Shared Ownership Property
Shared ownership housing schemes are Government backed and assist qualifying individuals to purchase their own home. With a shared ownership property an individual (or individuals) purchase a long lease from a housing association (using a commercial mortgage if needed) usually for 99 years. The individual pays a premium for the lease which represents usually between 25 per cent and 75 per cent of the full value of the property, with the housing association owning the remaining share. The individual(s) pay a sub-market rent for the remaining value. These are also known as part buy, part rent schemes.
Where a property is held on a shared ownership basis the freehold title will be held by the housing association.
31.3.331 Rights and responsibilities under a shared ownership scheme
An individual’s rights and responsibilities in relation to a shared ownership property are detailed in the lease, as are those of the housing association as landlord.
After the purchase of the initial share in the property it is possible for an individual to buy further shares in the property under the terms of the lease, until the whole value of the property is owned. This is known as staircasing. The cost of the further share purchase will depend on how much the property is worth at the time the share is purchased.
Once 100% of the lease is owned the freehold title will be transferred from the name of the housing association to the owners of the lease.
Even though the leases granted under shared ownership scheme are long leases it has been held [note 1] that they fall within the definition of an assured tenancy (see paragraph 30.68) [note 2] provided they are not excluded from being an assured tenancy by legislation [note 3]
Assured tenancies are excluded from a bankrupt’s estate [note 4]. Where a shared ownership property has equity, the value of this equity will be lost to the bankrupt’s estate unless it is claimed by the official receiver as trustee (see paragraph 31.3.347-8).
Assured tenancies or, in the case of a jointly owned property, the bankrupt’s interest in the tenancy, can be claimed for the benefit of a bankrupt’s estate by the official receiver, as trustee, where it is considered worthwhile to do so (see also paragraph 31.3.337). Notice must be served on the bankrupt in writing within 42 days.
Upon the service on the bankrupt of the written notice the interest or assured tenancy vests in the trustee as part of the bankrupt’s estate and the trustee’s title has relation back to the commencement of the bankruptcy i.e. the date of the bankruptcy order [note 5]. See paragraph 31.3.347-8 on how to claim the bankrupt’s interest.
Before claiming the shared ownership property for the benefit of the bankrupt’s estate [note 5] the official receiver, as trustee, will need to carry out an assessment of the assured tenancy. The official receiver will need to consider the terms of the tenancy agreement to establish whether or not the tenancy is an assured tenancy by considering if any of the exclusions listed in the legislation apply [note 3] (see paragraphs 30.69-77).
If the exclusions under the Housing Act apply, the tenancy will not be an assured tenancy, but will be a common law tenancy. The terms of a common law tenancy agreement are still valid but such a tenancy is not governed by the Housing Act 1988. A common law tenancy will vest in the official receiver as trustee, and consequently, there will therefore be no requirement to make a claim under section 308A. Further information on a common law tenancy can be found in paragraph 30.65.
Where the bankrupt’s interest in the shared ownership property has a value of less than £1,000 (the amount on which the OR can obtain a charging order- see Part 8) and therefore has no value to the bankrupt’s estate, the assured tenancy should not be claimed [note 5].
Where no claim is made for the assured tenancy and the tenancy is onerous, it will not be necessary to disclaim it as the tenancy will not vest in the official receiver as trustee.
Where the bankrupt’s interest in the shared ownership property is greater than £1,000, and subject to the guidance in paragraphs 31.3.336-7 consideration should be given to claiming the assured tenancy for the benefit of the bankrupt’s estate (see paragraphs 30.78-81).
Where the official receiver as trustee claims a solely owned assured tenancy for the estate [note 5], the lease will vest in him/her (see paragraph 31.3.335). This will mean that he/she is liable to pay the rent due to the housing association under the terms of the lease as he/she will be an assignee of the lease by operation of law.
The official receiver may become liable to pay the rent if the bankrupt or any joint owner of the assured lease default in making the rental payments to the housing association.
It is unclear whether the lease will cease to be an assured tenancy when the official receiver becomes an assignee on the lease (see paragraph 31.3.340). Whether or not the lease remains an assured tenancy or by default becomes a common law tenancy agreement, it is likely that by allowing the bankrupt to continue making the rental payments to the housing association the official receiver will be creating a sub tenancy on the property and consequently the official receiver will become the landlord of the bankrupt with all the usual obligations that are attached (see Chapter 31.11).
Sub letting of the property is usually against the terms of the lease agreement. It is likely the terms of the lease exist to prevent the leaseholder from profiting from renting the property which would go against the aims of the shared ownership housing initiative. It is considered that housing associations will not object to the granting of a sub-lease, taking into account the purpose of the insolvency legislation and the aims of the housing association to provide social housing.
