Further changes to model shared ownership leases
Before 12 October 2023
Those operating in the social housing sector should be familiar with the upgrades to the recommended shared ownership leases introduced by the Affordable Homes Programme 2021-2026 (the ‘2021 AHP’).
As a major departure from what had gone before, significant reforms included reductions in the size of the initial sale tranche (to 10%) and subsequent staircasing tranches (to 5%), the additional ability for tenants to staircase in annual 1% tranches for 15 years, and landlord liability for repairs and maintenance for up to 10 years.
These leases are mandatory for any shared ownership units funded under the 2021 AHP, as well as units funded from 1 April 2021 using Voluntary Right to Buy proceeds. Units funded under the Shared Ownership and Affordable Homes Programme 2016-2021 (the ‘2016 SOAHP’) also had the option to use these leases for units completing after 1 April 2021.
Changes from 12 October 2023
From this date, two new suites of Homes England model leases have been issued for use, marking a shift from rent reviews based on RPI (retail price index) to CPI (consumer price index), and aiming to align rent reviews for shared ownership leases to those for social and affordable rent tenancies.
Instead of a review based on ‘RPI + 0.5%’, the new mechanism will be ‘CPI + 1%’. These changes apply to new leases funded under SOAHP 2016 and AHP 2021 – so, this is looking back to a previous funding round as well as changing standards for the current Programme.
It does also mean that Registered Providers may be operating a shared ownership lease portfolio that includes RPI-based and CPI-based leases.
It's important to note that, while the older RPI-format lease allows for a 0.5% increase regardless of the state of the Index, the new CPI-based lease does two things:
- it applies a zero per cent review if CPI falls to -1% or lower, and
- it acknowledges that the landlord can - at its absolute discretion - apply a lower rent review than the formula provides for
Homes England has clarified in the Capital Funding Guide that, under the new form of lease, landlords can make sub-formula or nil reviews, and apply rent reductions, without the need for its consent.
Whether a lease falls under AHP 2021 or SOAHP 2016, there is a new preferred form lease in issue from Homes England - making the switch to CPI from October 2023, for use by Registered Providers from now unless a funding exemption applies. While these are mandated only for grant funded units, it is likely that these will be more widely adopted over time as they are a known quantity in the marketplace for plot sales and for portfolio funding.
Implications for Registered Providers
The immediate impact will be operational, with an inevitable strategic ‘must or may’ decision to consider stock that could fall into either camp.
This will cause additional management costs over time, so the better the data collected at the beginning of the funding and development process, the more efficient and inexpensive this will be for future asset management.
Clearly, a ‘day one’’ exercise for all Registered Providers will be identifying what stock within their portfolio falls into which review pot, so that, over time, rent reviews are dealt with accurately and efficiently. This may not be an issue at the moment but, as CPI-based leases come more into occupation, there will be an increasing two-tier review process to manage and document.
From a regulatory perspective, where stock is - or will be - grant funded, there’s a requirement that the Homes England preferred form lease must be used - at the very least, the prescribed clauses must be used. It makes sense from a sales and management perspective to use the standard documents as a common platform.
However, exemptions from the new review structure apply, and RPI-based leases may be used in those cases.
Simply put, the exemptions operate where funding for units has been agreed prior to 12 October 2023 – at the moment, that probably covers most units under development, but accurate record keeping will be needed for the future, so that leases are set-up correctly when schemes come into their sales phase
It will be important to identify why any leases were drafted as RPI-based in the future from a sales, funding and asset management perspective.
Whether that represents a better outcome longer-term is somewhat of an exercise in crystal ball gazing, even if backed with valuation input, and it would be prudent to document any strategic decision making around that choice for future reference.
It’s also an indication of the direction of travel that Homes England propose the newer form lease is used “where it is viable to do so”.
Over time, particularly as RPI runs its course, it’s clear that CPI will become the preferred format for shared ownership lease rent review, and running a two-tier portfolio - or switching older leases onto a CPI-based review structure - will be a further hidden cost of operation for Registered Providers.
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