5  Leases 

5.1 General

5.1.1 RSLs providing homes on shared ownership terms must ensure that leases are mortgageable and contain provisions that qualify the scheme for Grant. In all cases, RSLs must consult their solicitors on the form of lease to be used in particular in relation to the schemes in which they are participating

For Guidance on Lease, and examples of model lease follow the asterisk.  

 

5.1.2  To qualify for SHG RSLs must ensure that leases contain the Fundamental Clauses, see sub-section 5.2 below.

5.1.3  Where RSLs are not using the Agency’s model leases, they must ensure that that leases will comply with the Agency’s scheme/Grant criteria and contain the fundamental clauses as worded in the Agency’s Model leases.

5.1.4  RSLs must retain a copy of the form of lease granted for each scheme(i.e. one example pro forma for the scheme) as well as retaining the original counterpart lease signed by each leaseholder (i.e. for each individual property) at their registered office or solicitor’s office.

5.1.5  RSLs must refer to the Housing Corporation’s Circular number 03/08  for further information, which can be located in the library at www.housingcorp.gov.uk.

5.2 Fundamental Clauses

5.2.1 The following clauses are set out in the Model Leases published by the Homes and Communities Agency and must be included in any shared ownership lease to qualify a scheme for Grant funding:

• Alienation provisions (refer to clauses 3(15), 3(16) and the Seventh Schedule in the sample flat lease - clauses 3(15) and 3(16) 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 Model flat lease;
• Right of First Refusal (refer to clause 3(17) to the sixth, seventh and eighth schedules in the sample flat lease- fifth schedule in the house lease).

5.2.2 RSLs must seek the Regional Investment Team’s approval if they wish to vary any of the Fundamental Clauses in either an existing shared ownership lease or one being developed, RSLs must refer to Housing Corporation Circular 03/08 and contact the Regional Investment Team accordingly. It is anticipated that approval will only be given to correct errors or in exceptional circumstances.

5.2.3 Variation of a Fundamental Clause without the Agency’s approval may result in grant recovery.

5.3  General Features

5.3.1 Term

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 Agency’s sample lease provides for a 99-year term.

5.3.2  Where the RSL itself only has a short term leasehold interest e.g. less than 55 years, the scheme is ineligible for Grant.

5.3.3  Where the RSL’s interest (the landlord’s interest) is leasehold and that interest is 99 years or less, the term of the lease granted on the initial sale must be for a period which terminates 5 days prior to the termination of the landlord’s interest.

5.3.4  RSLs can grant leases for a period of more than 99 years.

5.3.5  Initial Share -  The initial share sold to the leaseholder must be a minimum of 25% and a maximum of 75%.

 
5.3.6 Premium -  The premium payable (sale price of the lease) on the grant of the lease must be equal to a percentage of the Market Value  of the property as assessed by an independent qualified valuer.

5.3.7  RSLs must instruct the valuer to assume:

• the sale is for the freehold interest, or where the RSL’s interest is leasehold, a 99 year lease or such lesser term of years as the RSL holds;
• the sale is an open market sale;
• a shared ownership lease has not been granted;
• the sale is to be with vacant possession.

5.3.8  In exceptional circumstances RSLs may sell at a discount, where there has been a change of market circumstances since the allocation stage. Click on the asterisk for an explanation of selling at a discount.  

 

5.3.9  All proposals to sell at a discount must be agreed by the Agency. Proposals to sell at a discount will only be considered where the RSL provides evidence that prospective buyers cannot afford to purchase at least 25% on the basis of Market Value.

5.3.10  Discounts cannot be considered:

1. where the price would be reduced to below the cost of provision or
2. where the value of the discount would exceed the maximum allowed for the statutory Right to Buy or Right to Acquire, whichever is the higher. 

5.3.11  Where a discount is being offered, RSLs must ensure (in consultation with their legal advisers) the benefit of the discount is passed on to all future purchasers. Discounts must NOT be given where only the first purchasers would benefit.

5.3.12 Staircasing provisions (see also para 7.2)

With the exception of specified Rural and Shared Ownership for the Elderly programmes, all shared ownership leases must contain provision allowing the leaseholder to buy further shares up to 100%.

5.3.13  Leases containing restrictive staircasing provisions (other than in programmes mentioned above) will make a scheme ineligible for Grant funding.

5.3.14 The lease must provide that the leaseholder can staircase to 100% in minimum tranches / shares of 10% (including the last tranche).

5.3.15 Exclusion from leasehold enfranchisement

What is leasehold enfranchisement? Follow the asterisk.  