Before claiming the property the official receiver should therefore consider the whole picture, having regards to the bankrupt’s capital value in the property and the rent which is due to the housing association which potentially may become payable as a bankruptcy expense, as a personal liability of the official receiver as trustee. Consideration will also need to be given to any costs likely to be incurred in respect of landlord responsibilities.
The greater the % if the capital value the bankrupt owns on the property the lower the rent payable to the housing association will be. The lower the rent is the lower the financial risk will be to the official receiver.
Many shared ownership properties have been owned for a considerable period of time and may have accrued a significant in value worth realising, despite the fact that the bankrupt may not hold a significant proportion of the capital value. In such instances the official receiver may be able to find a local insolvency practitioner who specialises in this area and is prepared to take on such cases.
The official receiver should also consider the guidance in paragraph 31.3.336-7 before deciding to claim the tenancy.
Whilst there is a risk that, in claiming the lease, the official receiver will become liable for the rent payable to the housing association under the terms of the lease, the occupant (usually the bankrupt) is likely to be paying the rent to the housing association and the monthly mortgage repayments as the property is his/her family home and there is likely to be a desire by the bankrupt to keep the home and to avoid repossession proceedings by either the housing association under the terms of the lease or the mortgage company under the terms of the mortgage deed.
This will afford the official receiver with some protection. In effect this is no different to any family home being dealt with by the official receiver where the bankrupt will often continue to pay the mortgage and any ground rent or service charge due, in an attempt to keep his/her home. In the shared ownership scenario the bankrupt is likely to have a greater incentive to carry on paying the rent and the mortgage as the combined amount payable as a consequence of the shared ownership scheme is likely to be lower than that payable under a normal mortgage. It is considered that it is unlikely that the bankrupt will default in the rental payments to the housing association and therefore the official receiver’s risk of becoming liable for the rent is considered to be minimal.
Where the bankrupt continues to meet the rental payments (and any mortgage payments due in respect of any mortgage loan) it is likely that he/she will be able to remain living in the property as the official receiver can seek to deal with his/her interest in the normal way by selling the interest or by obtaining a charging order.
It is considered that it is unlikely that the bankrupt will default in the rental payments to the housing association and therefore the official receiver’s risk of becoming liable for the rent is considered to be minimal.
To remove any risk of liability to the official receiver, where the bankrupt’s interest is greater than £1,000 but there is no willing purchaser who has made an offer to purchase the interest and no insolvency practitioner is prepared to accept an appointment as trustee, the official receiver should consider making an application to the court for a charging order [note 6] as soon as possible after claiming the assured tenancy under section 308A and prior to the usual 2 year and 3 month point (see Part 8). Once the interest is converted into a charge the bankrupt’s interest will cease to be part of the estate and will vest in the bankrupt [note 7]. On-going liability in respect of rent to the housing association and in respect of any landlord’s duties will cease from the date of the charging order.
Advice on the obtaining of a charging order can be requested from LTADT e.g. in relation to forms, template reports, advice on calculating the value of charging orders. Emails requesting advice should be sent to RTLU.Ipswich@insolvency.gsi.gov.uk.
The position is simpler in the case of jointly owned shared ownership property. The effect of the trustee giving notice (see paragraph 31.3.335) will be to vest the bankrupt’s beneficial interest in the trustee. The joint tenancy would continue to be held by the legal owners (the bankrupt and the joint owner) on a trust of land under the Trusts of Land and Appointment of Trustees Act 1996. Therefore where the official receiver as trustee claims the bankrupt’s beneficial interest he will not become the joint leaseholder with the solvent owner and the trustee will not become liable for the rent on the property as with solely owned property. This is the case even if both joint owners are bankrupt.
Where a failure on the part the bankrupt has, in some way, been a cause of the trustee’s failure to serve the notice in time, the court may allow the service of the notice out of time (see paragraph 30.80).
Once the notice has been served on the bankrupt (see paragraph 31.3.335), the assured tenancy (solely owned) or the bankrupt’s interest in the tenancy (jointly owned) vests in the trustee as part of the bankruptcy estate, and the trustee’s title to the property has relation back to the date of the bankruptcy order [note 5]. Once the property has vested, the official receiver should take such action as is necessary to protect and realise the property including, where appropriate, the issue of letters to third parties such as the mortgage company. Where appropriate, the official receiver should seek to insure the property (see paragraph 31.3.58).
Essentially, once the assured tenancy forms part of the estate, the official receiver should deal with it as he/she would with any other family home forming part of the estate. From this point in the process, there are no special procedures for dealing with the asset, and the information and guidance given elsewhere in this chapter should be followed.
For further information on disclaimers generally see Chapter 34.