lack of ownership in shared ownership..beware

geoffky

Lack of ownership in shared ownership

Published by NL
on 12 September 2008
in Housing law
. Tags: assured-tenancy, leasehold, mandatory possession, possession, shared ownership.

I may well be a little late to the party on this one, having only picked up on it via a report in September’s Legal Action, but this is a very significant case for the increasing number of shared ownership occupiers - a number that may well sky rocket as the result of policy on rescuing people from mortgage arrears.
Richardson v Midland Heart Limited High Court (Chancery) 12/11/2007, unreported, concerned a shared ownership lease taken out in 1995. Accounts of the case can be found here and, a more detailed report from Forbes Solicitors here. There is also apparently a detailed report in [2008] NLJ 327, which I will look up on Monday.
The facts were as follows.
Ms Richardson acquired a 99 year shared ownership lease from Focus Two HA (later Midland Heart). She paid £29,500 - 50% of the then market value - with a rent of £1,456 pa. Following personal difficulties that meant she could not live in the property for over a year, housing benefit stopped and the rent wasn’t paid. Ms Richardson tried to sell the property, now worth £151,000. Midland Heart sought possession under HA 1988 Sch 2 Ground 8 on the basis on 16 months rent arrears.
At County Court, a request for an adjournment was refused and an outright possession order made.
Ms Richardson made an application to the High Court for a declaration of her interest in the property and either an order for sale or an accounting for 50% of the proceeds.
Ms Richardson argued that
a) there were two tenancies - an assured tenancy under HA 1988 and a long lease subject to forfeiture. The possession order had only ended the assured tenancy.
b) The freehold of the property was held by Midland Heart on trust for itself and her on 50% beneficial interest. Even if the lease had been terminated, she was entitled to return of the capital payment in respect of her beneficial interest.
The High Court held that:
The capital payment did not purchase a half share of the property. The relationship was that of landlord and tenant not trustee and beneficiary. Ms Richardson had a right to lay claim to the freehold, but only if she had followed the staircasing process to ‘purchase’ increased shares of the property. She had not done so. Her interest was restricted to that of the lease.
The lease was a 99 year term certain. There were not two tenancies but rather one. The tenancy created fell under s.1 HA 1988 as it was a tenancy of a dwelling house let as a separate dwelling to an individual who occupied it as her only or principal home. It did not fall within any of the exclusions. It was therefore a fixed term assured tenancy. As such, the provisions of Ground 8 applied. the possession order was validly made, the lease determined, and her interest in the property was extinguished.
Apparently Midland Trust did repay Ms Richardson the initial premium, but this was entirely voluntary. There was no increase to match the increase in the value of the property, but there was no requirement to pay anything.
There is no news of any appeal.
So, just to be clear, a shared ownership lease, at least if it doesn’t fall outside the HA 1988 limits which many won’t, is functionally nothing more than an assured tenancy with an option to eventually purchase the freehold, or, I suppose, at least a 100% interest in the lease if a leasehold property. The premium for the percentage of the lease does not bring about any greater or other interest in the property.
Practically, the only difference between this and the dodgy sell and rent back schemes floating around is the difference between an assured and shorthold assured tenancy, if you don’t count the possibility of freehold/100% purchase eventually.
After some rapid education (thanks Francis), not having actually dealt with shared ownership lease possession proceedings, this makes a certain sense.
A residential lease which meets the requirements of Sch 1 Part 1 HA 1988 on rateable value (below £1500 in London, below £750 elsewhere) and rent level (more than two thirds of the rateable value) will be an assured tenancy.
This means that s.5(1) HA 1988 prevents the lease being ended by forfeiture proceedings, it has to be via HA 1988 grounds. HA 1988 s.7(6)(b) says that there has to be provision in the tenancy agreement for the tenancy to be ended on that ground (but a provision for forfeiture for non-payment of rent suffices to enable a ground 8 possession).
This means that the forfeiture for arrears provisions in shared ownership leases are unenforceable, because forfeiture is excluded as a valid means of ending the tenancy, but the provision is sufficient to enable a ground 8 possession claim under HA 1988. Artesian Residential Investments ltd v Beck [2000] QB 541
Standard shared ownership leases do contain forfeiture on non-payment of rent provisions, but assuming the rateable value/rent conditions are met, which they may well be, those provisions are unenforceable by the forfeiture proceedings route, and s.138 County Courts Act 1984 provisions on relief from forfeiture are unavailable to the tenant.
Oddly, on registration of the shared ownership lease at the Land Registry in the name of the tenant, there is a ‘no disposition by sole proprietor’ restriction, which normally indicates a trust - typically a trust for tenants-in-common who are also title holders. Here its purpose is to ensure no sale without the landlord’s consent, but it would indicate that there are split definite beneficial interests in the property, which accords with the (say) 50% tenant interest of a shared ownership scheme. But what is being held in trust - perhaps the leasehold interest, rather than freehold - could be a messy point to take on appeal.

GDB2222

That is simply astonishing! Anybody contemplating shared ownership should be aware of that case. It's so unfair.

In summary:
Richardson paid for 50% of the property and rented the other 50%. This went ok for 10 years, until she couldn't pay the rent and got repossessed. She lost the 50% she had already paid for.

I'm surprised that lenders will lend on these, as there is no security at all. The buyer pays say £100k for a 50% property share, and commits to pay say £300 a month to rent the other 50%. If the buyer misses just two rent payments (£600 in this example), the seller can get a court order to repossess the whole property and keep the £100k!

(I'm not stalking you Geoffky, but I thought this case is so important that people need to have a short summary. Well done for spotting it.)

GDB2222

The consequences

Midland Heart had the good grace to repay the premium which Ms Richardson had originally paid for the 50 per cent share in the property. This was an entirely voluntary offer and they were in no way obliged to do this. The repayment did not include any increase in the value of the investment over the intervening period, and Midland Heart were entitled to take all the capital appreciation as a windfall payment. However Ms Richardson was entirely fortuitous to receive anything - indeed some landlords may not entertain a similarly generous indulgence.
The above case should therefore serve as a timely warning for all shared ownership leaseholders. Given the credit crunch and down-turn in the economy, as well as the growth in popularity of this type of lease, this could prove to be a grave problem for a lot of tenants if they allow themselves to fall into debt. As can be seen, the nature of shared ownership leases and the way in which their terms are worded means that if a tenant falls into arrears it could turn out to be financially catastrophic. If the arrears aren't cleared within a relatively short time – in most cases that would mean as long as it takes for the relevant notice to expire and a hearing to be listed – they then risk losing everything that they have invested.

Debt_Free_Chick

I wonder what her solicitor said, when she bought?