Written evidence submitted by End our Cladding Scandal Campaign [SH0 0052]

The End Our Cladding Scandal (EOCS) campaign is resident-led; it is a collaboration between many resident groups across England and Wales, Inside Housing and Grenfell United.[1]

Introduction:

Our evidence solely focuses on the Shared Ownership (SO) scheme and is based on the experience of shared owners trapped in the building safety crisis whom we, and our local resident groups, have been supporting over the last six years.

Many of the findings and recommendations of our report ‘Dereliction of Duty: how HAs failed leaseholders trapped in the building safety crisis’[2], published in February 2022, are directly relevant to the present inquiry. The report was based on a survey of 352 leaseholders from 35 different housing associations (HAs); 83% of respondents were shared owners[3]. Our findings highlighted systemic, industry-wide issues such as withholding of information, lack of expertise and knowledge on building safety, poor communication, indifferent customer service, lack of accountability, and a disregard for people’s human right to adequate housing[4]. These issues echo concerns highlighted by media reports on the appalling treatment of social housing tenants.

Recent University of York research[5] highlights the financial vulnerability of shared owners and the risks of the SO scheme: homes sold as ‘affordable’ very quickly become unaffordable. It also highlights that the scheme has a disproportionately negative impact on already vulnerable and/or disadvantaged people, and notes that women - including single women on lower incomes, single women with children, disabled women, pensioners and so on - are disproportionately represented among shared owners. These clear detriments to equality and diversity must be taken into account.

A key ask[6] of our campaign is for social landlords to be granted conditional access to building safety funds as this will prevent tenants and shared owners effectively paying for repairs through their rents. In return for access to funding social landlords must be obliged to provide information to all residents, protect leaseholders from costs, and offer buyback deals to shared owners with unmortgageable flats where the property no longer meets their housing needs, or where they can no longer afford to stay in their homes.

Answers:

1. Does SO provide good value for money for the potential users of the scheme?

There is no evidence to suggest that it does. Outcomes for individuals will largely depend on their ability to build equity quickly and to meet increasing costs. Those trapped in the building safety crisis are a case in point: they have had to face exponential service charge increases, as well as above-inflation rent and cost-of-living increases, and are also unable to remortgage, sell, staircase or extend their lease. For the vast majority of lower-to-middle income shared owners this has had severe financial consequences, making them poorer, and forcing some to sell to cash buyers. We are concerned that there is no monitoring of how many have already had to do this[7].

Our survey[8] showed that 80% of respondents were worried about forthcoming costs and/or had researched applying for bankruptcy, while 10% were already facing financial hardship or bankruptcy. Only 10% of leaseholders had been offered the option to spread additional building safety costs over an extended period.

Shared owners’ financial vulnerability and resulting exposure to hardship is partly due to the SO scheme’s rules, which force prospective buyers to buy the largest share they can afford at the time of purchase and borrow at the threshold of affordability. This requirement precludes shared owners from having the financial capacity to absorb any additional costs. This is particularly worrying when research shows that 38% of shared owners display some indicators of financial vulnerability[9].

Many shared owners are already unable to meet their housing-related costs[10], but also face the inability to remortgage after a fixed rate deal, and/or the fact their building may be excluded from Building Safety Act leaseholder protections based on height[11].

Government and the social housing sector have failed to mitigate the impact of the building safety crisis on shared owners; this has led to repossessions[12] and forced shared owners into a distressed sale to cash buyers. Others had to become ‘accidental landlords’ as a result of the crisis.

We are concerned about the fact that the number of accidental landlords[13], or the number of distressed sales[14] are not monitored, including in Greater London, which has the highest number of SO properties. The resulting net loss of ‘affordable homes’ is not monitored either[15].

The existing government data collection system – the continuous recording of social housing lettings and sales system (CORE)[16] – is not fit for purpose. It does not enable adequate monitoring of outcomes for shared owners, because it does not enable disaggregation of ‘staircasing’ data, which includes ‘back-to-back staircase and resales’ data, including distressed sales[17].

