New Supply Shared Equity (NSSE) scheme: administrative procedures

Section One

The New Supply Shared Equity scheme

An introduction

1.1 The New Supply Shared Equity scheme is part of the range of assistance from the Scottish Government under the Low-Cost Initiative for First Time Buyers (‘ LIFT’). It aims to help people on low to moderate incomes access home ownership and to buy a new build home from either a Local Authority or a Registered Social Landlord.

1.2 The methodology for providing New Supply Shared Equity is set out in these procedures. In summary, grants are provided to Local Authorities or Registered Social Landlords to enable them to develop or purchase properties which are sold at a proportion of market value. In return, owners enter into shared equity agreements with the Scottish Ministers which are secured by an appropriately ranked standard security.

1.3 Accordingly, Local Authorities or Registered Social Landlords are - in certain cases - acting as principals (in relation to the procuring of developments) and in other cases (for example in all aspects of the Shared Equity arrangements with a purchaser) acting as agents for the Scottish Ministers. In all circumstances, however, Local Authorities or Registered Social Landlords must follow these administrative procedures and have due regard to the interests of the Scottish Ministers. They must also ensure that all duties of care owed to them by their advisors and contractors (including valuers) are properly extended to the Scottish Ministers.

1.4 The New Supply Shared Equity scheme aims to help all first-time buyers, and must be promoted actively to people living in social housing, people in the armed forces or veterans, and widows, widowers and other partners of service personnel killed in action for up to one year after their partner has been killed, people aged 60 and over, people living in private rented housing or with relatives, as these groups have priority access to the scheme. Practical advice to assist with the local targeting of the scheme, and further information on some of the target groups to be housed, can be found in section 2.

1.5 People buying a New Supply Shared Equity property from a Local Authority or Registered Social Landlord must generally take an equity stake of between 60 and 80 per cent of the market value of the property, as set by the District Valuer. The Local Authority or Registered Social Landlord may however agree to reduce the minimum equity stake to 51 per cent. This is likely to apply where a housing market is particularly pressured, in a regeneration area or where people with particular housing needs have identifiable additional housing costs (see section 2.34).

1.6 The Local Authority or Registered Social Landlord may waive the minimum equity stake requirement for existing owner occupiers whose homes are scheduled for demolition or for those aged 60 or over who have a housing need. This means the minimum equity stake can, in these circumstances, be lower than 51%. These buyers would be expected to invest, as a minimum, the value of their existing property in an equity stake of the new property. If there is any likelihood of the equity stake being funded purely from the value of the existing property with no lending from an external source it is important that the relevant Scottish Government More Homes Division Area Team is advised at as early a stage as possible. In all cases, the maximum initial equity stake that any purchaser can take is 80 per cent of the market value of a property.

1.7 The level of equity stake that the Scottish Ministers will have in a property depends on the level of equity stake taken by a purchaser. For example, if a purchaser has an equity stake amounting to 60 per cent of the market value of a property, the Scottish Ministers would have a 40 per cent equity stake in the market value of that property.

1.8 Registered Social Landlords and Local Authorities must inform applicants that they are expected to make payment of all sums due under the New Supply Shared Equity Scheme when they sell their home. Registered Social Landlords and Local Authorities should note that the shared equity arrangements between Scottish Ministers and individual shared equity owners are now intended to run indefinitely and that owners will not be required to grant a replacement standard security in the nineteenth year after their purchase of their property in order to address the legal implications of the “20 year security rule”. Scottish Government proposes to make an amendment to the 20 year security rule pursuant to powers contained in the Housing (Scotland) Act 2014. The amendment aims to remove the right to redeem securities after 20 years for those participating in designated schemes including the New Supply Shared Equity scheme. The style of legal offer to sell which is set out in Annexe A has therefore been amended to include a clause bringing this matter to the attention of purchasers and their solicitors.

1.9 With the exception of existing owner occupiers whose homes are scheduled for demolition, people buying a New Supply Shared Equity property must be means- tested in order to establish eligibility (see section 2).

The responsibilities associated with buying a home under the scheme:

1.10 An applicant will be responsible for their own legal and valuation costs incurred in relation to the purchase, and for all tax and registration costs. Unlike shared ownership, an owner will have full title to the property and will not make occupancy payments.

1.11 An owner is expected to occupy the property as their only residence and they will be responsible for keeping the property in a good and habitable state of repair. As well as making mortgage repayments and paying tax to their local authority, an owner must also insure their property. An owner is responsible for all maintenance, repair and insurance costs and not just a percentage, and if the property has common and shared areas they will be responsible for paying all common maintenance or service charges attributable to their property.

1.12. In so far as practicable, Local Authorities and Registered Social Landlords should provide applicants with information on common maintenance and/or service charges, and in relation to the homebuyer’s warranty or guarantee which will apply to the new-build property at an early stage as well as reliable and realistic information about when the construction of the property may be finished and other matters referred to in the Consumer Code for Home Builders (see Section 3).

1.13 Local Authorities and Registered Social Landlords are expected to follow the Factoring Guidance published by the Scottish Federation of Housing Associations in relation to the future management and maintenance of the development and/or block in which each shared equity property is located.

1.14 An owner is not allowed to let the property or any part of it to a third party without the Scottish Ministers’ prior written consent. (As noted in section 1.3 above, Local Authorities and Registered Social Landlords will act for the Scottish Ministers in this regard.) If consent is granted, this will be time-limited normally to a period of 6 months and potentially for a further 6 months extension period, given that an owner is expected to occupy the property as their sole residence. This allows an owner to retain the property, for example when temporarily working away from home, without compromising the principles of the scheme. If the property is let, no rental proceeds will be due to the Scottish Ministers. If required, under the terms of their mortgage, an owner is expected to inform their lender that they wish to let or share possession of the property. If at the end of the 6 month period, an owner is seeking an extension to let the property, further consent will need to be sought.

