Sue Phillips (FCCA) founded Shared Ownership Resources in 2021 in the belief that information on shared ownership schemes is frequently over-simplified, and sometimes even misleading, in downplaying potential risks, pitfalls and long-term costs. Ongoing reforms further complicate the picture. Shared Ownership Resources campaigns for greater transparency on the basis that homebuyers deserve honest, independent information and advice in order to make informed decisions, and to improve the likelihood of positive outcomes.
This submission on the regulation of social housing focuses on:
The Social Housing White Paper describes shared ownership as: ‘an affordable home ownership scheme that allows residents to purchase 25%-75% of a home and then pay a subsidised rent on the remaining share. Residents are able to buy further shares in their homes in minimum 10% instalments, and in most circumstances, up to full ownership’. Shared ownership is describes as ‘a vital step on the ladder towards home ownership’.
The White Paper introduces ‘a new shared ownership model’ described as ‘fairer, more consumer-friendly and more accessible’. The new model includes the following reforms: reduction of the minimum initial ownership stake from 25% to 10%; an option to buy further shares in smaller instalments as low as 1%; and a new 10-year ‘repair-free’ period during which the landlord covers the costs of major qualifying repairs.
Shared ownership schemes generally define affordability in relation to:
Reducing the minimum initial tranche to 10% is likely to open up shared ownership to greater numbers of households. However, the smaller the initial share purchased, the more exposed homebuyers are to contractual higher than inflation annual rent increases on shares held by the landlord, as well as potentially higher than anticipated service charges. Moreover, rent review is on an ‘upwards only’ basis meaning that specified rent won’t go down, or even remain static, regardless of the economic environment.
The lower the initial share they can afford, the more likely such households will not be resilient to longer term financial challenges. What evidence exists that it is in the best interests of homebuyers who cannot afford the current 25% minimum initial tranche to be encouraged to access shared ownership schemes by reducing barriers to entry?
The White Paper states: ‘Together [the new model] measures will ensure shared ownership supports those who need it most by making it easier for hard working people and families to access and progress to full ownership’. But the underlying problem is that, in recent decades, house prices have risen faster than wages so households quickly get priced out of staircasing. Although the introduction of a 1% gradual staircasing model attempts to address this issue, tiny 1% staircasing increments may offer little financial benefit to shared owners in practice.
Assuming a homebuyer purchased a 10% initial share, and then an additional 1% share in each of the following 15 years, they would still only have staircased to 25%, with correspondingly little impact on either rent payable, equity, or the prospect of ever staircasing to 100%. They’d remain exposed to all the risks and burdens of an assured shorthold tenancy (or assured tenancy depending on their contract terms).
The Consumer Protection from Unfair Trading Regulations 2008 establishes information that the average consumer needs, according to the context, to take an informed transactional decision. Information is defined as misleading if, for example, it is ‘unclear, unintelligible, ambiguous or untimely’.
Yet the Law Commission state that: ‘…members of the public do not always understand exactly how shared ownership schemes operate, or the precise nature of the legal arrangement which the purchaser of a shared ownership property is entering into’.[i] In their report 'A Fair Housing Market for All' the All-Party Parliamentary Group for Housing Market & Housing Delivery include as one of their key recommendations that: 'The Government should consider mandating better information on leases, service charges and enfranchisement for shared ownership purchases'.[ii]
The term ‘shared ownership’ is inherently unclear and ambiguous. Costs are not shared. Additionally the tenure does not constitute ‘ownership’ as many homebuyers understand that term.
Homes England’s Capital Funding Guide for 2021-2026 states: 'The term 'shared ownership' has a legal meaning and is used in this context'[iii] apparently referring to the Housing and Regeneration Act 2008. The HRA S71 heading neatly encapsulates the problem with the oxymoron: ‘Shared ownership low cost rental’. Notwithstanding the fact S71 goes on to state: ‘Accommodation which is both low cost rental accommodation and low cost home ownership accommodation is to be treated as the latter and not as the former’, shared ownership is governed by Housing Acts as either an assured tenancy or assured shorthold tenancy (albeit a tenancy for a relatively long term with an option to purchase further shares).
Pervasive use of ‘leaseholder’ terminology (including in Home England’s Shared Ownership Model Lease and Key Information document) is problematic given the legal actuality that there are fundamental differences between a ‘true’ long leasehold and an assured shorthold tenancy or assured tenancy, as detailed in the Housing Act 1988 and elsewhere:
The most significant risk under an assured shorthold tenancy or assured tenancy is loss of all equity invested in the event of possession. This risk is far from theoretical; recent research carried out by CCHPR found that shared ownership possessions are on the rise.[iv]
In short, a shared ownership lease does not constitute full leasehold title due to the legal burdens and restrictions referred to above, plus additional restrictions as specified in Homes England’s Model Shared Ownership Lease for Flats including vis-à-vis subletting and the selling process.
