Shared Ownership & Leasehold Explained?
Owning property and land in England and Wales is complicated, with a system that has evolved over centuries into its current form. Consequently, there are different ways to acquire property.
Buying a freehold property is often considered the gold standard. However, there are situations where a freehold purchase is not possible, say with flats in a block. There are other alternatives, like leasehold and shared ownership.
This article examines the workings of leasehold and shared ownership, as well as some key features that property purchasers and tenants should be aware of.
At Helix Law our property litigation team is nationally recognised. Dealing with both freehold and leasehold interests in both commercial and residential property, there aren’t many issues or disputes that we haven’t seen before, or haven’t advised on. If you have an issue or dispute relating to your property don’t hesitate to contact a member of our team and we will be happy to assist you.
What Is Shared Ownership?
Shared ownership is a mechanism that allows people to buy their own property when they can’t afford the full market value or are struggling to put together a deposit and meet the mortgage payments.
Shared ownership provides that first rung onto the property ladder for those in the rental market.
A buyer purchases a share in the property at a price typically ranging from 25% to 75% of the full market value. A mortgage usually supports this, but a purchaser can pay for it outright. A deposit of 5% to 10% is usually required on the buyer’s share..
A third party (usually a housing association) owns the remainder of the property. The buyer pays rent to the third party for the rest of the property, typically at a discounted rate. It is commonplace for the rent to be increased annually, and the lease should set a cap on such increases.
Similar to traditional leasehold purchases, the buyer is also required to pay a monthly ground rent and service charges, which typically cover the maintenance of communal areas and amenities.
All shared ownership homes, whether they are flats or houses, are leasehold properties—the purchase may be a new-build or an older home available through a shared ownership resale scheme.
Local councils and housing associations provide shared ownership schemes. Some new housing estates have a percentage of shared ownership properties aimed at first-time buyers.
How Does Staircasing Work?
Shared ownership schemes allow buyers to purchase additional shares in their home, a process known as ‘staircasing’. Buying more shares means you’ll pay less rent as rent is based on your landlord’s share, which diminishes if you buy more shares.
The lease will typically dictate the number of shares you can buy and whether you must wait a specified period before making a purchase.
For new leases of grant-funded Shared Ownership homes under the Affordable Homes Programme 2021-2026, the initial stake is reduced to 10%. However, some older leases only facilitate share purchases of 25% or more.
Buyers who purchased a shared ownership property after 1 April 2021 may be able to buy shares of 1% for each year for the first 15 years.
The cost of each share depends on the property’s value at the time you wish to purchase additional shares. As above, the lease will likely contain provisions regarding this, and it is not uncommon for a valuation by a surveyor registered with RICS, the Royal Institution of Chartered Surveyors to be required.
Generally speaking, you’ll likely need to buy additional shares within three months of the date of this valuation.
Final staircasing means the purchase of the last remaining share in the property by the leaseholder. For houses, the lease often provides that the freehold is transferred on final staircasing; otherwise, a leaseholder typically cannot use the Leasehold Reform Act 1967 to buy the freehold until they have reached 100%, and exemptions may apply for some landlords.
However, if the leaseholder has ‘staircased’ up to 100% ownership, they likely qualify for the statutory right to extend their lease. The specific terms of a lease may also permit lease extension without requiring 100% ownership of the property.
What Is a Leasehold?
In the UK, there are different ways to own land and property. The most common types of ownership are freehold and leasehold.
What’s the Difference Between Leasehold and Freehold?
Leasehold is a type of ownership where the purchaser doesn’t own the property outright, but just for a fixed period. The lease grants the leaseholder the right to occupy and use the property.
The property “owner” is referred to as the freeholder. A freeholder owns both the building and the land; a leaseholder owns the right to occupy the premises.
What Are the Different Types of Leasehold Purchases?
New-build blocks of flats and apartments in multi-occupancy blocks are traditionally sold on a leasehold basis. Some new developments may have a small percentage of houses for sale on a leasehold basis.
Large houses divided into one or two flats are commonly sold as leasehold.
