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The disposal options

The CLT model of community ownership has individual and community benefits. Properties which are brought into the CLT become affordable in perpetuity either through their continued ownership or through the recycling of equity retained by the CLT. CLTs can offer eligible households flexibility and choice,

Renting

Renting can be offered as an alternative to part-purchase but usually at a higher economic rental than that charged by a RSL. e.g. up to 25% of local average household incomes. (TBC)

Equity Mortgage

This is suitable for use generally in communities where prices overall are no more than two or three times the affordable level, where it is not a strategic requirement of community land trust or a legal requirement of the local planning authority under a Section 106 Agreement to retain a unit specifically as permanently affordable and where suitable homes are available on the open market for the CLT to purchase as replacements for those sold under this scheme. Equity mortgage is unlikely to be appropriate in rural exception sites.

The CLT transfers the freehold of the property to the buyer. The buyer’s principal lender grants to the buyer a loan on a first legal charge on the freehold interest in the property on the conventional basis.

The CLT grants the buyer an equity loan for the remainder of the purchase price of the property at full open market value secured by a second legal charge (“the equity mortgage”). The amount required to be repaid under the CLT’s charge to the CLT is the same percentage of open market value at point of repayment as the equity mortgage represented when it was first granted. No repayment is due on the second charge until the property is sold by the buyer and no interest is payable on the loan,

This might work as follows:

£ % of OMV
Loan amount affordable to the buyer 90,000  60
Plus Savings 10,000 7
TOTAL Resources available from buyer 10,0000 67
Full Open Market Value 150,000 100
CLT ‘Equity Mortgage 50,000 33

In the above example the buyer is financing 67% of the Open Market Valuer (OMV) which might equate with the CLTs build costs. However the buyer may be able to afford a higher purchase price of say £120,000 (80%) of equity which in turn would enable the CLT to dispose of another property at a smaller level of equity: £80,000 or 53%. In other words the two buyers are financing the CLTs total net costs of providing homes.

The CLT will also have:

  1. A pre-emption right to buy the property back at open market value when the buyer wishes to sell (so as to be able to retain it in affordable use if this is financially feasible) on condition that completion is achieved within thirteen weeks from notification that the buyer wishes to sell.
  2. A nomination right to put forward purchasers in housing need who may themselves receive the assistance of an equity mortgage to buy the property, again the purchase by a nominee to be completed within thirteen weeks.
  3. The CLT can also make a rent charge of £100-£200 on the property, rising annually with RPI, to cover its administration costs and a fee of up to 0.5% of the open market value on sale to cover its costs on sale.

You will need to negotiate with the local planning authority a Section 106 Agreement which would require the homes for sale on first sale to be affordable at the level required by virtue of equity mortgages available through a CLT. The CLT is required to use the equity made available to it through the planning condition to retain affordable opportunities in these or replacement properties. The Section 106 Agreement would

  1. Specify the range of sale prices for first sales, normally somewhere between 40-70% of open market value (with the balance of course held by the CLT equity mortgage).
  2. Require homes to be available first to people with a local connection and through a “cascade” mechanism then to those from surrounding areas and then to those from the whole district. The entire cascade procedure should take no more than13 weeks – some High Street lenders are trying to reduce this to as little as 45 days. Individual circumstances may vary from local authority to local authority but the time limits should not.
  3. Allow a mortgagee in possession to sell the property to a person without a local connection if no buyer with a local connection has been found by the mortgagee within the time limit in (c) above.

Protected Area Shared Ownership

This disposal method is suitable where homes have been provided through a rural exception site or on other rural sites where the Section 106 Agreement requires these specific units to remain permanently affordable to the extent that they cannot be allowed to move onto the open market

Protected Area Shared Ownership was introduced by the Housing & Regeneration Act 2008 to protect shared ownership leases from enfranchisement where the ability of the Lessee to acquire further shares was limited. The 2008 Act created a list of Protected Areas (link available on request) which, in essence, consists of those rural areas which are exempt from the Right to Acquire.

The CLT will have under the lease the following rights:

  1.  A pre-emption right to buy the property back when the buyer wishes to sell (so as to be able to retain it in affordable use) within a thirteen week time limit from the date the buyer notifies the CLT that he or she wishes to sell.
  2.  A nomination right to put forward purchasers in housing need who may themselves buy the property under a shared ownership lease provided the purchase is completed within a thirteen week time limit. The CLT would also charge a ground rent of £150 per annum on the property, rising annually with RPI to cover its administration costs and a fee of up to 0.5% of open market value on sale to cover its costs of sale.

You will need to negotiate a Section 106 Agreement with the local planning authority on the following basis;

  1. That it would require the homes to be owned for no more than a specific percentage of open market value or let at not more than a specific percentage of the market rent/local reference rent.
  2. That it would specify the range of percentages of open market value required on each initial sale, normally between 40-70% of open market value.
  3. Would require the homes to be made available first to people with a local connection and then through a cascade to those from surrounding areas after six weeks and to those from the whole district after thirteen weeks.
  4. Would allow a mortgagee in possession to sell to a person without a local connection and free from the cascade rules if no buyer has been found within thirteen weeks.

The mortgagee’s security is the share of ownership held by the buyer. The lease would contain a mortgagee protection clause on the same basis as New Build Homebuy under shared ownership allowing a mortgagee in possession to recover the same level of losses as it would under normal shared ownership. The CLT would have to recognise that using this method could allow a buyer to acquire a share as high as 80% and that a mortgagee selling the unit in possession would sell fee of the affordable housing obligations. However, shared ownership has a proven track record with lenders and a new form lease has just been agreed with the Council of Mortgage Lenders.