Case Study

Shared Ownership Occupancy Agreements - 20 years on

Monday 23rd June 2008

Shared Ownership Occupancy Agreements expire 20 years from the date when the sharing owner took entry to the property unless terminated earlier. Earlier termination may be because of the death of the owner, the sale of the property, the purchase of the whole property by the sharing owner, the Association buying back the owner's share or the default of the sharing owner.

 

If the Agreement is not terminated early then at the end of the 20-year period the options available under the Agreement are: -

 

  • 1. The sharing owner has the option to purchase the Association's share;

 

  • 2. If option 1 is not exercised, the Association has the option of purchasing the sharing owner's share;

 

  • 3. If options 1 & 2 are not exercised, the sharing owner and the Association can jointly sell the whole property.

 

A further option which is not stated in the Occupancy Agreement is for a new Occupancy Agreement to be entered into.

 

Questions raised by the SFHA: -

  • 1. How should Associations approach a sharing owner given that the sharing owner may not be aware of the terms of the occupancy agreement having signed it 20 years ago?

Associations should contact sharing owners to advise them of their options. The Occupancy Agreement clearly states the order in which options must be considered. The first option is for the sharing owner to purchase the Association's share, but they must decide to do so at least three months prior to the 20 year expiry date, so Associations must contact sharing owners at an early stage. Only if the sharing owner does not wish to purchase the Association's share (or does not notify the Association in time), do the second and in turn the third options become available. Associations can also offer a fourth option of entering into a new Occupancy Agreement, but they are not obliged to do so. Associations may wish to consider enclosing a pro-forma reply that sharing owners can easily complete, sign and return to them in a pre-paid envelope to facilitate a speedy response.

 

  • 2. In terms of signing up to a new occupancy agreement, who pays for what?

The existing Occupancy Agreement does not give a fourth option permitting both parties to enter into a new Occupancy Agreement. Therefore if the Association is willing to offer to enter into a new arrangement, they can potentially negotiate on who is pay the costs.

The sharing owner should probably take independent legal advice on the terms of the new Agreement. They will often have a lender who may have to formally consent to the signing of a new Agreement. If this is the case, the sharing owner should be responsible for their own legal costs. The Association could be responsible for their own legal costs, or alternatively the Association could make it a condition of entering into a new Occupancy Agreement that the sharing owner pays for the Association's costs. In other words, there are no rules, and the Associations can decide their own policy in this matter.

 

It is likely that some occupancy agreements will be in the old "Shared Occupancy Agreement" style, rather than the current "Exclusive Occupancy Agreement" style, so the new style should be used. The Association should ensure that a new style "global" Co-operation Agreement is put in place between the Association and the sharing owner's lender (if not already in place). Responsibility for the costs should be agreed between the Association and the sharing owner at the same time as the costs for entering into a new Occupancy Agreement are agreed.

 

The Occupancy Agreement requires the current market value of the property to be specified. If this is not known, then a valuation may be required. Again, the parties need to agree who is to meet the cost, or whether the cost will be shared.

 

  • 3. How should Associations seek to minimise their costs?

The Association could require the sharing owner to pay all the costs incurred in entering into the new arrangements. 

The Scottish Homes Shared Ownership Procedure Guide does not deal with the possibility of a new Occupancy Agreement being entered into after 20 years. Therefore there is no guidance which states that a professional valuer must value the property for the purpose of stating the market value of the property in the new Occupancy Agreement. This may be a point on which Communities Scotland could provide guidance as to whether evidence of the market value of comparable properties (which can usually be easily obtained for a small fee) could be used in place of a formal valuation.

 

4. If an Association fails to get a new occupancy agreement in place timeously, does tacit relocation apply?

Tacit relocation is a special legal provision which applies to leases which means that a lease may continue beyond its termination date if no action is taken to terminate it.

However, occupancy agreements are specifically called "Exclusive Occupancy Agreements" to differentiate them from leases. In a 1997 court case, Clydesdale Bank v Davidson, the judgement stated that a person who is an owner of a share of a property cannot also be a tenant of the same property. Therefore, Exclusive Occupancy Agreements have been set up on the basis that they are not leases and therefore the principle of tacit relocation does not apply to them. If the new Occupancy Agreement is not put in place in time, the old one does not continue.

 

5. What are the legal implications for Associations of failing to put in place a new occupancy agreement on time?

Once the Occupancy Agreement has expired, Associations will have no contractual right to collect an occupancy payment from sharing owners or to enforce any of the provisions in the Occupancy Agreement.  Should a sharing owner refuse to sign a new agreement, it would be the Association's responsibility to apply to the courts to evict the sharing owner and to ask for the right to sell the whole property.  

 

  • 6. When a sharing owner tranches / staircases up their level of ownership does this affect the effective date of the original occupancy agreement?

No, the original date of entry when the sharing owner took possession of the property still applies. No fresh agreement needs to be put in place when a sharing owner purchases an additional tranche.