 

5.3.16  All leases granted in respect of houses and bungalows must be excluded from the enfranchisement provisions of the Leasehold Reform Act 1967, Leasehold Reform (Housing and Urban Development Act) 1993 and The Commonhold and Leasehold Reform Act 2002 in order to qualify for grant.  RSLs must take their own legal advice on appropriate ways of avoiding leasehold enfranchisement.

5.3.17 Rent

RSLs must ensure that there are appropriate rent provisions (see {Section 4}) and a means of reviewing rent increases.

5.3.18 Stamp Duty and legal fees

Purchasers of shared ownership leases are responsible for the payment of their own legal fees and Stamp Duty Land Tax (SDLT).

5.3.19 As of March 2008 the rules around the payment of Stamp duty on shared onwership have changed. The shared ownership leases must contain an appropriate SDLT statement which gives an option of paying either

1. on a market basis as if the property had been purchased outright from the beginning (or)
2. only when the initial shares or shares purchased exceed 80% unless the value of the initial share exceeds the current SDLT threshold £125,000 (£150,000 in disadvantaged areas).

5.3.19a For the period from 03 September 2008 to 03 September 2009, the stamp duty threshold has been temporarily increased. SDLT will not be charged for any property worth under £175,000, as long as the land transaction is completed during the above period. After 03 September 2009, the threshold given in 5.3.19 is due to resume.

For Guidance follow the asterisk.  

 

5.3.20 RSLs should recommend purchasers seek advice from their solicitor over the best option for them"

5.3.21  Sub-Letting

Shared ownership leases must prohibit sub-letting by the leaseholder to protect public funds and ensure applicants are not entering shared ownership for commercial gain.

This stops the leaseholder having the right to sub-let, but allows the RSL to agree to a sub-letting arrangements if they choose to do so in exceptional circumstances.

5.3.22  RSLs must consider requests to sub-let on a case-by-case basis. It is the RSL‘s decision as to whether they agree to the request and permit sub-letting. RSLs must include the following criteria when dealing with requests:

• do the reasons for sub-letting genuinely stem from  unavoidable need, and are not primarily for speculation or gain?
• does the person (s) to whom the leaseholder sub-lets also satisfies the RSL’s criteria for shared ownership?
• are the terms of the sub-let for a fixed period during which the shared owner will retain ownership of the lease?
• Does the leaseholder have the permission of the mortgage lender (if required)?

5.3.22a  If a request is from a serving member of the Armed Forces whose tour of duty requires them to serve away from the area in which they live (a distance of at least 50 miles or 90 minutes travelling time) for a fixed period, and the general criteria above are also met, the shared owner may sublet subject to the RSL being satisfied that all of their additional criteria (if any) are met.

5.3.23 In all cases RSLs must seek their own legal advice before agreeing to sub-letting.
 
5.3.24 Right of First Refusal (Buy-Back Option)

The lease must provide the RSL with the right of first refusal to buy the property back for a period of 21 years from the time the leaseholder became the outright owner. This is achieved by inserting an appropriate covenant in the lease, and on the freehold when it is transferred to the outright owner.

For some more details follow the asterisk.  

 

5.3.25 RSLs must have a published policy as to the circumstances and locations in which they would anticipate exercising this option, so that the vendor can be aware of the RSL’s intentions. 

5.3.26  Funding for buy-back options is to be through RCGF and the RSLs own resources.

5.3.27 The standard RCGF rules would apply to subsequent sales receipts for sales on shared ownership terms. 

5.3.28  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.
 
5.3.29 Re-Purchasing Equity

NB – this is not the same as Flexible Tenure.  For an explanation follow the asterisk.  

 

5.3.30  In the case of flats only, a leaseholder can offer to sell their lease to their landlord in circumstances where they have not staircased to 100%. We would expect the RSL to re-purchase the available equity  where the value of the property, and the share owned, is such that it has not been possible to find a suitable nominee.

5.3.31  The landlord will then sell the lease on shared ownership terms at a lower percentage to make the property more widely affordable.

5.3.32  The RSL can use RCGF receipts and their own resources to fund these re-purchases. The usual RCGF rules will apply to the subsequent sales receipts.

5.4 Rural Programme.         

 

See also section 8.

5.4.1 RSLs developing schemes currently as part of the Agency’s rural programme (i.e. in settlements of up to 3,000 inhabitants, including rural exception sites) must include one or both of the following options:

• to repurchase the property once the maximum share permissible has been acquired and the shared owner wishes to sell; see above link.
• to restrict the maximum level of equity that can be purchased to 80% on rural exception sites only (Restricted Staircasing) .  

When using the above provisions RSLs must include relevant clauses in the lease. 
 
For some comments on these options follow the asterisk.   

