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Social Homebuy 10

1 INTRODUCTION

1.1 RSLs providing shared ownership programmes must ensure that leases are mortgageable and contain provisions that qualify the scheme for grant. In all cases, RSLs should consult their solicitors on the form of lease to be used.

1.2 To assist RSLs, the Corporation has published sample house and flat leases for Social Homebuy.  Copies of both can be located via a direct link from the Capital Funding Guide homepage on the Corporation’s website, www.housingcorp.gov.uk 

1.3 RSLs are not obliged to adopt the Corporation’s sample lease; however the Corporation encourages RSLs to do so.  But in order to qualify for PG RSLs must ensure that leases contain the fundamental clauses. See paragraph 3 below.

1.4 Where the RSL is not using the Corporation’s sample leases as published, it must certify at Confirmation of grant   stage that leases comply with the Corporation’s project/Grant criteria and contain the fundamental clauses identified by the Corporation.

1.5 The RSL should retain a copy of the form of lease granted for each scheme at  their registered office or solicitor’s office.

1.6  In the sample leases issued by the Corporation is a restriction, which is entered when shared ownership leases are registered. The restriction ensures that the Corporation’s consent is sought to any variation to the terms of the registered lease, and is intended to protect public funds.  Following the introduction of the Land Registration Rules 2003 such a restriction can no longer be entered as part of the lease, but must be applied for separately. RSLs should refer to the Corporation’s Regulation Circular number 12/03 for further information, which can be located in the library at www.housingcorp.gov.uk.

2 GENERAL FEATURES OF SOCIAL HOMEBUY LEASES

The term of the lease

2.1 To qualify for grant funding the term of the lease must be at least 25 years longer than the term of the RSLs long term loan and be acceptable for mortgage purposes.  For information the Corporation’s sample lease provides for a 125 year term.

2.2 Where the RSL’s interest (the landlord’s interest) is leasehold and that interest is 125 years or less, the term of the lease granted on the initial Social Homebuy should be for a period which terminates 5 days prior to the termination of the landlord’s interest. RSLs can grant leases for a period of more than 125 years. Short term leases e.g. less than 55 years will make the scheme ineligible for grant.

 

The premium

2.3 The premium payable by the tenant plus the discount (Social Homebuy price of the lease) on the grant of the lease must be equal to a percentage of the full market value of the property as assessed by an independent qualified valuer (see example in SHB 9 para. 7).The range of  initial shares purchased can be between 25% and 100% i.e. the purchaser can buy the property outright from the outset. Purchasers should buy as much as they can afford to the nearest percentage point. Shares are not restricted to the nearest 5% e.g. they can be 26%, 27% etc  

 

Staircasing provisions

2.4 Social Homebuy leases must contain provision allowing the leaseholder to buy further shares up to 100%. Leases containing restrictive staircasing provisions will make a scheme ineligible for grant funding.

2.5  Although RSLs may vary the size of equity shares that may be purchased, the   initial share must not be less than 25% of market value. The lease must    provide that the leaseholder can staircase to 100% in minimum tranches/    shares of 10% including the final share. However, should the initial tranche be   over 90% then the final staircasing tranche can be less than 10% as a single   transaction to purchase the 100% interest.

 

Exclusion from leasehold enfranchisement (houses and bungalows only)

2.6 All leases granted in respect of houses and bungalows must be excluded from the provisions of the Leasehold Reform Act 1967. Schemes not excluded from the enfranchisement provisions will not qualify for grant. RSLs must take their own legal advice on appropriate ways of avoiding leasehold enfranchisement.

Rent

2.7  RSLs must ensure that there are appropriate rent provisions and a means of  reviewing rent increases. The sample leases published by the Corporation  include rent review provisions linked to the September Retail Price Increase  (RPI). RSLs must ensure their solicitors are properly instructed on rent review  provisions. It is a fundamental clause requirement that annual rent increases  are to be limited to RPI plus 0.5%.  The initial rent must not exceed 3% of the  unsold equity.  RSL’s should aim for an average initial rent of 2.75% across  the properties sold under the programme.

