> Court of Appeal Ruling: Implications for Shared Ownership Sector

Court of Appeal Ruling: Implications for Shared Ownership Sector

27 Jun 2024

Does the Court of Appeal judgment of Avon Ground Rents Ltd v Canary Gateway (Block A) RTM Co Ltd in 2023 impact upon the shared ownership sector, both in respect of rent recovery and possession actions? Andy Lane and Aisha Akhtar look at the potential fall-out and offer their views on this important question.

Introduction

Shared ownership as a product has been around since the 1980s[1] and has especially developed as the goal of home ownership has assumed ever greater political and social importance. It is a deceptively simple model allowing a social landlord, usually although not exclusively a private registered provider of social housing, to allocate its stock to persons willing and able to purchase an identified share, whilst renting the remainder.

The Commons Library Research Briefing in December 2021 on “Shared ownership (England): the fourth tenure?” (“the Briefing”) begins by saying at page 6 (Emphasis added):

“Shared ownership (sometimes known as ‘part buy, part rent’) enables people to buy a share of a property and pay a subsidised rent on the remaining share. Purchasing a share in a property requires a smaller deposit and mortgage, thereby making it a more affordable route into home ownership.”

In 2022-23 17,507 initial sale (or first tranche) Shared Ownership sales were completed by large private registered providers of social housing (“PRPs”) and local authorities, an increase of 2% compared to 2021-22. 17,126 of these were by large private registered providers (77% of which were to first time buyers) and 381 were by local authorities, with the average initial equity stake being 43%.[2]

We have seen various changes to the model over the years, particularly following the ‘New Model for Shared Ownership Consultation’ ending in late 2020, and this allowed, by way of example, for 1% increments in the share for up to 15 years and the costs of structural and external repairs and maintenance being met by the landlord for the first 10 years post-purchase (along with a contribution by the landlord towards internal repairs).

Although there have been positive changes to the scheme over the years, there have been more recent calls to reform the shared ownership scheme to make it more affordable to obtain full ownership.[3]

Status of shared ownership leases

Shared ownership agreements which have not stair-cased to 100% are covered by both the Housing Act 1988 (“the 1988 Act”) – i.e., the tenant is an assured tenant – and the Commonhold and Leasehold Reform Act 2002 (“the 2002 Act”). In respect of the former, such agreements are assured tenancies where provided by PRPs because the 1988 Act provides:

Tenancies provided by housing associations and other PRPs are generally assured tenancies unless they fall within a Schedule 1 exception. Section 1 therefore says (emphasis added):

“(1) A tenancy under which a dwelling-house in England is let as a separate dwelling is for the purposes of this Act an assured tenancy if and so long as—

(a) the tenant or, as the case may be, each of the joint tenants is an individual; and

(b) the tenant or, as the case may be, at least one of the joint tenants occupies the dwelling-house as his only or principal home; and

(1A) Subsection (1) has effect subject to section 15A (loss of assured tenancy status).

(2) Subject to subsection (3)[5] below, if and so long as a tenancy falls within any paragraph in Part I of Schedule 1 to this Act, it cannot be an assured tenancy; and in that Schedule—

(a) “tenancy” means a tenancy under which a dwelling-house is let as a separate dwelling;

(b) Part II has effect for determining the rateable value of a dwelling-house for the purposes of Part I; and

Schedule 1 to the 1988 Act has a list of situations where the tenancy cannot be assured – such as where the landlord is a local authority, certain holiday and student lets, and business tenancies – but the exception which would ordinarily exclude long leases from the 1988 Act, paragraph 3A, does not do so for shared ownership agreements:

“A tenancy—

(a) which is entered into on or after 1st April 1990 (otherwise than, where the dwelling-house had a rateable value on 31st March 1990, in pursuance of a contract made before 1st April 1990), and

(b) under which the rent payable for the time being is payable at a rate of, if the dwelling-house is in Greater London, £1,000 or less a year and, if it is elsewhere, £250 or less a year.”

While the tenant (or at least one of joint tenants) lives in the demised premises as their only or principal home then a landlord will have to go through the ‘normal’ possession procedure provided for by the 1988 Act – i.e., the service of a notice seeking possession and reliance on one of the statutory grounds to be found at Schedule 2 to the 1988 Act.[6] Common grounds for PRP’s are the rent arrears grounds 8, 10 and/or 11.