Additionally a lease (whether it is an assured tenancy or assured shorthold tenancy) is not a long lease because there is an express statutory limitation under the Commonhold & Leasehold Reform Act 2002, s.76 unless and until staircasing to 100% has occurred.
Homes England’s Key Information document states: ‘The Leaseholder can buy further shares in the property (at the market value of those shares at the time of purchase), until he or she owns 100%’. But this is misleading in that the assured shorthold tenant or assured tenant is not a ‘true’ long leaseholder unless and until they have staircased to 100%.
It is essential that homebuyers understand the different bundle of risks, rights and obligations arising under the assured shorthold tenancy, assured tenancy and leasehold tenures respectively. First-time buyers do not have all the information they require to make informed purchase decisions if the implications of an assured shorthold tenancy or assured tenancy are not clearly spelt out. Use of the terms ‘leasehold’, ‘leaseholders’ and ‘shared owners’ is misleading in this context.
In order to make informed purchase decisions it is also essential that homebuyers are provided with adequate information to understand the statistical likelihood, or not, of staircasing to 100%. Please see below for additional evidence in this regard.
The White Paper does not appear to specify exactly how shared ownership reforms are ‘fairer’. The two previous sections already cast some doubt on this assertion.
Anecdotal evidence suggests not all entrants to shared ownership schemes understand that they are responsible for 100% of service charges regardless of the percentage share purchased. This issue may be exacerbated by reduction of the minimum initial tranche, as it could appear counter-intuitive to be liable for 100% of charges with an initial share as low as 10%.
The building safety crisis provides an extreme illustration of the uncapped risk and cost 100% liability transfers to households purchasing a shared ownership property, regardless of ‘affordable homes’ classification. But it doesn’t take a building safety crisis to expose financially vulnerable homebuyers, required to purchase the maximum share possible, to unaffordable service charge increases. (A fact at odds in principle, but not necessarily in practice, with the Capital Funding Guide requirement that: 'The level of service charge must be affordable for the intended client group' (4.3.3).
Assistance with the costs of qualifying essential repairs and maintenance addresses the issue of 100% liability for service charges regardless of the % share held. But it’s not exactly the ‘repair-free period’ referred to in the White Paper. Additionally, an entitlement of up to £500 maximum per annum is less equitable than a responsibility proportionate to the equity % share held. And, of course, households who’ve purchased homes via the shared ownership scheme remain liable for 100% of ongoing costs once the initial 10-year period is over regardless of the size of their equity share at that point (perhaps still only 10%).
There is also the question of ‘fairer’ to whom? Shared ownership reforms are not retrospective thereby increasing complexity in the market place. Existing shared owners may find themselves disadvantaged as compared to homebuyers benefitting from reforms outlined above, and also the introduction of new 990-year leases.
Regarding the new model for shared ownership (smaller minimum initial tranche, smaller staircasing instalments, and a 10-year repair fee period) the White Paper claims: ‘Together these measures will ensure shared ownership supports those who need it most by making it easier for hard working people and families to access and progress to full ownership’.
According to the Housing and Regeneration Act 2008 S70 low cost home ownership, including shared ownership, is ‘made available to people whose needs are not adequately served by the commercial housing market’. Yet the focus of Regulator for Social Housing data is on unit sales and transfers and total housing stock, as opposed to outcomes for shared owners themselves. What evidence exists that the long-term needs of entrants to the shared ownership scheme are adequately served by the scheme?
Gaps in Regulator for Social Housing data make it practically impossible to evaluate the degree to which policy claims such as ‘full ownership’ have been achieved: for example, a failure to analyse between staircasing to 100% in a home that a household continues to inhabit (full ownership) and a simultaneous sale and staircasing transaction (a costly and complex process which may be required purely in order to sell, perhaps to eliminate the rent component due to the cumulative impact of higher than inflation annual rent increases).
Additionally, an absence of whole life cycle cost data makes it difficult to sustain the argument that the scheme is effective at meeting need, or providing meaningful affordability, over the long-term.
In sum, it is hard to conclude that the current regime for regulating shared ownership, as social housing, is fit for purpose either in ensuring compliance with consumer protection regulations, or in monitoring and regulation of outcomes for entrants to the shared ownership scheme.
[i] https://soresi.co.uk/assets/Uploads/Appendix-3-Law-Commission-Response-Shared-Ownership.pdf, pg. 1
[iii] https://www.gov.uk/guidance/capital-funding-guide, pg. 3
[iv] Shared Ownership Market Review 2020, CCHPR, pg. 11