Shared ownership—a problem shared? Property analysis: Is shared ownership a risky option for property buyers? Charlotte McMurchie, Nicola Charlton and Ian Hellawell of Bond Dickinson comment on the legal issues in light of the growth in shared ownership for low and middle income households.

Analysis

What is shared ownership? Midland Heart v Richards (unreported) defined a shared ownership lease as an assured tenancy for which a buyer has paid a premium. Until a buyer owns all the beneficial interest in the property they remain a rent paying tenant. If they fail to pay their rent, the buyer is at risk of the landlord forfeiting the lease leaving the buyer with nothing. Briefly, what are the benefits of shared-ownership housing? Shared ownership is halfway between renting and conventional home ownership with the following benefits:

• affordability and mortgageability—purchasing a share of a property means a buyer requires a smaller deposit and smaller mortgage, thereby increasing the number of buyers that have the opportunity to purchase a property

• security—the grant of lease for a term of 125 years lease gives a shared owner security and stability for a substantial period they would not otherwise have if they were renting in the private rented sector

• low rent—the rent payable on the landlord’s share is relatively low with a fixed increase formula

• ownership—the mortgage, security of tenure and certainty referred to above gives a shared owner a feeling of ownership that helps lead to the formation of settled communities and homes

Are shared owners under the same duties as those owning 100% of their property? Shared ownership is not conventional home ownership. Therefore there are additional restrictions which affect shared owners. As they only have a tenancy on sale (as by definition of the term shared ownership the tenant cannot have staircased to 100% ownership) the property must be offered to the landlord before being sold on the open market and the marketability of a share in a property is more limited than a conventional property sale.

The key drawback with the scheme is that failure to pay the rent and service charge to the landlord can result in the landlord taking steps to forfeit the lease. This can lead to the owner losing their home, the premium paid when they purchased and the sums paid for any later acquired shares.

Restrictions on resale can make a property difficult to sell and shared owners are not permitted to sublet a property. The latter may be needed if a shared owner’s circumstances change and they need to move to work elsewhere and have difficulties selling the property. A shared owner is liable for repairs and maintenance as if they were the outright owner of the property regardless of the size of share they have paid for.

What are the most common legal issues? The key facts prospective buyers of shared ownership properties and their solicitors need to be aware of are:

• a shared ownership lease is only an assured tenancy

• forfeiture results in the loss of all premiums paid

• there are particular restrictions that affect sale

• subletting is prohibited

Some commentators have suggested that this category of ownership is ripe for default and for landlords providing this product to achieve windfalls in possession proceedings due to the retention of both the property interest and any capital sums paid by the defaulting tenant.

Others have argued that issues which arise in defences under the Human Rights Act 1998, art 8 (HRA 1998) to rented possession cases may cause the leading authorities in this area (Manchester City Council v Pinnock [2010] UKSC 45, [2011] 1 All ER 285 and Hounslow London Borough Council v Powell; Leeds City Council v Hall; Birmingham City Council v Frisby [2011] UKSC 8, [2011] 2 All ER 129) to apply to shared ownership possession claims, but with the exceptional circumstances of the shared ownership arrangement taking precedence over the landlords’ now accepted right to possession. Pinnock and Powell concerned arguments as to proportionality of a landlord’s decision to seek possession and followed a line of authorities citing breaches of HRA 1998, art 8 and the incompatibility of domestic housing legislation with HRA 1998. If these arguments were capable of advancement, the landscape for a defaulting shared owner might not be as bleak as that seen in Midland Heart. The hurdle to be vaulted for the shared owner is the status of the landlord—can it be defined as a public authority by its exercising functions of a public nature? If it can, then the above arguments are ones that can be advanced. What is the status of registered providers (RPs)? On the question of status, in the leading case of Weaver (R (on the application of Weaver) v London and Quadrant Housing Trust (Equality and Human Rights Commission intervening) [2009] EWCA Civ 587, [2009] 4 All ER 865) Elias LJ felt the approach adopted by the Court of Appeal—that acts of management were functions of a public nature extended to all tenants who are in social housing where the properties were acquired as a result of state grants—was correct. In support of the extension of Weaver to shared ownership possession claims are arguments that shared ownership schemes are part of the government’s social housing policy designed to meet housing need. However, this is subtly, but nevertheless importantly, different to the requirement Elias LJ and the Court of Appeal saw in that the relevant acts of management needed to relate to housing funded by state grant.

As is the case with many RPs, shared ownership and other products have been developed or bought using privately raised funds.

Is it right therefore to define RPs as exercising a public function in such circumstances? Although the shared ownership product is regulated by the Homes and Communities Agency that in itself does not produce, by reflection, a public status on the relevant RP landlord. This status of the RP in the very specific circumstances of a specific property is a fundamental question still to be resolved. At present the failure to recognise differing categories of public and private function of RPs is a potential saving grace for shared owners who find themselves in straightened circumstances.

What should be kept in mind when considering shared-ownership housing in light of potential litigation? We have seen first-hand the arguments that can be advanced on a defaulting tenant’s behalf in possession claims for shared ownership properties. The Pinnock and Powell defences arise in the case of mandatory orders for possession—that is to say where there is no question of ‘reasonableness’ being addressed by the court. Therefore, for a shared owner it will only be in claims for possession where the mandatory ground 8 is being utilised that the Pinnock and Powell defences are likely to be used. What is being argued by those acting for the tenants is that the presumed right of the landlord to possession (unless the tenant can show exceptional circumstances) needs to be supplemented substantially—proper justifications given to make the interference with that tenant’s convention rights lawful. It is argued that because so much more is at stake for the tenant (loss of home and capital contribution) it is only right that challenges to the lawfulness of the decision to terminate are made.

For the other main grounds for possession, the court will be able to exercise its discretion and consider the reasonableness of the possession claim being made. This can lead to an outright, suspended or a postponed possession order. Commentators have considered the effect of the latter two orders on a shared owner and suggest this means the owner has no option but to remain in a property shrouded in a possession order, making it unsaleable.

Will this really be the case? A suspended or postponed possession order will contain terms for the tenant to abide by and in so abiding giving protection from an outright order and eviction. If the tenant is looking to sell its share in the property to finance the debt, the landlord will know about it due to the restrictions on re-sale. In our experience all the RP landlord actually wants is for the arrears to be cleared. If that is achieved by a sale of the tenant’s shares to someone more able to keep up the payments, then undoubtedly this will be encouraged.

Finally, we have seen the argument advanced that in the case of an outright order for possession HRA 1998, art 1 has application—no-one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. This directly relates to the ownership of the capital invested by the tenant in to the property. What is the trend in this area and what are your predictions for the future? It is likely more schemes of this kind will be needed to provide properties for buyers who do not qualify for other types of affordable housing but cannot afford to buy a property on the open market. To popularise shared ownership consideration needs to be given to:

• the risk of total loss on forfeiture

• relaxing rules or increasing a stricter timescale on resales, and

• possibly permitting temporary subletting (with the landlord sharing in the sums received when the property is let to stop shared owners profiting from subletting)

From a litigation perspective we have seen the arguments above advanced in live possession proceedings. To date however, we have no decided authority on any of the above arguments. It is however, only a matter of time.

Interviewed by Nicola Laver. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.