Shared Ownership was launched in the late 1970s. Given it’s been around for so long, it’s not surprising that there have been some significant changes to the way the scheme works. And that means there can be important differences in lease terms, depending whether you buy a new-build or a resale.
Your Shared Ownership lease is a legal and binding contract between you and your landlord. Consequently it’s vital that you understand the terms you are signing up to. But this is complicated by the fact that, over time, the model lease published by the Government has been amended and updated. Consequently, different resale properties could come with different lease terms.
You might imagine that if you buy a new-build home you will get the ‘new’ Shared Ownership lease. But this isn’t necessarily the case. It takes a long time from agreeing funding, to constructing a Shared Ownership development, to marketing new homes. Consequently, some new-builds may be sold with the previous ‘standard’ lease terms in force at the start of the development process.
Up until recently, Shared Ownership homes were usually sold with a ‘short’ 99- or 125-year lease term.
If you buy a resale, check the lease length carefully. You may need to budget for lease extension. This will depend on how many years remain on the lease, and also on your intentions for your home. Is it a forever home, or do you intend to sell on before lease length becomes an issue? (Lease extension is much more expensive once there are fewer than 80 years remaining on the lease. Consequently it can be harder for buyers to obtain a mortgage and the property drops in value.)
Bear in mind that any lease extension carried out after 14 April 2022 currently removes protections available under the Building Safety Act 2022. Work is underway to address this flaw in the Act. But, if you’re buying a resale property with building safety issues, or where a lease extension was carried out after 14 April 2022, ask your solicitor to explain any related risks.
If you buy a new-build, you are more likely to be offered the new 990-year lease term.
Annual rent review
A new rent reform, announced on October 12th, 2023, introduces more favourable rent terms. We’ve explained these in a previous article. If you’re purchasing a new-build, check with the sales team and your solicitor whether you will benefit from the new rent reform.
The reform is not retrospective, meaning that any resales currently on the market will almost inevitably have the ‘old’ rent terms. Though, of course, as time goes on more Shared Ownership homes with the ‘new’ rent term will come onto the market as resales.
Depending on the original start date of a resale lease, the annual rent review could specify RPI plus 0.5%, RPI plus 2%, or perhaps some other formula. Seemingly small differences between these formulas could have a big impact on the amount of rent you will pay over the longer term.
The new model lease offers an initial share as low as 10%, and the option of staircasing in 1% increments for 15 years, and 5% increments thereafter.
Resales will currently come with older lease terms requiring staircasing in larger chunks. This is not necessarily a bad thing. In fact, if you can afford it, staircasing to 100% in one go keeps valuation and legal costs to a minimum whilst eliminating rent.
Ground rent is a payment made to a landlord. The landlord does not have to provide a clear service in return.
Historically, Shared Ownership properties were offered with peppercorn ground rent (effectively zero). However, ground rent terms have been introduced into some Shared Ownership leases. Be aware that, in some cases, ground rent may be triggered by staircasing to 100%.
The Government has introduced reforms abolishing ground rent on new leases, which should benefit anyone buying a new-build.
Repairs and maintenance
The new model lease includes a 10-year ‘initial repair period’, during which the landlord is responsible for some repair and maintenance costs.
If you buy a resale with a 10-year initial repair period still in force, you will benefit from the amount of years remaining. If you buy an older resale you will be responsible for 100% of all maintenance and repair costs.
Deeds of variation
In the property sector, a deed of variation is used to change the terms of a lease. Some older Shared Ownership leases include terms which are no longer acceptable to mortgage lenders. So, if you buy a resale with an older lease, you may have to pay for a deed of variation: for example, to add a mortgage protection clause.
Housing providers include a ‘new-build premium’ in the sales price. There are several reasons for this. Your new-build home is freshly decorated and ready to move into; everything inside it is brand new and unused; and you have the reassurance of warranties and guarantees.
How much difference do new-build premiums make to sales prices? It’s hard to say. New-build premiums can vary by location, and by property type. One RICS surveyor estimates that new-build Shared Ownership homes are typically sold at a premium of around 15%, and lose value as soon as the buyer moves in.
It’s a bit like buying a brand-new car: it’s worth less the moment you drive it off the dealer’s forecourt. Though, on the other hand, most cars continue to depreciate whereas property tends to rise in value over time. If you’re planning to sell on in the short-term, you may need to wait until the value of your new-build home catches up with the price you paid initially. However, the new-build premium also exposes you to a greater risk of being in negative equity if the market declines.
If you buy a resale you may have to deal with some wear and tear, but the property could still offer better value for money.
Do your own research!
If you’re purchasing a new-build, check with the sales team and your solicitor whether you’re getting the new model lease and the new rent terms. Read up on new-build premiums, and check what similar properties are selling for in your local area, both new-builds and resales.
If you’re purchasing a resale, ask your solicitor to explain any differences between the lease terms and those you would obtain with a new-build offering the new model lease.