Shared Equity Schemes

With the current economic climate house builders and developers are looking for various ways to encourage sales of residential properties. One option that developers can look at is to offer prospective purchasers a “shared equity” scheme.

What is a shared equity scheme?

A shared equity scheme enables a developer to sell a residential property and defer payment of an amount of the purchase price until a later date. For example the purchaser pays for 80% of the price of the property now and the developer retains 20% by way of a second loan secured by a charge registered on the title of the property. The remaining 20% of the price can then be paid to the developer at a later stage which will be specified in the agreement, for example 10 years from the date of completion of the sale of the property by the developer to the purchaser or on sale if that is earlier.

Some shared equity schemes are interest free. Instead the developer can agree that on the repayment date the amount repayable is 20% of the current market value of the property when the charge is repaid. Assuming that the market improves, the developer can therefore recover an increase in the value of the property.

The benefit of such a scheme is that it enables purchasers to proceed at a time where they are finding it difficult to get a mortgage for the full amount of the price. The developer is able to sell the property without reducing the costs as part of the sale price is deferred.

What does this mean?

The shared equity scheme is a form of financial credit and the scheme may therefore fall within the Consumer Credit Act 2006 (“2006 Act”) requiring a consumer credit licence. Click_here for more information on the Consumer Credit Act 2006.

Before the Consumer Credit Act 2006 there was a financial upper limit of £25,000.00. Beyond this limit a scheme would not be caught by the Consumer Credit Act 1974 and therefore no licence was necessary.

The 2006 Act removed this upper limit and therefore all second legal charges now fall within the 2006 Act.

Is there an exemption and does a developer need a licence?

Provided that you comply with some specific rules if you are “lending money” to purchase land under an agreement which is limited to and will result in a one off re-payment in say 10 years time then there should be no need for a consumer credit licence.

You will need a licence and be caught by the 2006 Act if in your shared equity scheme the purchaser is required to make more than four repayments of the loan. In this case the developer needs to comply with the 2006 Act and get a consumer credit licence.

For further information please contact Nicola Porter on 01782 652329 or nicola.porter@tinsdills.co.uk.