Lack of ownership in shared ownership

[Edit 15/09/08. It now looks like the following judgment is a) being appealed shortly and b) may only have been a County Court judgment, not High Court – this latter point is not clear but reliable sources say County Court]

[Edit 18/09/08.  In the comments to this post, a few people, mostly being me, were wondering why any lender would touch shared ownership if their security could vanish this way. I’ve had a look at a few shared ownership leases now. They typically carry a clause requiring the landlord to notify the lender of any forthcoming possession/forfeiture proceedings for rent arrears. So the lender has the opportunity to pay off the arrears, protecting its security, and then take possession proceedings against the tenant/leaseholder themselves for breach of mortgage conditions. So there is a measure of security for the mortgagee written in, which is presumably why lending still takes place.]

[Edit 23/09/08. Updating post, with benefit of transcript here.]

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.

About Giles Peaker

Giles Peaker is a solicitor and partner in the Housing and Public Law team at Anthony Gold Solicitors in South London. You can find him on Linkedin and on Twitter. Known as NL round these parts, and still is Nearly Legal on Google +.
Posted in assured-tenancy, Housing law - All, Leasehold and shared ownership, Possession and tagged , , , , .

24 Comments

  1. A couple of points.

    S.146 notices don’t apply to forfeiture for arrears of rent (which is why we drafters of leases argue so much about whether service charges are reserved as rent or not).

    Its also important to realise that the High Court proceedings were separate proceedings from the possession proceedings. It was in those proceedings that the trust point was rejected.

    A very nasty example of the operation of our wretched landlord and tenant law.

  2. @Francis. S.146 – I knew that, dammit. Post edited accordingly. I’ve got into a forfeiture/s.146 loop lately, so I think I just typed it on auto pilot.

    I think I set out that the trust point was only raised on application to the High Court, but I’ll put a para break in there.

  3. Pingback: Shared Ownership Not So Shared After All - House Price Crash forum

  4. Pingback: lack of ownership in shared ownership..beware - MoneySavingExpert.com Forums

  5. I’m sure I saw a client with a secured loan against their ‘half’ or what they and the creditor thought was their ‘half’.

    As the client had taken out a mortgage to purchase their ?? fixed term assured tenancy I guess the creditor who agreed to the secured loan would be stuffed?

    Aren’t the ‘tenants’ of these properties usually responsible for the repairs as sec 11 LTA 1985 doesn’t apply?

    Apologies if dumb questions! Never really liked shared ownership!

  6. @housed. Good point. From my brief conveyancing experience, I think there are additional arrangements for the mortgagee’s security, but I will check that tomorrow.

    Whether repair obligations are under s.11 L&T 1985 or under the lease is also a interesting point (not least for limitation – 6 years for tenants, 12 years for leasehold). Hmm. No answer just yet, but watch this space.

  7. Ah – an example of “never post when dazed and confused”. Of course section 11 of the Housing Act 1985 might apply (provision of board and laundry facilities by the local housing authority in connection with its provision of accommodation) but what I meant was section 11 of the Landlord and Tenant Act 1985.

  8. Well, I don’t see shared ownership leases very often (thankfully it would seem). I gather that most are granted for 7 or more years and therefore fall outside s.11 of the LTA 1985. If that’s right then (assuming that the leases are made by deed which would be normal) a suit for disrepair under any term of the lease would be 12 years as an action on a specialty.

    If the lease is less than 7 years but is made by deed and has a covenant by the landlord to keep in repair, I don’t see that the situation should be any different – the effect of s.11 shouldn’t be to remove a duty that was imposed by deed on the landlord even if there is an additional statutorily implied term.

    No authority on s.11 and limitation comes to mind. I suppose it could be argued that breach of the implied covenant is a breach of statutory duty and therefore only has a 6 year limitation period.

    If I run across anything I’ll post it here.

  9. That makes sense, it is an assured tenancy of fixed term, rather than periodic, and, as you say, it is over 7 years, so outside s.11. Repairing obligations are under the lease.

  10. Of course, the point I was groping for in the post that we have managed to avoid is that no lender is going to touch shared ownership when any interest in the property can be ended via ground 8, regardless of whether the landlords will or won’t use it. No security does not make a happy mortgagee. So practically, the judgment means the end of mortgages for shared ownership, unless the CoA change matters or there is legislation – which one has to imagine would be very shortly.

  11. @NL – its worse than that. I’d be rather worried about Ground 9.

    Also I am feeling a little less complacent about this having noticed how high some long leaseholders’ annual rents are (something I had not looked at all that closely).

    But you are right, no-one would be able to get a mortgage for one of these. Is that normal? If so, I am astonished. There’s clearly a huge failure to understand the sector there.

  12. Yep, such mortgages may not really be that secure afterall!

    I wonder how many owners have second charges that were supposed to be secured against the owners ‘share’.

  13. @Francis Davey: Yes, this is the biggie. As housed says, most shared ownership properties were/are mortgaged. Once this sinks in, there will be zero mortgages available. And this may well spill over into residential leases where the annual rent is high. Lenders haven’t even thought of this (if my conversations with conveyancers are any guide).

    Hence my initial view that this is a big judgment, not on the law per se, but because no-one had taken this into account. If upheld in the Court of Appeal, I’d expect Government action quickly. Otherwise the shared ownership sector will simply vanish.

  14. I’m following this with interest as these types of property are boldly plugged FOR SALE near where I live. Even before that case, reselling was nigh on impossible: attributed in part to these shared schemes “not being well understood”, and if an estate agent is saying that, you know it’s a hard sell. IMHO they were holes to fall into due to this, so the case is really bringing some harsh reality to the whole area. Again IMHO they were a trendy gov. band-aid for starters in this housing/credit bubble.

    I’d be more worried if the gov does whip (3-line?) up some new bad law. Let this sleeping dog die.

  15. Pingback: Shared ownership - Legal Banter

  16. Actually it is not that bad for the lenders. I have had a look at a couple of joint leases and they contain a provision that the landlord give the lender notice of any forthcoming possession action for arrears. The lender can then pay the arrears and claim possession against the tenant borrower themselves, so their security does have a safeguard. Panic over. They will still lend.

  17. Only just found this site – excellent work! This case is extraordinary unless I’m missing something. Perhaps Midland Trust paid out because they feared an unjust enrichment claim from the lenders. Would such a claim be dependent on a trust being established? It is difficult to see how there could not be a trust, at least of any proceeds of sale. Also how come this case took place in Nov 07 and was only reported on Lawtel in June 08? What about article 8 for goodness sake? Shame there’s no appeal…Hi Francis btw

  18. The original payment was not repaid.

    The appeal is due to be heard on 5 and 6 November 2008

  19. Michael: Interesting. I think CMylod got the wrong end of the stick – there was no extant mortgage in this case as far as I can see, and I doubt that whether there was would make any difference to ‘voluntary’ payment anyway. But why was no publicly touted payment made? Pending appeal?

    Thanks for the appeal dates. We’ll await it keenly. There is anyway an update post ‘with benefit of transcript’ coming very shortly…

  20. Pingback: Shared ownership | hilpers

  21. Pingback: Stupid question probably « Housed

Leave a Reply (We can't offer advice on individual issues)

This site uses Akismet to reduce spam. Learn how your comment data is processed.