Rent Waiver clause

2.8  Some RSLs have decided not to charge rent on 25% of the equity to make the  schemes more affordable and to expand the market for SHB. For example  where someone buys a 50% share they pay rent on 25% of the equity instead of  the remaining 50%.  In these circumstances the HC is content for the following  amendments to be incorporated in the third or fourth schedule of the sample  leases, as appropriate.

THE THIRD / FOURTH SCHEDULE above referred to
CALCULATION OF SPECIFIED RENT

1 In this Schedule the following expressions have the following meanings:-

1(1) “New Gross Rent” shall mean the Gross Rent increased pursuant to Paragraph 2 hereof on each Review Date

1(2) “Reduced Relevant Percentage” shall mean (a) the Relevant Percentage less 25%, or (b) 0%, whichever is the greater

1(3) “Reduced Specified Rent” shall mean a sum equal to the Reduced Relevant Percentage of the New Gross Rent

1(4) “the Relevant Percentage” shall mean at any time 100% less the aggregate of the Initial Percentage and any Portioned Percentage or Portioned Percentages paid for pursuant to Clause 2 and the Fifth Schedule hereto


 1(5) “the Review Date” shall mean [          ] and each successive [                ] during the term

  
 1(6) “RPI” shall mean the United Kingdom General Index of Retail Prices or in the event that such ceases to be published (as to which the Landlord's decision shall be conclusive) or if the said Index or the basis on which it is calculated or published is altered to a material extent (as to which the Landlord's decision shall be conclusive) then the Landlord may give written notice to the Leaseholder of some other published index of general prices or the value of money as a substituted index and in that case the substituted index so selected shall thereupon be the RPI


OPTION A
2(a) On each Review Date the New Gross Rent shall be such figure as is notified to the Leaseholder by the Landlord provided that the New Gross Rent shall not exceed the Gross Rent increased by the percentage increase of the RPI from the RPI published for September [         ] to the RPI published for the September prior to the relevant Review Date plus 0.5% 


OPTION B
2(a) On each Review Date the New Gross Rent shall be such figure as is notified to the Leaseholder by the Landlord provided that the New Gross Rent shall not exceed the Gross Rent increased by the percentage increase of the RPI from the RPI published for September [ ] to the RPI published for the September prior to the September immediately previous to the relevant Review Date plus 0.5%
2(b) On each Review Date the Specified Rent payable hereunder shall be reviewed to an amount equal to the Relevant Percentage of the New Gross Rent as at the relevant Review Date
2(c) Immediately following each Review Date the Landlord shall serve written notice on the Leaseholder specifying the amount of the Specified Rent then payable


 

WAIVER OF RENT OPTION


.1  The Landlord agrees that until the first assignment of this Lease it will    only require payment of the Reduced Specified Rent;
 
.2  Whilst clause 3.1 above applies the Landlord’s notice under clause 2(c)     shall in addition specify the Reduced Specified Rent.


   
Sinking Funds

 2.9  RSLs are required to establish and manage sinking funds to provide for the   long term repair and maintenance of communal facilities. Sinking funds may   apply to   houses as well as flats, in some instances e.g. communal car    parks, unadopted roads. Provision for the on-going upkeep needs to be    incorporated in transfer documentation as necessary. The mechanism for    collecting the contributions will be determined in the lease/ conveyancing    documents and should be appropriate to the client group and mindful of the   context in which these charges are to be levied.

Stamp Duty and legal fees

2.10 Purchasers of shared ownership leases are responsible for the payment of their own legal fees and Stamp Duty Land Tax (SDLT). The Revenue gives beneficial treatment of Shared Ownership leases for SDLT purposes, if the lease contains an appropriate statement that the tenant wishes to take advantage of this treatment (schedule 9 to the Finance Act 2003). The shared ownership leases should contain, for discussion with the purchaser, an appropriate SDLT  statement which gives an option to the purchaser of paying SDLT on the actual premium and rent paid and on future staircasing; or for example, on the open market value plus minimum rent at the time of purchase (as set out in the SDLT statement).

2.11 The discount will be treated for SDLT purposes in the same way as the discount for RTB/RTA/VPG transactions i.e. SDLT is not paid on the discounted amount.