Importantly, Section 45 of the 1988 Act expressly excludes forfeiture from the options potentially available to a landlord of an assured tenant (it may be used if the assured status is lost – e.g., because the tenant does not live at the demised premises as their only or principal home):

“(4) For the avoidance of doubt, it is hereby declared that any reference in this Part of this Act (however expressed) to a power for a landlord to determine a tenancy does not include a reference to a power of re-entry or forfeiture for breach of any term or condition of the tenancy.”

Avon Ground Rents

The motivation for this article is the judgment handed down by the Court of Appeal on 30 May 2023 in Avon Ground Rents Ltd v Canary Gateway (Block A) RTM Co Ltd [2023] EWCA Civ 616; [2023] 1 W.L.R. 3516[7], and the potential fallout.[8]

The Court of Appeal were considering the definition of “long lease” under sections 76 and 77 of the 2002 Act in the context of the right to manage provisions found at Part 2, Chapter 1 of that legislation. “Qualifying tenants” for the right to manage process are defined at section 76 and in essence the definition is satisfied “if he is a tenant of the flat under a long lease”[9] and the crucial question for the court therefore was whether the shared ownership tenancies held by 17 of the 97 tenants were long leases.

Lord Justice Newey delivered the sole judgment and ultimately found that a tenant with a shared ownership lease “granted for a term of years certain exceeding 21 years” had a “long lease” within the meaning of section 76, regardless of whether they had stair-cased up to a 100% interest in the property.[10]

We have underlined that part because it may not seem apparent from a simple reading of section 76:

” (1) This section and section 77 specify what is a long lease for the purposes of this Chapter.

(2) Subject to section 77, a lease is a long lease if—

(a) it is granted for a term of years certain exceeding 21 years, whether or not it is (or may become) terminable before the end of that term by notice given by or to the tenant, by re-entry or forfeiture or otherwise,

(b) it is for a term fixed by law under a grant with a covenant or obligation for perpetual renewal (but is not a lease by sub-demise from one which is not a long lease),

(c) it takes effect under section 149(6) of the Law of Property Act 1925 (c. 20) (leases terminable after a death or marriage or the formation of a civil partnership),

(d) it was granted in pursuance of the right to buy conferred by Part 5 of the Housing Act 1985 (c. 68) or in pursuance of the right to acquire on rent to mortgage terms conferred by that Part of that Act,

(e) it is a shared ownership lease, whether granted in pursuance of that Part of that Act or otherwise, where the tenant’s total share is 100 per cent., or

(f) it was granted in pursuance of that Part of that Act as it has effect by virtue of section 17 of the Housing Act 1996 (c. 52) (the right to acquire).

(3) ‘Shared ownership lease’ means a lease—

(a) granted on payment of a premium calculated by reference to a percentage of the value of the demised premises or the cost of providing them, or

(b) under which the tenant (or his personal representatives) will or may be entitled to a sum calculated by reference, directly or indirectly, to the value of those premises.

(4) ‘Total share’, in relation to the interest of a tenant under a shared ownership lease, means his initial share plus any additional share or shares in the demised premises which he has acquired.”

Newey LJ essentially held that, in line with the Upper Tribunal authority of Corscombe Close Block 8 RTM Co Ltd v Roseleb Ltd [2013] L.& T.R. 16, and notwithstanding the consultation paper and explanatory notes to the 2002 Act indicating that shared ownership leases which had not stair-cased to 100% were not included in the definition of long leases, it was possible for all shared ownership leases to fall into both sections 76(2)(a) and 76(2)(e):

“23. As was stressed by Mr Mark Loveday, who appeared for the Company with Mr James Castle, there is an “or” between paragraph (e) and paragraph (f) in section 76(2) of the 2002 Act. That plainly means that paragraphs (e) and (f) are alternatives, but it is also clear that the “or” is intended to apply more generally. As was accepted by Mr Bates, this time appearing with Ms Katherine Traynor, there is no question of, say, a lease “granted for a term of years certain not exceeding 21 years” within paragraph (a) also having to fall within one or other of paragraphs (b), (c), (d), (e) and (f). On the face of it, the various paragraphs represent, as was submitted by Mr Loveday, a series of gateways. A lease will be a “long lease” if any of paragraphs (a) to (f) is in point. That suggests that, as the Company contends and the Judge held, a shared ownership lease for a term of more than 21 years will be a “long lease” whether or not the tenant has a 100% interest: paragraph (e) will not be applicable, but paragraph (a) will, and that will suffice.”

