Shared ownership arrears and possession

Shared owners have a fixed-term assured tenancy with a social landlord called a Private Registered Provider of Social Housing. The fixed term is at least 99 years and classed as a long lease.

The shared owner pays a premium for the lease, set at a fixed amount of the property value (10-75 percent). They usually pay for this with a mortgage.

The shared owner pays rent to the landlord based on the percentage of the premium they have paid. Rent is normally around three percent annually of the landlord’s share of the property value. Shared ownership rents can be increased once a year by a maximum of Retail Price Index (RPI) plus 0.5%. For shared ownership leases granted from 12 October 2023 by Consumer Price Index (CPI) plus 1%. [1]With certain exceptions, this applies to new shared owners who purchase homes delivered through the Affordable Homes Programme, the planning system via Section 106 developer contributions, the Right to Shared Ownership and Rent to Buy schemes. ]

Read more about how shared owners purchase the property, rights to buy the freehold, and subletting and succession rights on Shared ownership housing rights.

What can go wrong with shared ownership

Shared owners must make several different monthly payments. These are:

• rent

• mortgage

• service charges

The shared owner is at risk of eviction if they fall into arrears with these payments.

To evict a shared owner, the landlord or mortgage lender must issue a claim in the County Court, obtain a possession order, and apply for an eviction warrant.

A shared owner who falls behind with mortgage payments could face possession proceedings by their lender.

The court can allow the shared owner to stay in their home if they can pay the current monthly instalment, plus an amount towards the arrears that will pay the debt within a ‘reasonable period’.[2] The court is only likely to suspend possession if the shared owner shows they can afford to pay the rent on top of this amount.

The shared owner might be able to avoid eviction for mortgage arrears. They could:

• reduce the arrears to a level acceptable to the court

• offer to pay the mortgage plus arrears each month

• ask the court to make a time order

A time order can give the shared owner more time to pay what they owe. The court could reduce the monthly payment and allow the shared owner to stay in their home.[3]

The shared owner will need expert advice and representation to apply for a time order.

Financial Conduct Authority rules

Most mortgages for shared ownership property are regulated mortgage contracts, meaning they are covered by FCA regulation. The lender must follow the rules set out in the FCA handbook, including the Mortgage Conduct of Business Rules (MCOB).

Under MCOB, the lender must treat the borrower fairly. They must not repossess the property unless all other reasonable attempts to resolve the problem have failed.

The FCA handbook including MCOB is available on the FCA website.

How to complain about a mortgage lender

Shared owners can complain about breaches of MCOB and unfair treatment generally. The complaint must be made in writing to the mortgage lender. If there is no response within eight weeks, or the response is not satisfactory, the borrower can complain to the Financial Ombudsman.

The Financial Ombudsman Service website has more information about how to make a complaint.

The landlord can bring a possession claim on any of the grounds in schedule 2, Housing Act 1988 that apply to long fixed term tenancies. They include the rent arrears grounds 8, 10 and 11.

Mandatory rent arrears ground

Ground 8 is the mandatory rent arrears ground. That means the court must make a possession order against a shared owner who owes a specified sum of rent arrears both at the date the notice is given, and at the date of the court hearing. The court cannot suspend possession when the order is made on ground 8.

The specified sum of arrears is:

• eight weeks, for rent that is paid weekly

• two months, for rent that is paid monthly

A shared owner who receives a claim form that specifies ground 8 needs expert housing advice.

The shared owner might be able to defend a ground 8 claim. They could:

• reduce the arrears below eight weeks/two months before the hearing

• identify a defect in the claim form or the notice

• bring a successful counterclaim against the landlord

The landlord is not liable for repairs in a shared ownership property, so a disrepair counterclaim is not likely to be an option.

Discretionary rent arrears grounds

Grounds 10 and 11 are discretionary rent arrears grounds. The shared owner could persuade the court it is not reasonable to make a possession order. The court can suspend possession, usually on terms that the shared owner pays the current rent plus a set amount towards the arrears.