2.12 The Finance Act 2004 provides additional relief in respect of staircasing. Where a shared ownership lease granted after 17 March 2004, subject to certain conditions, and irrespective of whether or not the SDLT statement is included in the lease, when staircasing takes place, the shared owner will not be liable for SDLT on the staircasing. However, this is subject to the condition that immediately after staircasing, the shared owner’s share in the property must not be greater then 80%. 


 
 
Mortgagee protection

2.13 All leases (for PG funded programmes) must contain an appropriate mortgagee protection clause (as set out in the Corporation’s sample lease). The Corporation has agreed with the Council of Mortgage Lenders the terms of mortgagee protection for lending on shared ownership. See Recycled Capital Grant chapter.

Right of First Refusal / Pre-emption

2.14  For 21 years from the date of conveyance of the 100% interest, the purchase and any subsequent purchaser is obliged to offer the property back to the  original landlord who can purchase it at the prevailing market value or  nominate another RSL to purchase it.  (see 3.1 below).

2.15 RSLs also have rights to nominate purchasers or to buy back the property if the shared owner of a flat wishes to sell their share.  The option to buy back the   share by the Landlord does not apply to houses although the nomination    provisions still apply.

2.16  RSLs are required to have a public policy in place that outlines the     circumstances in which and how the RSL would expect to exercise the option   to buy  back either as a pre-emption or under the right of first refusal    provisions. Vendors should expect to have a formal indication of the RSL’s   intentions to proceed or otherwise within 4 weeks of offering the property    back.

3 FUNDAMENTAL CLAUSES

3.1 The following clauses are set out in the sample leases published by the Housing Corporation and must be included in any shared ownership lease to qualify a scheme for grant funding:

  • Alienation provisions (refer to clause 3(15) in the sample flat lease - clause 3(14) in the house lease);
  • Mortgagee protection (refer to clause 8 in the sample flat lease -clause 6 in the house lease);
  • Staircasing provisions (refer to the fifth schedule of the sample flat lease - fourth schedule in the house lease);
  • Rent review (refer to the fourth schedule of the sample flat lease - third schedule in the house lease);
  • Service charge provision (where appropriate) (refer to clause 7 of the sample flat lease);
  • Repayment of discount provisions ( refer to the ninth schedule of flat lease and sixth schedule of house lease);
  • Right of First Refusal and pre-emption clauses. 

4 SUB-LETTING

4.1 Social Homebuy leases must prohibit sub-letting by the shared owner. 
 
4.2 RSLs may consider, on a case-by-case basis, requests to sub-let in certain controlled circumstances. RSLs should consider the following criteria when dealing with requests:

  • the reasons for sub-letting are genuine and unavoidable, and are not for speculation or gain;
  • the person (s) to whom the leaseholder sub-lets also satisfies the RSL’s criteria for affordable housing;
  • the terms of the sub-let are for a fixed period after which the lease must revert back to the original shared owner;
  • the permission of the mortgage lender will also normally be required.


4.3 In all cases RSLs should seek their own legal advice before agreeing to sub-letting.


 
5 CONVEYANCE OF FREEHOLD AND GRANT OF A LEASE

5.1 The Corporation’s model leases are located on the Capital Funding Guide webpage of the Corporation’s website.  RSLs must consult their own solicitors on the conveyance or lease to be used, in relation to the schemes in which they are participating.


 
Right of First Refusal

5.2 A standard clause or covenant is to be inserted into all conveyances that, during the period of 21 years from the date of conveyance the tenant (purchase) or any successor in title, must make an offer of first refusal to the former landlord. 
 
5.3 The covenant must be a local land charge and must be entered into the property’s register of title by the Chief Land Registrar. This should avoid the covenant being overlooked at the point of resale. 

6 DISCOUNT REPAYMENT COVENANT

6.1 The covenant for repayment must be inserted in conveyances and leases and is included in the model lease.  The convenant must be protected during the 5 year discount repayment period by the entry of a restriction on the title at the Land Registry. 
 

7 LEGAL CHARGES

7.1 The RSL is required to dispose of the property to the tenant free of any legal charge on the property e.g. a secured mortgage. It is essential therefore that the RSL obtains its lender's consent to the disposal prior to processing SHB applications.

 
© Housing Corporation 2006