After sale shared equity procedures: guidance 2019

9 Expiry of 19 years/Application of the 20 year security rule

The Redemption of Heritable Securities (Excluded Securities) (Scotland) Order 2018 came into effect on 15 February 2019 and removed the right to redeem securities after 20 years for those participating in designated shared equity schemes including the OMSE, NSSE and HtB(S) schemes. The purpose of this order was to address the so-called “20 year security rule”, the effect of which would be to entitle shared equity owners to repay Scottish Ministers’ equity stake following the twentieth anniversary of the owner’s purchase of their property, at its original value.

Some existing shared equity agreements may provide that, after 19 years, a “payment event” is triggered, as a result of which the owner would require to pay to Scottish Ministers the full value of their equity stake at that time unless the owner granted a new second-ranking standard security in favour of Scottish Ministers. Provided the owner did grant a new standard security, that would defer the owner’s entitlement to redeem the equity stake under the 20 year security rule for a further 20 years.

Now that the 2018 Order has come into effect, no action will be required by RSLs in the nineteenth year after completion of relevant shared equity transactions, as no replacement standard security will be required. With the exception of purchasers under the First Home Fund (see below) it will no longer be necessary for any new shared equity purchasers to be given prior notice of Scottish Ministers' intention to vary the application of the 20 year security rule.

It should be noted, however, that the 2018 Order does not exempt all shared equity schemes from the application of the 20 year security rule. As mentioned above, the main Scottish Government OMSE, NSSE and HtB(S) schemes have been fully exempted from the application of the 20 year security rule, as have the Help to Adapt scheme, the Home Owners Support Fund (Mortgage to Shared Equity Scheme), and the shared equity scheme operated by Places for People Scotland, which means that any standard security granted in favour of Scottish Ministers or Places for People, whether before or after the coming into force of the 2018 Order, cannot be redeemed after 20 years by the shared equity owner.

However, the 2018 Order provides that, in relation to certain other shared equity schemes, the right to redeem will only be removed in relation to standard securities granted for the purposes of those schemes after the date when the 2018 Order came into force – i.e. 15 February 2019, and any standard securities granted for the purposes of those schemes before that date in relation to the relevant shared equity schemes will still be capable of redemption after 20 years. The shared equity schemes which come within this category are (a) the original Homestake scheme, (b) the NSSE with Developers scheme, and (c) certain local shared equity schemes operated by Aberdeen City Council, Aberdeenshire Council and East Dunbartonshire Council.

In relation to these schemes, therefore, those administering them should be mindful of the fact that the 20 year security rule will still be capable of applying where specific shared equity arrangements continue for a period greater than 20 years. Relevant shared equity transactions should be identified and monitored, and individual shared equity agreements should be checked, to see whether they address the point by triggering a "payment event" in year 19 of the shared equity arrangement unless the owner grants a new standard security at that time. If this requirement applies, it should be flagged to the shared equity owner as year 19 of the shared equity arrangement is reached, and arrangements made to have a replacement standard security granted and registered, in order to avoid triggering the "payment event".

First Home Fund

Because the First Home Fund has only just been launched, the First Home Fund is not currently exempt from the application of the 20 year security rule. Scottish Government does, however, intend to make a further statutory order in the future to remove the right to redeem securities after 20 years from persons who participate in the First Home Fund. Until such an order is made, however, it will be necessary for First Home Fund purchasers to be given notice of Scottish Government's intention, and to make clear that they should not purchase under the First Home Fund in the belief that they will be able to redeem the Scottish Government standard security after 20 years.

The Standing Instructions to Solicitors for the First Home Fund will be updated to require a purchaser's solicitors to give the purchaser the appropriate notice.