Workshop: Property: mortgages and shared ownership

A colleague recently gave me a file in relation to a matter of shared equity. In this case, we were acting for the housing association while another firm acted for the individual purchaser. Although it is also interesting to note that my firm were also instrumental in the original set-up of the plot sales following development of the estate by the Housing Association.

At the time of set-up, the client housing association required that the properties in the development be sold as shared equity. This means that each plot was sold as a freehold in the joint ownership of the individual and the housing association. Essentially, the two parties would enter into a Declaration of Trust as to how they were to hold the equity in the property and therefore hold it as Tenants in Common.

In most cases the individual purchaser would have a mortgage to assist with the purchase. Now, your first thought may be that the lender would not accept a situation where only the individual would be on the mortgage. Your second thought may be that registration of the mortgage at the Land Registry would not be possible if only the individual was on the mortgage. You would be right.

Amending mortgage deeds

Therefore, it was necessary to make amendments to the mortgage deed in each case which would mean that the housing association would be a party to the document but, would have no liability in respect of the same. There are few lenders that would agree to this.

In the case I mentioned at the start, we were instructed to act for the housing association following a sale of the property from one individual to another. In this case, however, no amendments were made to the mortgage deed and as a result, the Land Registry have refused to register the charge, quite rightly too. For my client, this really makes no difference as they remain one of the registered proprietors on the title as a Tenant in Common and we have a signed and dated Declaration of Trust.

However, for the other solicitor, they are under a lot of pressure to arrange for registration of the charge from the lender. Whether this lender will agree to the alterations my client requires to the mortgage deed, I cannot say yet, but it will be interesting to find out.

Either way, this whole episode made me think about how complicated and restrictive a shared equity scheme can be. So, I can only think that I must warn my clients who are looking at these types of schemes to speak to the lender as soon as possible about its acceptability to them. A much better solution has to be a shared ownership scheme whereby the individual obtains a leasehold percentage interest [perhaps with the option to staircase up to 100 per cent].

A shared ownership scheme usually allows a buyer to acquire at least a 25 per cent share in the property while paying a rent to the developer. It is important to remember, when dealing with a shared ownership lease for a buyer, the issues surrounding Stamp Duty Land Tax. It is possible to pay SDLT on the full market value of the property at the time of the initial purchase. The alternative is to opt to pay SDLT on the share purchased which may result in no tax being paid.

However, SDLT will need then to be considered when the buyer decides to staircase which may result in more tax being paid overall as market prices fluctuate. A short term gain may lead to a long term loss.

However, to bring this back to where I started, it is vitally important to establish early on in a transaction if it is shared ownership or shared equity and once you have established this you should advise your client accordingly and check the lender's requirements. Otherwise, you may end up in the terrible position of not being able to register the mortgage or perhaps even the client as proprietor without significant additional cost to your firm.