We also have serious concerns about the complex and costly SO resales process. In a falling housing market, many shared owners who are forced to sell may face negative equity on the percentage share they bought, but for some, the financial impact will be even greater. This is because some HAs[18] require shared owners to sell 100% of the property on the open market after the ‘nomination period’[19]. In doing so, they make shared owners liable for any loss on the percentage share owned by the HA[20]. Shared owners will owe the difference between the pre-sale RICS valuation and the actual sale price to the HA, leaving many shared owners with life-changing debt. The vast majority of shared owners we spoke to had not been informed about these resale terms at the time of buying the property.

Government should:

⮚        Change monitoring requirements in the CORE system[21] to monitor the number of distressed sales of SO properties to cash buyers.

⮚        Urgently investigate HA practices on resales

⮚        Require HAs to provide information about the financial liabilities their former shared owners face when exiting the scheme through a cash resale; and how many manage to staircase to stay in their own home. 

⮚        Mandate extensive information provision in plain English to existing and prospective shared owners on all aspects of SO, including, but not limited to, scheme rules on staircasing, lease extension[22], rent increases, service charge information, and the resale process.[23]

⮚        Require funding authorities such as Homes England and the Greater London Authority to control the quality of information supplied to existing[24] and prospective shared owners. [25]

2. How can the Government ensure that SO remains an affordable programme in light of rising provider costs and inflation?

The SO scheme was poorly designed. The likelihood of inflation going up, let alone other long-term costs, were not factored in. Successive governments have failed to measure long-term outcomes for shared owners.[26]

The scheme was not financially sustainable for many shared owners before recent crises. Given the high proportion of existing shared owners who are financially vulnerable, and the significant number of leaseholders facing the end of their fixed rate mortgage in the next few months[27], it is urgent to provide existing shared owners with new legal rights to address major flaws in the scheme, as well as prevent hardship and homelessness.

The Government must make significant changes to the SO scheme for existing shared owners, including:

⮚        A legal right to downward staircasing. Government guidance[28] describes downward staircasing as ‘an option of last resort where the leaseholder has got into or is about to get into mortgage arrears and is at risk of losing their home’. HAs make their own rules and impose criteria[29]. A legal right to downward staircasing would protect shared owners. It should include the right to remain in the property as a HA tenant when downward staircasing to zero. This could prevent significant hardship, homelessness and bankruptcies.

⮚        Introducing primary legislation to override lease clauses that force shared owners to sell 100% of a property after the nomination period. Shared owners should not be exposed to life-changing debt as a result of exiting what was sold to them as an ‘affordable’ housing scheme.

⮚        A legal right to a buy back by the HA where the property is unmortgageable for reasons beyond the shared owner’s control and where it no longer meets their housing needs. The property no longer meets the needs of the shared owner when any of the following applies: (a) they have become ‘accidental landlords’ or (b) the property is overcrowded[30] or (c) the shared owner no longer has a legal right to reside in the UK[31] or (d) the shared owner has acquired a disability that cannot be accommodated in their property.

⮚        The right to sublet at market rate for shared owners who are accidental landlords. Current rules prohibit any ‘profit’ on a sublet, and rent setting is generally decided by their HA[32]. Additional costs accidental landlords have including additional income tax are not taken into account[33]. As a result, most face ongoing losses while other leaseholders can let their property at market rate and absorb costs. As the building safety crisis is likely to take over a decade to fix, especially for buildings under 18m, shared owners who sublet should be protected from further losses.

⮚        Introduce primary legislation to override the formula for rent increases. Annual upwards-only above-inflation rent increases benefit HAs but are unsustainable for shared owners. Some face annual rent increases of RPI plus 2%. RPI is no longer considered an appropriate index by the Office of National Statistics[34], yet there is no evidence HAs amending lease terms to use other indexes.

⮚        Introduce primary legislation to override all existing RPI-linked ground rent clauses and amend to peppercorn at no cost for shared owners.

⮚        Investigate HA service charge increases. We’ve recently seen exponential increases and scrutiny is very difficult. We welcome the campaign organised by the Social Housing Action Campaign (SHAC)[35].

⮚        Ban additional fees[36] HAs charge for services.

⮚        Clarify the meaning of ‘exceptional circumstances’ in the Capital Funding Guide HAs currently decide behind closed doors what constitutes ‘exceptional circumstances’. As an example, we had to intervene to get a HA to accept that a leaseholder with stage 4 cancer was facing exceptional circumstances and should therefore be offered a buy back for his unmortgageable flat.

