Rent reform introduced for shared ownership leases

Coming as somewhat of a surprise, the Department for Levelling Up, Housing and Communities (DLUHC) has today announced reforms to shared ownership rent increases which come into play with immediate effect. No consultation was undertaken prior to publication of the Policy paper and the reforms will bring technical changes to some elements of the rent review schedule and address issues which arose earlier this year when RPs wanted to cap shared ownership rents which was technically in breach of the model shared ownership lease. 

One point of change which is material is the shift from Retail Price Index (RPI) based increases to Consumer Price Index (CPI) which could have a significant impact on existing business models. The Government says that RPI is outdated and that they want to phase it out by 2030 so by using CPI for shared owners, this will align them with other forms of social housing.

The key reforms are as follows:

1. Annual rent increases to be capped at CPI + 1% 

Note the change to CPI but also from 0.5% to 1% in addition. This will mean that regulated rents (Social and Affordable Rent) and now shared ownership rents can all be increased by CPI + 1% but there is flexibility with other forms of exempt social housing. A shift from RPI to CPI will have an impact on income so RPs are going to have to review their business models relating to income from new shared ownership leases, but also post 2030 in respect of all shared ownership income given what the Government has said about phasing out RPI entirely. 

2. RPs will have discretion to increase rent by less than CPI + 1%

The new additions to the model shared ownership lease will address concerns about compliance with the lease as was the case for this last round of increases. Giving RPs discretion means that they don’t need to be concerned about the validity of rent increases if they choose to increase to a lower percentage, and the only question for the Board will be on affordability and financial viability if a lower increase is in question. 

3. The floor for rent increases will be reduced to 0% and the latest amendments to the model shared ownership lease allows for reductions in rent

This means that it will not be permissible to increase the rent if CPI is minus 1% or lower. The latest model shared ownership lease also allows RPs to reduce the rent.

The reforms come into play today and will apply to new shared ownership homes that have funding on an indicative basis, or part of a scheme included in new bids to the Continuous Market Engagement element of the Affordable Homes Programme (AHP). It is important to note that there is an exemption for new homes that are already contracted to be delivered pursuant to the AHP.

s.106 planning obligations for any new planning permissions granted after 12 October 2023 must reflect the CPI + 1% increase. However, a planning authority can let current agreements which are to be approved to go through if “substantial works” has already taken place to reach the agreement. Where a s.106 agreement is already in place, the parties may amend the agreement to reflect the reforms.

The reforms provide much needed flexibility on the increase to be applied to shared ownership rents, but the reforms do not apply retrospectively, given the nature of the product. As such RPs are going to have to get their head around two different regimes when implementing rent increases for shared owners; those pre 12 October 2023 and beyond whether the property was contracted for on 12 October 2023, and those contracted for/entered into post 12 October 2023. Records of which regime a shared ownership lease falls into are going to be imperative to avoid increasing above or below the mandated level in the particular leases.

It is also foreseeable that RPs will receive queries from shared owners about differing levels of rent increases for different properties in the coming years. However, if RPI is phased out by the end of the decade, shared ownership rents will presumably all be increased with reference to CPI from that point on. Some RPs may think about aligning their rent review provisions for all leases, but this will require significant consideration from a legal perspective.

Please do get in touch if you have any queries about the reforms and look out for more publications on these changes in the coming weeks.