 

5.5 Shared Ownership for the Elderly

5.5.1  In addition to the requirements listed above at  5.3.1, leases must:

• be granted to a person aged 55 years or over.  RSLs must not consider any sale to a person younger than 55.  The Housing Ombudsman Service has determined that sales to someone not meeting the age restriction must be regarded as a breach of the terms of the lease;
• restrict the maximum share to 75% of the open market value;
• contain no rent provision where the maximum share of 75% has been acquired;
• make provision for a warden service or access to a warden service.  Where no resident warden is available the lease must detail the service available to the leaseholder for obtaining emergency assistance.  This may be provided by a peripatetic warden employed by the RSL, a local authority or a private agency;
• restrict assignment to a person of or over the age of 55 at the date of assignment except where assignment is to a deceased leaseholder’s spouse residing at the dwelling at the time of death.  The restriction on assignment equally applies to a mortgagee;
• contain a covenant prohibiting underletting of the whole or part of the dwelling;
• not provide for the leaseholder to acquire the landlord’s interest under an option to purchase;
• contain a landlord covenant to provide the leaseholder with a list of duties included in the basic management fee and itemise and price those which are to be charged separately. 

 

5.6  HOLD:  Home Ownership for people with Long term Disabilities

 
5.6.1  This programme is designed to assist people with a long term disability purchase a home on the open market on a shared ownership basis. The usual shared ownership Requirements apply.
 
5.6.2 Prospective applicants should contact the HBA in the first instance, who will then refer them on to the local specialist provider.
 
5.6.3 Property Criteria  for HOLD

These are the same as for Open Market HomeBuy.  For details see  EOMHB 3.2.

5.6.4 HOLD & Supporting People

RSLs participating in the HOLD scheme must be familiar with the Supporting People regime operating locally and ensure that the purchasers are aware of and supported, if required, by the local Supporting People team.  

5.6.5 RSLs must consider whether it is appropriate to provide a repairs and maintenance service in return for a fee, to purchasers in this scheme under the terms of the lease.

5.7 Key Worker Schemes

5.7.1 RSLs should note that Key Workers are a type of applicant that are eligible for New Build HomeBuy schemes undertaken under various funding programmes.

5.7.2  This should not be confused with schemes undertaken under the Key Worker Living programme - a specific programme of schemes separately funded, outside of the NAHP. Although there are considerable overlaps between the Requirements for the Key Worker Living programme and Key Worker New Build Home buy, there are some differences.

5.7.3  The detailed Requirements for the Key Worker Living programme are set out in the KWL Chapter of the Guide.

5.7.4  Clawback

5.7.4.1 Clawback” was a fundamental clause in the Key worker lease for 06-08. It meant making sure that the property continued to be used for the social purpose for which it was developed, if a key worker left their qualifying form of employment.

5.7.4.2 However, From April 2008 clawback no longer applies. For existing key workers who have Key Worker leases containing the clawback provision, the requirements of such clauses can be disregarded.

 
5.7.5 Nominations

5.7.5.1 Where a Key Worker New Build HomeBuy owner is looking to sell their share either voluntarily or under the clawback provisions, they are required to sell only to qualifying key workers nominated by the RSL.

5.7.5.2 If the RSL is unable to nominate an eligible purchaser within eight weeks,, the Key Worker leaseholder will need to staircase to 100% and can then sell without restriction on the open market (but only at the price at which the 100% staircasing was effected, not more).

5.7.6 Mobility

A Key Worker who is in qualifying employment and needs to move as a result of a change in household circumstances must:
1. offer their existing property back to the RSL for nomination to another qualifying key worker;
2. be offered another New Build HomeBuy or Open Market HomeBuy  dwelling by the RSL in their “new” area;
3.  meet any valuation / legal fees.

This mobility option is subject to an assessment of the Key Worker’s eligibility and financial viability.

5.8 Self Build Shared Ownership

5.8.1 REPLICATE PARA 1.3.31 AS INTRO TO SBSO

5.8.2 All leases must be granted simultaneously after confirmation of final costs and values and the determination of the ‘sweat equity’ (i.e. the proportion of equity to be granted as a reward for the Self Builder’s labour).

5.8.3  If the ‘sweat equity’ amounts to less than 25% of the total value of a dwelling, the Self Builders must purchase additional equity to have the minimum of 25% . If this is to be purchased with a mortgage the RSL must check that the self builder can raise that mortgage and sustain it , see 6.2.1

5.8.4  A provision must be inserted into the lease as to the effect that it is a lease under which the tenant (or his personal representative) will or may be entitled to a sum calculated by reference directly or indirectly to the value of a house or dwelling.

5.9  Year – End Date

5.9.1  Within clause 7 of the flat leases, the account year is shown as ending on 31st March. This date can be varied to reflect the end of the landlords’ Accounting Year.  A date however must be included.