Affordable housing has been boosted by Gordon Brown’s Budget opening up commonhold as a realistic option for the development of mixed private and social housing by reducing the stamp duty (SDLT) burden.

Those who cannot afford to buy a home outright and wish to buy a share in a property through a shared ownership trust will benefit from the tax break announced in the Budget which allows owners to pay SDLT incrementally – on the first of the series of transactions and then only on the balance that takes the owner over an 80% holding.

The shared ownership trust allows a joint owner to increase their share in the property. This break on stamp duty could make all the difference to a low income family’s ability to be able to afford their home and has removed a major obstacle to commonholds.

Previously the unintentional burden of SDLT that fell on shared ownership trusts, but not the traditional shared ownership lease, was viewed by some as a disadvantage of the trust model. Without a suitable comparator to shared ownership leases, commonhold would have struggled to find an even playing field. Trowers & Hamlins has recently worked with the Housing Corporation and the government to secure a provision in this year’s Finance Bill to harmonise the SDLT treatment of shared ownership, whether delivered by a lease or a trust.

Background

Commonhold arrived in 2004 but was not the property big bang many hoped for. Was this simply because of the imagined problem of delivering shared ownership? Perhaps not – certainly while leases still sell, developers and their advisers may see no benefit in commonhold, preferring to stick with the familiar. Finding a way to deliver shared ownership within commonhold has been critical though to enable commonhold to deliver all it promised. Registered social landlords (RSL) in particular can use commonhold to deliver housing policy objectives – developing responsible and sustainable communities in good quality housing.

Leases – familiar but flawed

Shared ownership has been central to enable a wider socio-economic sector to enjoy home ownership. Long leases are the most common form – but leases are far from perfect for owner occupation, particularly of housing. The problems (wasting assets vulnerable to forfeiture, the lack of standard terms, etc) are widely known.

The commonhold solution

Commonhold units are freeholds (so no wasting asset or forfeiture to worry about) and, with standard documentation employed, eventually transaction costs should be reduced. Moreover, commonhold obligations bind successive unitholders; it is altogether a more inclusive arrangement for property management. Only unit-holders can be members of the commonhold association. The directors are chosen by, and owe their duties to, the unit-holders. The directors will consult on services provision/cost (the assessment) but their decision is final.

A bar to shared ownership?

There is a bar on granting out of a commonhold unit residential leases for a term of more than seven years. This rule applies to shared ownership leases as well as leases granted on the open market. No exception was made for shared ownership leases. Had it been, all the problems commonhold was developed to avoid would have been reintroduced. A solution was needed that did not need a lease that achieved the principal objectives of a shared ownership lease.

Key features of shared ownership leases

The shared ownership lease is specialist, and relatively uncommon – it is restricted to social housing. Its key features are:

(1) The landlord – an RSL – grants a long lease to a tenant for a premium that is only a part of the capital value of the property.

(2) The tenant pays rent calculated by reference to the difference between the premium paid and the market value.

(3) The tenant may ‘staircase’, ie pay further premiums in exchange for reductions in rent – and if the property is a house, may buy the reversion having staircased up to 100% of the original market premium.

‘Shared ownership lease’ is therefore something of a misnomer. The RSL owns the reversion and the tenant owns the term. Many of the problems with leases still apply.

Tenants will still need to borrow to fund the capital payment on commercial terms. The lender will need security. It is obvious that these are not the best borrowers, and the costs of the increased risk must be met somehow. To encourage commercial lenders, shared ownership arrangements typically give the commercial lender first rights to use the RSL landlord’s share in the property if the tenant (borrower) does not keep up their payments under the commercial mortgage. Despite that, many lenders are still reluctant to lend on the security of shared ownership leases.

Conventional trusts of land

Trusts of land are well-established in English law. They are flexible, secure, and resilient. Interests under them are well protected. They are used in vast property holdings, as well as for modest homes.

All cases of co-ownership (eg spouses or civil partners who own their homes together) are trusts of land. The trust of land for co-owners is genuine shared ownership of a single asset, unlike the division of ownership in separate legal estates with interrelated rights and promises involved with shared ownership leases.

Trusts need not be complex. Usually where couples own their homes together the trusts that arise by implication from co-ownership itself are perfectly acceptable. Of course good solicitors will recommend an express declaration of trust deed and not rely on implication. Even such a deed need not have to be complicated.

In a trust of land the legal estate may be vested in up to four persons, who necessarily hold the property as joint tenants at law. Beneficially, in equity, the property may be:

• held as joint tenants, which means that on the death of the penultimate of the co-owners the property is held for the survivor absolutely; or

• held as tenants in common, meaning that on the death of any co-owner their share passes to their estate.

