Repossession of a shared ownership home
Combination of rights stemming from mortgage for a share of property and tenancy for the remainder complicates the possession process.
Assured tenant occupiers
Possession of shared ownership properties may be complicated by the fact that occupiers have a landlord/tenant relationship with the private registered provider of social housing (PRPSH) as assured tenants and have usually taken out a mortgage with a lender who has a legal charge on the land.
The Council for Mortgage Lenders (CML), National Housing Federation (NHF), Homes & Communities Agency and Building Societies Association jointly published guidance for mortgage lenders and PRPSHs on handling arrears and possession sales of shared ownership properties. This supplements the more general joint shared ownership guidance to be read together.
Flexible tenure/downward staircasing
If a leaseholder gets into difficulty paying their mortgage, it may be possible for the social landlord to buy back shares in the property. Flexible tenure is optional for social landlords but strongly encouraged.
A leaseholder does not have to actually have any arrears for downward staircasing to take place. However, a leaseholder does not have the right to downward staircase. It is a last resort option, and the PRPSH will ensure that the leaseholder has explored all the other options first.
In the case of leasehold for the elderly only, downward staircasing may also be available if the leaseholder needs the equity to pay for essential repairs and maintenance.
Downward staircasing is not available to leaseholders who have staircased to 100 per cent.
If the mortgage arrears have reached the level specified in the mortgage deed, the mortgage lender will usually begin possession proceedings. Having obtained vacant possession, the mortgage lender is free to dispose of the lease by selling the existing lease, staircasing to an intermediate level and selling the lease or staircasing to 100 per cent, where this is allowed (see mortgage protection clause, below), and selling a new lease or the freehold.
The mortgage lender should keep the PRPSH landlord informed about the possession proceedings, particularly where there is a possibility of repayment of arrears or undue delay. In the event that the rent arrears are not paid the landlord can seek possession under the Housing Act 1988.
When a leaseholder has not complied with the covenants in the lease, including non-payment of rent, mortgage or service charges, the PRPSH/freeholder can apply to the courts for forfeiture of the lease. The leaseholder cannot be evicted without a court order.
Where forfeiture proceedings are being considered, the mortgage lender must be served with reasonable notice. The length of notice required will depend on the circumstances of the case. If the mortgage lender takes no action to ensure the breach is rectified (such as paying the outstanding rent) within the specified period, forfeiture proceedings can be started. The leaseholder and the mortgage lender have the right to apply to the court for relief from forfeiture.
If an application for relief is made, it is most unlikely that the court will grant the forfeiture order. It is more likely to make an order endorsing a settlement on agreed terms, so in practice the PRPSH and the mortgage lender may agree an appropriate course of action before any legal proceedings to forfeit are begun.
Mortgage protection clause
Shared ownership leases usually contain a mortgage protection clause. The inclusion of such a clause means that a purchaser will not need to take out mortgage indemnity guarantee (MIG) insurance.
If the property is repossessed and the mortgage lender can staircase to 100 per cent to sell the property, the lender can offset their reasonable expenses against the price they pay to the PRPSH for the remaining shares. To take advantage of this guarantee, the mortgage lender must have:
been approved by the PRPSH
taken a charge on the right to purchase the freehold or a new lease, as appropriate
exercised the right to staircase to 100 per cent, and
sold a new lease or the freehold reversion.
The right to staircase is not an automatic consequence of obtaining possession. A separate charge is required to enable the mortgage lender to exercise this right. In practice, the increase to 100 per cent and the sale take place simultaneously.
Where the protection clause is applied, the amount to be paid by the mortgage lender for the outstanding share is the actual price of the property less those sums and reasonable expenses due to the mortgage lender. The shortfall remains a debt owed to the PRPSH by the leaseholder. Reasonable expenses can include:
advances to the PRPSH to cover any sums such as rent and service charges due under the lease (these have to be paid to enable staircasing to take place)
the mortgage lender's expenses incurred in exercising the right to purchase the outstanding share and in exercising its power of sale
the amount of capital due under the mortgage and no more than 12 months unpaid interest.
Leaseholder's continuing liability
The mortgage lender's protection clause makes the leaseholder liable for any difference between the amount that the PRPSH receives from the mortgage lender and the price of the outstanding share. The registered social landlord will normally take steps to recover the debt.
Sale of property by mortgage lender
The leaseholder or mortgage lender must ask the PRPSH to obtain a valuation before staircasing. For most leases entered into before January 1989, the valuation must be carried out by the district valuer unless there is a written agreement between the leaseholder and the PRPSH to use an independent qualified valuer. For leases after January 1989, the valuation can be done by an independent valuer. The PRPSH landlord must inform the leaseholder and the mortgage lender of the valuation within seven days of receiving it.
The price obtained by the mortgage lender is not governed by the valuation. If the mortgage lender is a building society, it must take reasonable care to ensure that the property is sold for the best price that can be reasonably obtained. Other mortgage lenders must have regard to the leaseholder's interest and take reasonable precautions to obtain a proper price. If the mortgage lender agrees a sale at a price that is less than the valuation, the PRPSH should satisfy itself that this is the best price that can be reasonably obtained.
The leaseholder may wish to sell the property before the mortgage lender takes possession or the PRPSH applies for forfeiture of the lease or for possession under the Housing Act 1988. This is only possible where there is sufficient equity in the property to cover the costs and arrears.
The leaseholder may voluntarily surrender the lease. If there is a mortgage, it is unlikely that the mortgage lender will give consent. If the lease is not mortgaged it can be surrendered, normally by a formal deed.
If the rent is in arrears by more than two months, the PRPSH landlord may inform the mortgage lender of the position. There may also be an informal arrangement whereby the mortgage lender will inform the PRPSH when a leaseholder's mortgage payments are in arrears by more than two months.
A shared ownership leaseholder can request that the mortgage lender covers the rent payments for a temporary period if they have a genuine reduction in income, for example a period of sickness after which they expect to return to work. If the mortgage lender begins to pay rent in any other circumstance, it is likely that the lender will start possession proceedings against the leaseholder. Any rent advanced by the mortgage lender can then be claimed from the proceeds of sale where a mortgage protection clause applies. This should only be in the short-term, as any long-term arrangement would reduce the amount available to the PRPSH on repossession.
Under all new leases, if the PRPSH intends to terminate the assured tenancy and commence possession proceedings under the Housing Act 1988, it must give the mortgage lender at least 28 days' written notice. This can allow the lender time to remedy the breach.
The High Court has considered the security of tenure of a shared ownership leaseholder who paid the initial premium for her lease without the assistance of a mortgage, and later fell behind with her rent. It held that her shared ownership leasehold interest in the property was an assured tenancy with a fixed term of 99 years, which could be ended by the PRPSH landlord without any entitlement to the return of any capital appreciation in the property.
Specialist debt advice support with debt cases
Shelter's Specialist Debt Advice Service provides advice to debt professionals in England and Wales, including:
Local Citizens Advice
all other free to client advice agencies
This service can't advise members of the public. Use Money Helper to find a debt adviser.
Last updated: 22 March 2021