“27. In short, I agree with the Judge that a tenant with a shared ownership lease “granted for a term of years certain exceeding 21 years” has a “long lease” within the meaning of section 76 of the 2002 Act regardless of whether the tenant has a 100% interest and, hence, that every shared ownership tenant in Block A is a “qualifying tenant” for the purposes of the 2002 Act. To adapt slightly what Stanley Burnton J said in Brick Farm, “Parliament cannot be taken to have intended to restrict the unqualified ambit of paragraph (a) of section [76(2) of the 2002 Act] by adding a paragraph purporting to widen rather than to narrow the definition of ‘long lease'”.

Impact

It is tempting to say when considering possession or rent matters – so what, we are not concerned with right to manage issues. However, the writers have already had experience in a possession setting of the Avon Ground Rents authority being used for the proposition that if a shared ownership is a long lease for section 76 purposes regardless of the share purchased by the tenant, then section 166 of the 2002 Act applies to all shared ownership agreements.

That section requires a prescribed notice before the tenant is required to pay the weekly/monthly rent:[11]

“(1) A tenant under a long lease of a dwelling is not liable to make a payment of rent under the lease unless the landlord has given him a notice relating to the payment; and the date on which he is liable to make the payment is that specified in the notice.

(9) In this section—

“dwelling” has the same meaning as in the 1985 Act,

“landlord” and “tenant” have the same meanings as in Chapter 1 of this Part,

“long lease” has the meaning given by sections 76 and 77 of this Act, and

“prescribed” means prescribed by regulations made by the appropriate national authority.”

The inconvenience of such a requirement, financial and administrative, let alone the position that leaves existing rent liabilities to date, is apparent.

We recognise that section 166 itself only expressly excludes, at sub-paragraph (5), a service charge and an administration charge, but say that the Avon Grounds Rent decision does not however impact on or apply to the question of rent payments for 2 primary reasons:

Section 166 refers to Ground Rent and not rent, and in any event
A long lease for section 166 purposes does not have the same meaning as, say, for the right to manage provisions.

Ground rent/Rent

Does section 166 apply just to ground rent, as its heading suggests,[12] or does it have a wider context encompassing the usual weekly/monthly rents payable by shared ownership tenants under the terms of the agreement?

It must be said at the outset that trying to identify an established, accepted and distinct meaning for ‘ground rent’ is very difficult and in essence it seems to be a moveable and contextual “beast”.[13]

We know that from 1 April 2023 Ground Rents cannot be charged for most new long residential leasehold properties because of the Leasehold Reform (Ground Rent) Act 2022 (“the 2022 Act”).[14] In a shared ownership lease, rent is payable on the landlord’s owned share and the peppercorn rent limit applies to the leaseholder’s owned share.[15] The Explanatory Notes to the 2022 Act, at paragraph 3, does seek to define ground rent as:

“a payment specified in the lease that the leaseholder is required to make to the landlord (directly or indirectly through an agent or representative) without obligation on the landlord (or person acting on behalf of the landlord) to provide a clear service in return to the leaseholder.”[16]

We say there are 5 primary reasons why a distinction between ground rent and rent is not only possible and available, but appropriate and required for the purposes of weekly/monthly rent payment requirements:

When one looks at the purpose of the section 166 requirement to serve a written notice before (ground) rent is payable it is clear that it is designed so that forfeiture is not available to a landlord until such a notice(s) has been served.[17] We have already noted above that forfeiture is not available where an assured tenancy exists.
The further logic of section 166 mitigates against applying it to weekly/monthly rents. Rather, it promotes a process more akin to and designed for an occasional payment such as is the case with ground rents. This is clear when reference is given to a minimum of 30 days’ written notice needing to be given prior to rent liability being imposed.[18] In most shared ownership agreements, ground rent only begins becoming payable once a 100% staircase has been achieved.
The Explanatory Notes to the Landlord and Tenant (Notice of Rent) (England) Regulations 2004/3096, regulations made under section 166, says that they “relate to the form and content of notices requiring the payment of ground rent.”
The rent due on the landlord’s share of the property the tenant has protection afforded to such tenants of registered providers.[19] Shared ownership leases which have not stair-cased would fall under the 1988 Act where the landlord is a PRP. There is sufficient protection accorded by the requirement to serve a notice of seeking possession under section 8 of the 1988 Act.
Finally, it is worth noting that the Guidance for leaseholders, landlords and managing agents (23 June 2022) defines ground rent as follows:

“…a payment specified in a lease that the leaseholder is required to make to the landlord (directly or indirectly through an agent or representative) without obligation on the landlord (or person acting on behalf of the landlord) to provide a specific service in return to the leaseholder.

Leaseholders pay ground rent on top of their property purchase price and service charges. There is no obligation to charge a ground rent and there is no clear service provided in return for the payment. The market has seen high and escalating ground rents, which has caused real harm to leaseholders.”

