discount would be the equivalent of 10%. If the property value subsequently rose and was sold for £180,000 during year 1 the repayment would be £180,000 x 10% =£18,000. If the same property sold within year 3 for £220,000 the repayment due would be £220,000 x 10%, = £22,000, x 60% = £13,200.

8.3 Where property values fall the same calculation method is to be followed. Continuing the above example, if the property value dropped to £150,000 within year 1 the repayment would be £150,000 x 10% = £15,000.

Disregard of improvements value

8.4 Any increase in a property’s value attributable to improvements made by the owner after acquiring it, will be disregarded if the property is sold within the five-year period. The resale value is treated as net of the value of those improvements. Where the value of any improvements is disputed, consideration may be given to referring the matter to a qualified Independent valuer to arbitrate- where is it reasonably practicable to do so. Any costs associated with reference to the Valuer are to be borne by the person disposing the property.  If the arbitrating Valuer does not make a determination no disregard for the value of improvements is allowed.

Deferred resale agreements

8.5 Should tenants enter into transfer agreements with third parties to buy properties, and immediately sell the property to that third party, but transfer ownership at a later date to avoid repaying any discount, these transfer agreements will be treated as a relevant disposal. This has the effect of triggering the discount repayment from the date of the transfer agreement and not the date of the property transfer.

Exempted disposals

8.6 These do not trigger repayment of the discount.  They are set out in S.15 of the  Housing Act 1996 as amended by the Housing Act 2004. A summary of  exemptions from the repayment provisions is listed below:

• disposal to any member of the family who joined in the original application or who has resided in the property 12 months immediately before the date of disposal;
• disposal to a spouse;
• disposal to a person under the terms of a will or on a intestacy;
• disposal arising from compulsory purchase by a public body;
• disposal of the whole of the property in pursuance of an order under:  -Section 24 /f the Matrimonial Causes Act 1973
      -Section 2 of the Inheritance (Provision for Family and       Dependants) Act 1975
      -Section 17 of the Matrimonial and Family Proceedings Act     1984 (property adjustment orders or orders for the sale of      property after overseas divorce, &c);
      -Paragraph 1 of Schedule 1 to the Children Act 1989 (orders for     financial relief against parents) or
      -Part 2 or 3 of Schedule 5, or paragraph 9 of Schedule 7, to the     Civil Partnership Act 2004 (property adjustment orders, or      orders for the sale of property, in connection with civil      partnership proceedings or after overseas dissolution of civil     partnership, etc).

8.7 The RSL must ensure that a conveyance or lease has an appropriate repayment  covenant included (see paragraph 9 below).  The requirement to repay discount will rank immediately after the qualifying lending institution that has provided the tenant's mortgage). Where further lending is needed to fund essential works to the property the RSL may postpone its charge in favour of   the lender. The charge should not be postponed for any other reason.

9 REPAYMENT OF DISCOUNT COVENANT

9.1 The RSL must ensure that any Conveyance/Transfer/Lease under SHB scheme incorporates an appropriate repayment covenant. The Corporation has produced a model repayment of discount clause (see Ninth Schedule of Flat Lease and Sixth Schedule of House Lease) however the RSL should seek its own legal advice to ensure that the repayment covenant is adequate for its needs.

9.2 The repayment of discount covenant is a charge that will rank in priority as if it was a statutory charge under Sections 11 and 12 of the Housing Act1996 as amended by the Housing Act 2004.

9.3 Repayment of the discount for a 5 year period is protected by a restriction that must be entered on the Land Register.  The wording of the restriction is set out in the discount schedules (see 9.1 above) in the model SHB lease

9.4 RSLs’s solicitors must insert the discount % figure in the particulars of the Lease. This figure must equate to the percentage value of the discount given to the buyer compared to the property’s sale price.

 Example -  Property sale price = £150,000
   RTA discount for area = £16,000
   Share purchased 75%
   Discount given to the buyer= £12,000
   Percentage value =  8% (£150,000 divided by
   £12,000)