Conversions of former industrial buildings, such as warehouses in urban areas, are typically sold as leasehold properties, particularly those designed with shared spaces or communal facilities.
Shared ownership schemes are always leasehold, regardless of whether they involve flats or houses.
Retirement properties are often operated as a leasehold, offering support services and shared amenities for older residents.
Lease Length, Terms, and How They Affect Value
Leasehold can last for a few years or several hundred years; 999-year leases are not uncommon, but most leasehold properties start with a lease of 99 or 125 years. During this time, the property can be bought and sold. At the end of the lease, the property reverts to the freeholder.
The lease length remaining directly impacts the property’s value, which decreases as the lease term is reduced. However, this may be somewhat offset by inflation and property values typically increase over the longer term..
Short leases create problems with mortgage providers due to the reduced resale value. Extending the lease may be an option if the lease agreement and/or the freeholder allows for it.
Ongoing Costs: Rent, Service Charges, and Maintenance
Alongside the right to occupy the property, most leases require the leaseholder to make certain payments to the freeholder; this is called ground rent and is typically an annual payment.
The freeholder is responsible for the upkeep, maintenance, and repair of the building, and recovers these costs via a service charge for communal facilities and shared areas. Every lease is different in terms of how these costs are calculated.
Buyers need to understand the regular costs associated with a leasehold agreement and a shared ownership scheme, as well as the areas of the building for which they are responsible.
Not only does this affect their rights (and their pocket), but it can also impact the value of the property in the long term. A buyer should always review the terms of any lease before r committing to it.
Resale Process, Nomination Periods, and Pre-emption
If a leaseholder doesn’t own 100% of a shared ownership property at the point of sale, then the property can only be sold on a shared ownership basis. They must write to the housing association and give them notice of sale, and first refusal.
The sale will likely require an independent valuation by a RICS-qualified surveyor, which the leaseholder may pay for.
Under shared ownership leases, the landlord has ‘pre-emption’ rights, meaning that the leaseholder must offer the property to the landlord first, or to a purchaser they nominate if the leaseholder has not ‘staircased’ up to 100% ownership.
If the landlord does not exercise those rights within 8 weeks, then the leaseholder may offer the property for sale on the open market. For new grant-funded Shared Ownership homes in the Affordable Homes Programme 2021-2026, the nomination period is 4 weeks.
If the landlord does not nominate a buyer within the nomination period set by the lease (commonly 8 weeks under older leases and 4 weeks under the new‑model Shared Ownership introduced under the Affordable Homes Programme 2021–2026), the leaseholder with 100% ownership may market the property on the open market, subject to eligibility and landlord approval requirements
In this case, the landlord will either arrange for someone to buy the home or repurchase it themselves.
Many shared ownership leases reference a ‘nomination period,’ which is a time span during which the landlord can exclusively market the property; this typically lasts 4-12 weeks. After this, you are free to put the property on the open market.
If the landlord finds a suitable purchaser during the nomination period, the sale price is based on the RICS valuation.
Frequently Asked Questions
Is Shared Ownership in High Demand?
The concept of shared ownership is a dream come true for many people stuck in rental properties. However, whilst more properties have become available on a shared ownership basis, these schemes have attracted a rising number of complaints to the Housing Ombudsman.
What Is Happening With Leasehold Reform?
Major reform on leasehold arrangements is looming, making it cheaper and easier for leaseholders to extend their leases or buy the freehold title of their property. A new statute, the Leasehold and Freehold Reform Act 2024 (LAFRA), has received Royal Assent, and the current government has committed to implementing its provisions as quickly as possible.
Shared Ownership Bridges Affordability Gaps, Imposes Legal Complexities, and Demands Specialist Advice
Acquiring property, whether that’s freehold title, leasehold, or shared ownership, may give rise to disputes, particularly between leaseholders and freeholders, or relating to relatively new Shared Ownership schemes. Helix Law’s specialist property litigation team are well placed to assist and to advise you if you find yourself needing advice and/or assistance. We handle significant disputes nationally and will be happy to assist you. Get in touch today.