Claims on mandatory and discretionary grounds

Landlords typically bring a possession claim that states all three rent arrears grounds - 8, 10, and 11. They do not have to choose which one to proceed with until they are in the court hearing. That means the shared owner must be prepared to defend a ground 8 claim at the hearing.

Ask the mortgage lender to pay the rent arrears

Mortgage lenders are typically willing to pay off rent arrears to avoid the landlord taking possession action. This helps them protect their security by purchasing a larger share. The shared owner should ask the lender and landlord what effect this has on their monthly payment, as the mortgage and rent calculations will change.

Shared owners who cannot afford to pay their rent arrears should contact their lender to find out what support they can offer.

The terms of the lease set out the service charges the shared owner is expected to pay. Service charges are usually variable as they depend on the work that needs to be done to the property.

The shared owner must usually keep paying some service charges after they have purchased the property outright.

The landlord can bring possession proceedings against a shared owner who fails to pay service charges, if the amount is more than £350. To bring possession proceedings the service charges must have been either:

• agreed by the shared owner

• decided by a court or tribunal (including a default judgment)

The landlord must forfeit the lease before they can issue a possession claim. The shared owner can apply to the County Court for relief from forfeiture.

The lease is automatically forfeited if the landlord gets a possession order for rent arrears.

Challenge the service charges

The level of service charges is controlled by legislation. It prevents landlords from making late demands. The shared owner could apply to the First-tier Tribunal (Property Chamber) to challenge service charges that are not reasonable.[4]

Ask the mortgage lender to pay the service charge arrears

The mortgage lender might be willing to pay off service charge arrears to stop the lease being forfeited. They add the amount they have paid to the capital balance of the mortgage. That means the monthly payment goes up.

The lender or the shared owner can apply to the County Court for relief from forfeiture.[5]

A shared owner in financial difficulties could reduce their overall monthly payment by selling some of their share of the property back to the landlord, reducing the part they pay a mortgage on. This is called downward staircasing. The monthly rent increases in line with the proportion sold back to the landlord.

Whether the monthly payment will reduce and by how much depends on factors like mortgage interest rates. The shared owner should make sure they know how much their monthly payment will be if they decide to downward staircase.

Downward staircasing means it could take longer for the shared owner to purchase the property. The landlord normally only agrees to buy back a larger share as a last resort to avoid possession action by the mortgage lender.

Downward staircasing is not available for shared owners who have purchased 100 percent of the share.

The shared owner can sell their lease on the open market if they own 100 percent of it, and the property is not located in a designated protected area.[6]

Some leases contain a term that the lease can only be sold back to the landlord.[7]

Shared owners who have not yet staircased to 100 percent must give the landlord notice that they want to sell the property. The landlord has either 4, 8, or 12 weeks to find a buyer, depending on the terms of the lease. This is called the nomination period.

During the nomination period, the landlord can sell the share of the property for the current market value, as set by a chartered surveyor.

Remaining term of the lease

Mortgage lenders normally require at least 80 years left on a lease before they will grant a mortgage. That means the value of leases with less than 80 years remaining can fall drastically because potential purchasers cannot get a mortgage.

The landlord might be willing to grant an extension to the lease to allow the shared owner to sell at a better price.

A shared ownership property could be repossessed by either the landlord or the mortgage lender. In practice, it is more likely to be the mortgage lender, because the lender’s security is better protected if it pays off rent arrears and issues possession proceedings than if it allows the landlord to do so.

Possession granted to the landlord

In a case involving a shared owner with no mortgage, the High Court held that when a possession order was made for rent arrears the lease was forfeited. The shared owner was not entitled the return of any equity including the appreciation in value.[8] The case was decided on a particular point of law, and other points of law were not dealt with.

In practice, housing association landlords do return at least the amount purchased. Some might also pay the shared owner the appreciation in value.

Sale by the mortgage lender

The mortgage lender can sell in some cases if it exercises the right to staircase up to 100 percent. The lender can deduct their reasonable costs from this sum. This is called the mortgage protection clause. It is a fundamental clause contained in all shared ownership leases.

The shared owner is liable for the difference between the amount the lender pays to the landlord and the price of the outstanding share. The landlord could issue a money claim for the shortfall debt.