1.15 Save in very limited circumstances all private landlords must register with their local authority to ensure that they are a "fit and proper person" to let property. It is an offence to let any house without being registered.

1.16 Any consent to let or share possession of a property will be conditional on appropriate certification by the shared equity owner’s solicitor of registration; length and nature of tenancy and other consents including that of the Primary Lender. Further details including relevant correspondence are set out in the After Sale Shared Equity Procedures

1.17 Registered Social Landlords and Local Authorities should make sure that applicants are made aware of these obligations (and the associated financial responsibilities) when they apply for a New Supply Shared Equity property and recommend that they fully discuss these and all other costs and restrictions - whether arising from the shared equity documentation, the primary lender’s documentation or otherwise - with their financial and legal advisers. Property disposals

1.18 Section 107 of the Housing (Scotland) Act 2010 provides that Registered Social Landlords must obtain written consent from the Scottish Housing Regulator for certain disposals of land or property. New Supply Shared Equity sales are covered however by the General Consent issued by the Scottish Housing Regulator dated February 2016. As a result, disposals under the New Supply Shared Equity scheme do not require the specific written permission of the Scottish Housing Regulator.

Processing legal documentation

1.19 Annexe A contains the standard styles of legal documentation to be used when operating the New Supply Shared Equity scheme. A succession of central conveyancing contracts have been established under the Scottish Government Framework Agreement for the provision of legal services for the New Supply Shared Equity scheme for all projects entered into after 12 May 2009. Scottish Government Solicitors have been appointed to carry out this work and they will liaise closely with the Local Authority or Registered Social Landlord and their solicitors in order to handle the preparation, completion and registration of the shared equity documentation.

1.20 In essence the Solicitors appointed by Scottish Government (currently Harper Macleod LLP) will deal with the shared equity agreement, standard security and ranking agreement among the Scottish Ministers, the purchaser and the primary lender. Everything else including acquisition, title examination, burdens/deed of conditions/development management scheme/disposition of individual houses, searches etc. will be dealt with by the Local Authority or Registered Social Landlord’s own solicitor.

1.21 This will ensure that lines of responsibility to both the Local Authority or Registered Social Landlord and the Scottish Ministers are clear and avoid any duplication of title work or additional costs.

1.22 Annexe A also contains a standard style of offer to sell and draft disposition with provisions which solicitors should complete subject to any amendments and all additions which they and the Local Authority or Registered Social Landlord deem necessary and/ or desirable in accordance with good market practice and the nature of the development as well as the principles underpinning the Consumer Code for Home Builders (referred to below). This will include inserting plan(s) and conveyancing descriptions in order to ensure uniformity across the site and may include a draft Deed of Conditions or development management scheme.

1.23 Once agreed, the Local Authority or Registered Social Landlord’s solicitors should make a formal offer to sell to the solicitors acting for the purchaser.

1.24 If accepted the Local Authority or Registered Social Landlord’s solicitors will progress the sale of the plot in the normal manner in accordance with their duty of care whilst Scottish Government Solicitors will deal with the shared equity documentation shown in Annexe A.

Processing legal documentation - projects approved before 12 May 2009

1.25 Where the project was approved before 12 May 2009 and any houses have still to be sold, solicitors acting for the Registered Social Landlord should continue to act for the Scottish Ministers in accordance with the terms of the relevant Grant Agreement signed at the time the project was entered into. If the Registered Social Landlord or its solicitors have any questions as to what is required of them or their responsibilities and duties to Scottish Government, they should seek clarification from Scottish Government’s solicitors.

1.26 Registered Social Landlords must also ensure that they have all appropriate licences and authorisations for consumer credit purposes in relation to their role in the administration of NSSE transactions. (Local Authorities do not require any particular licences or authorisations in order to administer NSSE transactions). As a consequence of responsibility for the regulation of consumer credit being transferred from the OFT to the Financial Conduct Authority ( FCA) with effect from 1 ^st April 2014, any applications for authorisation after that date must be made to the FCA. The Scottish Government has issued a guidance note on the impact of the changes to the FCA legislation

on registered social landlords administering shared equity schemes. Registered Social Landlords may also wish to consider guidance that has been provided to them by the Scottish Federation of Housing Associations on this particular issue.

1.27 Shared equity agreements which are entered into from 21 March 2016 will no longer be classified as regulated consumer credit agreements, provided that they fall within the definition of “exempt housing authority loans” as set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. This should then mean that undertaking debt administration and debt collection in relation to such exempt loans will not themselves be regulated activities for which a registered social landlord would require FCA authorisation. In order to qualify as “exempt housing authority loans”, borrowers (i.e. shared equity purchasers) must be given timely information on the main features, risks and costs of the loan at the “pre-contractual stage”.

1.28 Both local authorities and registered social landlords must therefore ensure that a letter in terms of the template set out in Annexe J is issued to all prospective purchasers who have been assessed as eligible for shared equity support, to explain the key features of the equity loan. This letter must be issued by the local authority or registered social landlord before the local authority or registered social landlord instructs its solicitors to issue to the purchaser’s solicitors a formal legal offer for the sale of the property - this is required so that the explanation to the prospective purchaser is given at the “pre-contract” stage.

1.29 Local Authorities and Registered Social Landlords should comply will all relevant Guidance Notes related to the Affordable Housing Supply Programme and New Supply Shared Equity Scheme.