None of the above is affected by the criticism of the judgment in Richardson v Midland Heart Ltd (formerly Focus Homes Options) [2008] L & TR 31 for incomplete consideration of the authorities/legislation.[20] The tenant there had sought to argue a 2-tenancy arrangement was created by the shared ownership agreement and accepted that the ground 8 possession proceedings had “terminated” the assured tenancy one.

There are therefore strong arguments to suggest that section 166 notices are not required for the rent payable on the landlord’s retained share.

Long lease

A bolder but no less cogent argument is that whatever the position for the right to manage elements of the 2002 Act, the meaning given to section 76(2) there does not extend beyond that Chapter of the 2002 Act. In short, care must be taken not to apply Avon Ground Rents beyond its proper ratio.

Three factors in particular support the argument that for the purposes of section 166, found in Chapter 5 of Part 2 to the 2002 Act, a shared ownership agreement is only a “long lease” if the tenant has stair-cased to 100%:

Section 167(5) of the 2002 Act also defines long lease as having (with emphasis added) “the meaning given by sections 76 and 77 of this Act, except that a shared ownership lease is a long lease whatever the tenant’s total share”. The underlined wording would be unnecessary if the Avon Ground Rents definition of section 76 were applied to Part 5.
That definition is repeated in the supplementary provision of section 169(5), confirming the same meaning to section 168.
The sensible approach to section 166 when it comes to defining what is meant by a long lease having “the meaning given by sections 76 and 77 of this Act” and without the exceptions found at sections 167 and 169, therefore is that there is a deliberate distinction and conscious drafting decision not to add in this section the words “except that a shared ownership lease is a long lease whatever the tenant’s total share”.[21]

That is not to avoid the Avon Ground Rent ratio, which can be seen as specifying the meaning of long lease “for the purposes of [that] Chapter”,[22] but rather it properly considers this Chapter of the 2002 Act in its proper context. It acknowledges an express alternative definition approach not seen in the Chapter 1 right to manage case dealt with by the Court of Appeal.

Forfeiture

There has been some suggestion that the effect of Avon Ground Rents extends to the question of whether landlords of non-fully stair-cased shared ownership tenants must go down the forfeiture route rather than seek possession by reliance on a notice seeking possession and Schedule 2 statutory ground of possession. The writers are aware of one case where this is being argued in opposition to a possession order obtained pursuant to the 1988 Act.

The difficulty with such an absolutist position is that it inevitably runs up against section 45(4) of the 1988 Act which says in terms:

“For the avoidance of doubt, it is hereby declared that any reference in this Part of this Act (however expressed) to a power for a landlord to determine a tenancy does not include a reference to a power of re-entry or forfeiture for breach of any term or condition of the tenancy.”

This was considered in Artesian Residential Developments Ltd v Beck [2000] Q.B. 541, 549 where Hirst LJ said:

“Next, I am quite satisfied that the terms of the Act of 1988 expressly rule out a claim for forfeiture, firstly by virtue of section 5(1) itself, which provides the only route for bringing an assured tenancy to an end (i.e. by obtaining an Act of 1988 order for possession), and, secondly, by virtue of section 45(4) which makes an express declaration to this effect for the avoidance of doubt.”

Conclusion

As indicated above Sovereign Network Homes (formerly known as Network Homes) were recently involved in a case before HHJ Bloom sitting at the County Court at Central London where the section 166 argument was raised, amongst other matters, in the context of a set aside of a possession order application. HHJ Bloom stated that the S166 point was arguable and should be determined at trial, the judge setting aside the possession order so that this point could be determined. The issue was not ultimately determined, and did not need to be decided, but it has raised concerns and debate as to the true impact of the Avon Ground Rents judgment.

The Renters (Reform) Bill contained a solution to the issue of the status of shared ownership leases atclause 28 when it proposed an additional Schedule 1 exception to assured tenancies; “A fixed term tenancy of a term certain of more than seven years from the date of the grant of the tenancy” but did not survive the dissolution of Parliament on 30 May 2024. Whether it is “restored” by the incoming government remains to be seen.

In the meantime, the precise relevance of section 166 to non-staircased shared ownership agreements remains a point of legal debate and uncertainty. Hopefully this article is a useful and constructive part of the debate with the ultimate aim of achieving crucial clarity to housing associations and their shared ownership tenants.

Andy Lane is a barrister in the Housing & Public Law Teams at Cornerstone Barristers. Aisha Akhtar is the Interim Head of Legal Services and Practice Manager at SNG.