3. What support can be offered to SO tenants given the impact of leasehold properties?

Shared owners face different experiences depending on the HA they are dealing with, but their difficulties are seriously compounded when the HA is not the freeholder, but a head lessee or sublessee, which is common with section 106 agreements. Access to information is significantly more difficult for those shared owners as they have no contractual relationship with the managing agent.

4. What impact, if any, are changing sector regulations having on the SO scheme?

We do not believe these changes will have a significant impact for existing shared owners. Customer service in HAs hasn’t improved since our Dereliction of Duty report, where 90% of respondents rated their HA’s communications and customer service negatively, with over half rating these as ‘very poor’.

Furthermore, existing non-judicial means of redress are inadequate as HAs ignore the Housing Ombudsman ‘maladministration’ rulings. Media exposure of poor practice or ‘name and shame’ have had limited impact. HAs have also ignored the recommendations we made in our Dereliction of Duty report.

Unlike existing shared owners, prospective ones will benefit from long leases and peppercorn ground rents; however we do not believe that HAs will adequately maintain new buildings. Shared owners are therefore likely to face large bills for major works after 10 years.

5. Is there a lack of mortgage providers for SO properties?

Yes. In addition, interest rates for SO mortgages are also higher.

6. What challenges are associated with repair costs being covered by those utilising the SO schemes?

The main issue is that shared owners are liable for all costs. A just alternative would be cost sharing between the HA and the shared owner based on percentage owned. This would also provide a strong incentive for HAs to remedy issues early and appoint competent contractors.

Unfortunately, misleading HA marketing often states that shared owners are not ‘responsible’ for maintaining their building but fail to mention they are responsible for footing 100% of costs. Most were not made aware of this at the time of purchase.

7. How viable is full ownership through the SO scheme?

Full ownership turns a former shared owner into a ‘standard’ leaseholder; they will face similar challenges, including the inability to control costs: this cannot be described as ‘full ownership’.

8. Does the Right to SO policy in its current form reduce homeownership risks for individuals from lower income backgrounds?

No. It exposes individuals to very significant new risks and financial hardship.

9. What more can be done to secure the SO scheme as an affordable route into home ownership?

Government should

⮚        Urgently investigate long term outcomes of the SO scheme for existing shared owners.[37]

⮚        Overhaul initial affordability assessment to take long-term costs into account.

⮚        Provide extensive unbiased information about all aspects of the scheme.[38]

⮚        Ban use of HA panel solicitors to ensure advice is impartial.

10. How does the variation of costs from HAs and other providers impact the SO Scheme and the experience of tenants or potential buyers?

There is no level playing field. Some HAs insert egregious clauses in leases, including in relation to the resale process, but also charge additional fees for their services[39].

Complex tenures[40] add multiple layers of complexity for shared owners, making it very difficult for them to get an acceptable level of service for day-to-day issues, let alone in a crisis.

11. What should be done to improve the Department for Levelling Up, Housing and Communities’ data collection regarding SO?

Government should:

⮚        Collect additional information via the CORE reporting system, including to enable disaggregation of data for ‘staircasing’. This must enable differentiation between ‘real’ staircasing - where shared owners acquire additional shares themselves – and ‘back-to-back staircasing and resale’ data. Within the latter dataset, information about the nature of the ‘staircase and resale’ transaction must be collected, so as to monitor the number of distressed sales, i.e. where the sale price achieved was below the RICS valuation.

⮚        Require all HAs to publish this data.

12. Are alternative schemes such as ‘Rent to Buy’ viable and do they offer more value for money?

13. What more should be done to support first time buyers and those from lower household incomes onto the property ladder?

The current cross-subsidy model effectively leads to structural impoverishment of first-time buyers at the lower end of the income scale. Government should make the scheme fairer for existing shared owners, to ensure they do not continue to pay for all the costs and face all the risks. A complete overhaul of SO scheme rules is required to ensure no shared owners lose their homes. As set out above, a buyback scheme would ensure shared owners can move on and a change of tenure to social rent would significantly help alleviate the housing crisis. 

September 2023

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