Government plans to introduce a new form of shared ownership lease from April 2021 will apply to all schemes funded by the 2021-26 Affordable Homes Programme. The intention is that it will be more consumer friendly, easier to access and allow shared owners to increase the stake in their home in a more manageable and affordable way.
The new model includes:
- A reduced initial share from 25% to 10% of the value
- A 10 year repair-free period
- The ability to buy extra shares up to 15% of the value in much smaller amounts, from 10% to as little as 1% with heavily reduced fees
- Giving the shared owner more control over resales
The government intends to send the new form of lease out to consultation soon and, as always, the devil will be in the detail. The lease will still however have to follow the four new principles. It will also need to be supported by lenders.
Where will liability for repairs lie?
Registered providers (“RP”) are understandably very concerned about the 10 year repair-free period. The government argues that it will only apply to new homes, that usually those homes do not need much maintenance, and that they come with a 10-year warranty. The warranties provided by the likes of NHBC and Premier Guarantee are default warranties.
They typically require the developer to carry out most repairs in the first two years and then only major structural repairs in the next eight years. The warranty provider usually only pays out / takes action if the developer no longer exists. Is the government seeking to rely on these warranties and place the obligation (through them) on the original developer?
We suspect that the lease will leave the liability with the RP which will be responsible for pursuing a claim against the developer through the warranties. The chances are that the RP’s liability will not match the protection it gets though the warranties and therefore leave it with a deficit.
The extent of the repairs covered by the 10 year period will be dictated by the terms of the new lease. Whatever the situation we can see shared owners making claims for repairs before the end of year 10. This not only creates a liability for the RP but may also lead to a deluge of disputes using up valuable management time.
The other obvious question is who will be responsible for paying for repairs at the end of the 10 year period to any improvements carried out by the shared owner early in their tenure? Will the RP be expected to foot the bill? And what happens if the shared owner carries out repairs without the landlord’s consent?
Different lenders seem to have different concerns about the initial 10% share. At the recent National Federation Affordable Home Ownership Conference, one lender expressed concern that 10% shares and 1% staircasing could mean that shared owners could end up with secondary lenders who might be expensive. Another thought it might work in London but not elsewhere.
In order to make the 1% extra shares work, the government intends that the price of each share will be based on an estimated valuation linked to the original purchase price adjusted each year upwards or downwards in line with house price inflation. We wonder who is going to work out the estimated valuation and at what point? Both parties need certainty so maybe it will just be the original valuation increased/decreased in accordance with house price inflation?
Unintended consequences of the new lease
The effect of the repair-free period,1% shares and reduced initial payment must affect the overall valuation of shared ownership leases both from an RP’s balance sheet and from a residual funding point of view. This may lead to RPs having less money to buy new homes. The RP will probably also offer less to the developer to take account of its potential liability for repairs.
Giving the shared owner more control over sales could create hidden problems. The government intends that if, on a resale, the RP cannot find a suitable nominee within four weeks (reduced from the current eight weeks) then the shared owner can sell on the open market. This could cause problems with nomination and local connection provisions in Section 106 Agreements potentially heralding the end of local connection provisions altogether.
The changes are potentially radical and will need lender support to have any chance of success. We will only know what the government really intends once we see the draft model lease. This new lease will add yet another to the number of different model leases already in existence. We are seeing that lenders are starting to refuse to lend on older leases (that were perfectly fine at the time they were granted) which is putting pressure on RPs to amend them (which can cause significant cost and a management headache). This new lease will only add to that pressure in the future.