The Department for Levelling Up, Housing and Communities announced important changes to the Homes England model shared ownership lease on 12 October 2023. This affects the rent review mechanism in the lease, changing the maximum rent increase from RPI + 0.5% to CPI + 1%. We are already hearing of the impact of this announcement on our clients, particularly the necessary re-assessment and evaluation of existing schemes and submitted offers.
The new rent review mechanism
Rent reviews in shared ownership leases have to date been calculated by reference to RPI, with the maximum rent increase being RPI + 0.5%. In recent times of high inflation, this calculation has resulted in maximum rent increases that could have proved unaffordable. Many housing providers responded last year by voluntarily capping shared ownership rent increases at 7%.
The government has stated that they recognise RPI is now an outdated measure of inflation, having committed to phasing out its usage by the end of the decade.
The reform announced on 12 October changes the maximum rent increase in shared ownership leases to no more than CPI + 1%.
The government has also reduced the floor for shared ownership rent increases from 0.5% to 0%. This means that rents cannot be increased if CPI is minus 1% or lower.
Where the CPI-based model lease applies, if the index figure for the specified month is nil, any rent increase will be limited to a maximum of 1%.
This reform brings shared ownership rents into line with social and affordable rented homes. However, unusually and somewhat controversially, the sector was not consulted about this change.
The new model shared ownership leases incorporating these changes can now be accessed via the Capital Funding Guide.
When do the changes apply and what are the transitional arrangements and exemptions?
The changes applied immediately but there are transitional arrangements and some exemptions that housing providers should be aware of.
The exemptions are set out in Section 11 of the Capital Funding Guide and are:
Shared ownership homes provided through Continuous Market Engagement:
- the scheme has been accepted as a firm scheme and has been allocated funding on IMS as at 12th October 2023;
- the scheme has been submitted in IMS as a bid prior to 12th October 2023 but is awaiting a decision from Homes England and is subsequently allocated;
- the scheme is either a substitute or an indicative scheme in IMS and the provider is able to evidence that they are in a legally binding contract to acquire and/or develop the site/ properties; this legally binding contract needs to have been entered into prior to the 12th October 2023 and commits them to incur Development Costs as defined in the relevant Grant Agreement.
Shared ownership homes provided through Strategic Partnership:
- the scheme is an “active site”;
- the scheme is in a strategic partner’s pipeline and the partner is able to evidence that they are in a legally binding contract to acquire and/or develop the site/properties; this legally binding contract needs to have been entered into prior to the 12th October 2023 and commits them to incur “Development Costs” as defined in the relevant Grant Agreement.
Many current schemes will therefore be unaffected. Each scheme will need to be looked at on an individual basis and assessed in line with the above criteria.
Where schemes are exempt from the requirement to use the CPI-based rent review, Homes England encourages housing providers to consider offering the new lease where it is viable to do so.
Section 106 obligations
The government expects that, for any planning permission issued on or after 12 October, the Section 106 agreement will specify the CPI + 1% rent review. The local planning authority has some leeway here where they consider that substantial negotiations have already taken place which justify retaining the RPI-based rent review in order to secure the affordable homes.
Remember: schemes which are not grant funded are not affected, unless there is a requirement in the Section 106 Agreement.
Will the sector move over to this new lease for all new shared ownership leases?
When it comes to reviewing the rent under existing older leases, housing providers may adopt the new mechanism where they think it is appropriate; it is for the parties involved to agree this.
It remains to be seen how many housing providers will use the new CPI-based rent review where it is not a Homes England requirement to do so. As with the last time the model lease was reformed in 2021, we may see pressures from the market to use the CPI-based rent review on more and more leases going forward.
Further, it can be an administrative burden for housing providers to have different rent review mechanisms in their new schemes, so they may decide to use the CPI-based model lease on other schemes for consistency.
Right to shared ownership and rent to buy
The reforms will automatically apply to the leases of all tenants who purchase a share in their property through the Right to Shared Ownership scheme or from a Rent to Buy tenancy.