Trusts of land and social housing

While an RSL and shared owner clearly could not be joint tenants, they could co-own as tenants in common – creating what used to be called ‘a tradesmen’s trust’. It would be simple enough to record the amount of each co-owner’s share in a professionally drafted declaration of trust (otherwise the position would necessitate working out who contributed what to acquire the property, a matter often litigated absent an express statement). Other matters for the trust deed would include:

Identity of the trustees

Most obviously, the trustees should be the RSL and the occupant. Each should be able to appoint up to two trustees, and to remove any whom they have appointed. Each party’s lenders would want similar rights. There should also be provision for the replacement of trustees.

Dealings with the property

This should need concurrence of all the trustees. Each trustee should be on the registered title as owner (subject to the limitation to four named persons).

The RSL’s return on its capital

This should be equivalent to the rent that it would charge under a shared ownership lease.

The occupant’s right to buy a greater ‘share’

The occupant may have the option to buy part or all of the share of the RSL in the property. The deed should prescribe how such shares will be valued.

The circumstances in which a sale will be required

The trust of land creates a trust for sale – the land is to be sold unless the trustees exercise their power to postpone the sale. Clearly the RSL and the occupant want the power exercised to provide a home for the occupant. The right to require sale must be carefully regulated. Under s14 Trusts of Land and Appointment of Trustees Act 1996 (TOLATA) the courts have power to regulate the way trustees perform their functions, and that includes making any decision to sell the property.

The RSL’s return on capital

Section 13 of TOLATA created a statutory framework for what happens when one beneficiary occupies trust land but the others do not. It allows the trustees to require payment of what is usually called an occupation rent. It is not technically rent, but performs the same function. The beneficiary who is not occupying gets an income to make up for their not occupying, the equivalent of rent on their share in the property. The trust deed should set out the way to calculate this occupation rent, including provisions for revaluations of the property and the shares of the occupant and the RSL. (Shared ownership leases only require revaluation when staircasing takes place. RSLs use housing subsidy to achieve below market rent levels, and so want to keep to a minimum any increases in the occupation rent under the trust.) Revaluations on staircasings enable the RSL to recalculate the share on which the occupation rent will be charged which, coupled with automatic RPI-based increases, will be a way of delivering this.

Staircasing

It is easier for a trust deed to include more flexible options for staircasing than shared ownership leases. Transaction costs are low – really just those of recording the transaction – so the amounts by which the occupant’s share in the trust fund can be increased do not have to be restricted to large shares in the property – often 25% under shared ownership leases. RSLs want to encourage staircasing, and so will hardly mind if an occupant wants to exercise an option to buy more than twenty-one years after it was granted.

It should be possible to construct staircasing merely as part of the way of calculating the respective interests of the occupant and the RSL as beneficiaries under the trust, and so even this technical difficulty from the little-loved Perpetuities and Accumulations Act 1964 can be circumvented.

Using trusts as a route to shared ownership in social housing does not require new law. Trust law is well established. It is flexible. While trust law is predominantly judge-made rather than statutory, two statutes, though, do effectively regulate trusts of land: the Trustee Act 1925 and TOLATA. This statutory framework provides a robust default position where there is no express provision in the declaration of trust.

Even playing field for SDLT

The Budget move extends to shared ownership trusts the beneficial treatment of SDLT available to staged purchases of shared ownership properties brought through long leases.

Acceptable security?

The interests of each of the occupants and the RSL under the trust could be used as mortgage security, although because they are equitable interests the mortgages would be equitable mortgages. Equitable mortgagees would still be protected – by notice to the trustees under ss136 and 137 Law of Property Act 1925, by using the right to appoint trustees (see above), and by using restrictions in Land Registry Form N.

RSLs’ lenders are legally and financially sophisticated, and have good enough legal advice, to understand the protections and rights given, and to operate them safely – it has the same essential structure as a securitisation. It is as good for lenders to the occupant, and they ought to be able to put such procedures in place.

High street lenders may, however, find a legal mortgage more reassuring, and may prefer to keep to one simple set of security mechanisms than to risk too much complexity with high street delivery, and so prefer a legal mortgage over the whole of the trustees’ commonhold interest to secure a specified debt (plus interest and costs). Acknowledging no recourse to the RSL itself may be the preferred structure. Because their interests are at the same risk as with mortgages of shared ownership leases, this should be acceptable to RSLs.

The shared ownership trust is a relationship of shared ownership, not of landlord and tenant. Both occupants and RSLs will have to think differently. They will be trustees who both have to behave as responsible owners, taking decisions in a trustee-like manner. They will have to consult, and both will have to act in the interests of the beneficiaries as a whole, giving weight to their respective interests in the trust fund, the property. It should be a better and more equal relationship.