Shared ownership schemes

Answered according to Hanafi Fiqh by

Answered by Mufti Muhammad Taqi Usmani

There is a scheme in the UK which is called shared ownership. This allows a person to part buy and part rent a property. Typically a percentage equity would be up for sale so at 25% equity for a property worth 200,000 one would have to raise 50,000. On the rest owed a rent is paid, which does not go towards paying the complete equity. However one has the opportunity to “staircase” payments usually in 25% increments.

The lease is held by the shared ownership company typically for 99 years, rent is paid. Though one may own a chunk until total equity is paid, ownership remains with the scheme. Is it OK to engage in a contract like this. I am not sure however like in  ijarah whether a separate contract is raised on the point of final sale.

Assalamu alaykum

This question was Answered by Shaykh Taqi Usmani on the albalagh website. Here is the text of his answer:

The following questions are with regards to purchasing a house in the UK:

Purchasing a house in a country like the United Kingdom (especially in London) is very difficult because it is based upon a system of mortgages, which are in turn based upon interest. I recently discovered a scheme that   facilitates the purchase of a house (brand new or used) without the involvement of interest. However, I think there is an aspect of the scheme which seems to be linked to inflation and hence I need your advice as to its permissibility. Details of the scheme are described below:

‘Tower Homes’ is a housing association that provides homes (both new and used) on the basis of shared home ownership. It is a not-for-profit organization and it works with and is partly funded by local councils and the Housing Corporation (the Government agency that funds and regulates housing associations).

Shared Home Ownership is a Government-backed scheme for people who cannot afford to buy a home outright. Basically, when the buyer has decided which home he wishes to purchase, he pays Tower Homes (since Tower Homes is the owner) for a certain percentage of that property. So for example, if the property is worth £100,000 then he can pay for, say 50% of the property

(£50,000) and then in addition pay a subsidized rent for the other 50% not owned by him. Then later on, when the buyer has saved up enough money he can purchase another say 25% of the property and pay a further reduced subsidized rent for the remaining 25% not owned by him.

Hence he may eventually purchase the property outright. Furthermore he is not restricted to purchasing fixed percentages. The percentage of the property he can purchase at any one time is variable. Therefore for example he may choose to purchase 35% of the property (as his first purchase) and then increase his ownership up to 100% (and he therefore pays no rent at all) in several stages (as his financial circumstances indicate).

However, my question essentially revolves around the following point: (while the purchaser is paying rent, i.e. he owns less than 100% of the property) the rent will increase each year on 1 April, by the rate of inflation + 1%. Does this last point invalidate the whole scheme? And are there any other problems with this scheme? [London, UK]

In the Name of Allah, Most Gracious, Most Merciful

A.) The scheme mentioned in your question is based on the principle of diminishing partnership. In principle this is a permissible mode of financing but the main factor in deciding its permissibility or otherwise is the way in which this technique is practiced. If all the agreements are based on this concept, which is truly reflected therein this scheme may be permissible. But there are cases where the principle of diminishing partnership is not truly reflective in the agreements; hence, the whole transaction becomes dubious. Therefore, it is necessary that for true application of the related principles, agreements are vetted by a Shariah expert.

If the rent of the property is increased every year on the basis of rate of inflation and this increase has prospective (and not retrospective) effect, merely this effect does not render the whole transaction as impermissible.

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