Footnotes

[1] See “Shared Ownership – Joint guidance for England” (October 2016) produced by what was then known as the Homes & Communities Agency.
[2] Department for Levelling Up, Housing & Communities, Accredited official statistics (8 February 2024). The House of Commons Library briefing “Shared ownership (England): the fourth tenure” by Hannah Croimarty (14 December 2021) reported that at that time there were approximately 202,000 households living in shared ownership homes in England.
[3] See the House of Commons Committee report of 28 March 2024 https://publications.parliament.uk/pa/cm5804/cmselect/cmcomloc/61/report.html
[4] Now repealed.
[5] Not relevant here.
[6] See sections 5(1) and 7(6) to the 1988 Act.
[7] The initial prospect of further review by means of an appeal to the Supreme Court has been ended by the latter court’s refusal of permission on 30 October 2023.
[8] It is right to say that the Court of Appeal followed the obiter remarks of Stanley Burnton J, when dealing with a similar provision under the Leasehold Reform Housing and Urban Development Act 1993, in Brick Farm Management Ltd v Richmond Housing Partnership Ltd [2005] EWHC 1650 (QB), as well as the judgment of Fancourt J in Corscombe Close Block 8 RTM Co Ltd v Roseleb [2013] UKUT 081 (LC); L.& T.R. 16.
[9] Section 75(2) to the 2002 Act.
[10] See paragraph 27 of the judgment. This went against the well-known shared ownership judgment of Jonathan Gaunt KC in Richardson v Midland Heart Ltd [2008] L&T.R. 31.
[11] The Leasehold Advisory Services’ website says in terms – “The law requires the landlord to send you a demand in a prescribed form before you are liable to pay ground rent. You are not liable to pay ground rent unless the landlord has sent the demand in the correct form. If you are selling the property and are required by the buyer to pay any outstanding ground rent, than you would need to follow the advice from your conveyancer as to how you approach the landlord and settle any outstanding amounts. Please note that the landlord can only go back 6 years to demand ground rent if they have not sent you any demand to collect the ground rent.”
https://www.lease-advice.org/faq/my-landlord-has-not-demanded-ground-rent-what-should-i-do/
[12] Explanatory notes to the 2002 Act say: “42. This Chapter introduces a new requirement that ground rent is not payable unless it has been demanded by giving the tenant a prescribed notice, and prevents the application of any provisions of a lease relating to late or non-payment charges) if the rent is paid within 30 days of the demand being issued.”. See also R. v Montila (Steven William) [2004] UKHL 50; [2004] 1 W.L.R. 3141 at §34 re headings.
[13] In Elmbirch Properties plc v Schaefer-Tsorpatzidis [2008] 1 P.& C.R. 8 the Lands Tribunal approved and cited Jarrett v Burford Estates & Property Co Ltd [1999] 1 E.G.L.R. 181 at §49: “The term ‘ground rent’ has no precise meaning. It must be interpreted in its context against the background of the matrix or material surrounding circumstances.
[14] Section 3(1) of the 2022 Act.
[15] Ibid, Section 5(2) – “(2) The permitted rent is— (a) in respect of the tenant’s share in the demised premises, a peppercorn rent; (b) in respect of the landlord’s share in the demised premises, any rent.”
[16] It also emphasizes at paragraph 16 that “The Commonhold and Leasehold Reform Act 2002 requires landlords to serve written notice before ground rent becomes payable and prevents landlords from starting forfeiture action unless they have issued a written notice and the ground rent arrears exceed a specified sum or have been in arrears for more than a specified period.”
[17] Section 167(1), 2002 Act. The Encyclopaedia of Housing Law and Practice describes section 166 at §2-3179: “This also is a novel provision and it is intended to place restrictions on the possibility of landlords taking advantage of provisions in the lease allowing them to extract penalties or other charges on account of late payment of rent or in extreme cases to forfeit the lease. It simply provides that in a long lease of a dwelling the rent is not due unless a notice under this section is served on the tenant. In any claim for ground rent arrears, the landlord must plead and prove that the notice has been served: Chasewood Park Residents Ltd v Kim [2010] EWHC 579 (Ch).”
[18] Ibid, section 166(3)(a).
[19] Prior to 12 October 2023 that limited increases to retail prices index + 0.5%. Since then, it is limited to the Consumer Prices index + 1%.
[20] Paragraph 18 of the Avon Ground Rents judgment.
[21] The section 166 definition being repeated in section 164.
[22] Section 76(1). Sections 150-172 – i.e., Chapter 5 of Part 2 to the 2002 Act were not ostensibly considered by the court in Avon Ground Rents.