12 August, 2008
In 1995 the claimant, Ms Richardson, acquired a 99 year shared ownership lease of a property from Midland Heart Limited and paid half its then market value. The lease required Ms Richardson to pay an annual rent subject to an annual increase determined by way of indexation. As is commonly the case, the lease also contained 'staircasing provisions' which enabled Ms Richardson to acquire further shares of the value of her house with consequent rent reductions. This could continue up to the point of acquiring 100 per cent of the shares, when she would thereby own the freehold.
Despite having the opportunity to do this, Ms Richardson did not acquire any further shares. In fact, eight years later, her husband was sent to prison and, upon being subjected to threats of violence from her husband's associates, she and her family moved out of the area and into a refuge. In the past Ms Richardson had received housing benefit to pay the rental element of the lease however, now that she was no longer residing in the property as her only principal home, her housing benefit ceased. Her subsequent appeal against the decision failed.
As a result Ms Richardson soon owed a substantial amount of rent to Midland Heart. To remedy this, Ms Richardson instructed her landlord to sell the property on her behalf. All attempts to find a buyer failed and the rent arrears continued to increase.
Midland Heart eventually served a notice under section 8 Housing Act 1988 and issued possession proceedings on the basis of rent arrears, relying on ground 8 of schedule 2 to the Act.
At the subsequent hearing the judge found in favour of Midland Heart, granted possession and ordered Ms Richardson to pay the rent arrears and her landlord's costs. The court had no discretion to adjourn the hearing or give Ms Richardson further time to make repayments.
In response to this, Ms Richardson brought proceedings. She asked for a declaration as to the extent of her interest in her former home and sought either an order for sale or an account of 50 per cent of the proceeds of any sale from Midland Heart.
In support of her claim Ms Richardson relied upon two arguments. Firstly, she submitted that she had two tenancies, an assured tenanacy which was protected by the Act and a long leasehold interest which was vulnerable to forfeiture. Whilst the court order had brought to an end the assured tenancy, the long lease continued. Secondly, she maintained that the freehold of the property was held on trust by Midland Heart for itself and Ms Richardson. As such she argued that, although the lease had been terminated, she was entitled to the return of her capital payment as she was still entitled to the half beneficial share in the free hold.
Ms Richardson's claim was dismissed by the court on the basis that the payment she had made at the time of entering into the shared ownership lease had not bought her a half share of the property.
In respect of her first argument, the court struggled with the concept that a single lease had created two different but concurrent tenancies of the same premises. Rather, the lease created a 99 year term of years certain. The tenancy arising was therefore one to which s1 of the Act applied, in that it was a tenancy of a dwelling house let as a separate dwelling to an individual who occupied it as her individual home and it did not fall within any of the exclusions. In short, it was an assured tenancy.
As a result it could only be determined by a court order on the grounds set out in Schedule 2 to the Act. In relation to fixed term tenancies a court could not make an order unless it found that the conditions under s7(6) of the Act were fulfilled, namely:
(a) the ground for possession is Ground 2 or Ground 8 in Part I of Schedule 2 to this Act or any of the grounds in Part II of that Schedule, other than Ground 9 or Ground 16; and
(b) the terms of the tenancy make provision for it to be brought to an end on the ground in question (whether that provision takes the form of a provision for re-entry, for forfeiture, for determination by notice or otherwise).
There was no doubt that the judge at the possession hearing was so satisfied that these conditions had been met. In short, there was therefore only one tenancy, the mode of determination of which was laid down by statute and was duly determined.
In respect of her second argument, the court decided that the relationship of Midland Heart and Ms Richardson was that of landlord and tenant, not of trustee and beneficiary. Ms Richardson had the right to lay claim to the freehold but only if she had paid up the other half of the value of the property and exercised her staircasing rights. In effect, she had the option but chose not exercise to it. Her proprietary interest therefore could only be a leasehold interest.
Midland Heart had the good grace to repay the premium which Ms Richardson had originally paid for the 50 per cent share in the property. This was an entirely voluntary offer and they were in no way obliged to do this. The repayment did not include any increase in the value of the investment over the intervening period, and Midland Heart were entitled to take all the capital appreciation as a windfall payment. However Ms Richardson was entirely fortuitous to receive anything - indeed some landlords may not entertain a similarly generous indulgence.
The above case should therefore serve as a timely warning for all shared ownership leaseholders. Given the credit crunch and down-turn in the economy, as well as the growth in popularity of this type of lease, this could prove to be a grave problem for a lot of tenants if they allow themselves to fall into debt. As can be seen, the nature of shared ownership leases and the way in which their terms are worded means that if a tenant falls into arrears it could turn out to be financially catastrophic. If the arrears aren't cleared within a relatively short time – in most cases that would mean as long as it takes for the relevant notice to expire and a hearing to be listed – they then risk losing everything that they have invested.