New reforms are set to change the game for shared ownership homeowners amid the cost-of-living crisis, adding protection against extreme rent rises.
Here, Solicitor and housing lawyer Josh Wing explains how the changes in the rent review will impact registered providers of social housing and their tenants.
Leasehold ownership reforms
Shared ownership is usually a route through which those with lower affordability criteria can get onto the property ladder — yet these homeowners have been subject to the most extreme rental increases when compared with their standard leasehold counterparts.
The shared ownership reforms — effective from 12 October 2023 — were announced by the Department for Levelling Up, Housing and Communities (DLUHC) as set against a backdrop of the reform of leasehold ownership (referenced in the King’s Speech) which includes the Leasehold and Freehold Bill.
The measures being introduced by the Leasehold and Freehold Bill include setting default lease terms at 990 years, capping ground rents and encouraging enfranchisement (leaseholders purchasing the freehold) — as discussed by our own Katherine Whittle for Social Housing.
For now, a key reform for housing associations and their tenants relates to the rent review provisions that address a burdensome and immediate issue for shared ownership leaseholders and their escalating ground rents. It’s hoped that the ambition for a more equitable system of home ownership by way of leasehold reform will translate to a more equitable system for shared ownership leaseholders going forward.
Shared ownership lease amends — how will rent be reviewed?
Rent reviews will no longer make reference to Retail Price Index and instead use the Consumer Price Index (CPI).
The range at which the rent may now increase is essentially between 0% and the CPI rate, plus 1% (depending on the CPI change for the given month):
- CPI is between 0% and minus 1% = cap of CPI plus 1% (maximum amount).
- CPI is nil = maximum rent increase is 1%.
- CPI is minus 1% or below = maximum of 0% rent increase (minimum amount).
This will be achieved through:
- Less volatile indexation — the transition to the CPI is made with the cost-of-living crisis in mind. It aims to protect new shared ownership homeowners from the extreme rent increases associated with RPI-linked rent reviews. The CPI measure is considered a more realistic measure of inflation and therefore a more equitable rent review mechanism.
- Greater discretion for registered providers to set rent review rates — registered providers will be able to set rates lower than the CPI rate plus 1% (the maximum amount). This ensures that providers have greater flexibility to protect new shared owners from particularly high rent increases during periods of high inflation.
- Reduction of the ‘floor’ rate — the floor for shared ownership rent increases has been reduced from 0.5% to 0%, meaning that rents can’t be increased if CPI is minus 1% or lower.
Which leases do the reforms apply to?
As of 12 October 2023, the reforms apply to all new shared ownership leases, including affordable homes, section 106 development contributions and right to shared ownership products.
The reforms don’t have retroactive effect. So if you’re already in contract to deliver affordable housing, these reforms won’t apply.
The only exception to this rule is in relation to section 106 development contributions where the local planning authority considers that substantial work has already been undertaken (in advance of 12 October 2023) to reach agreement on the basis of the previous quantifications. That authority may allow the agreement to proceed provided that it’s considered ‘pragmatic’ and ‘necessary’ for delivery.
It’s also important to note that the key information document (KID) has been updated for leases that incorporate the updated rent review provisions, which contain prescribed information by Homes England in relation to shared ownership leases.
Talk to us
Queries or concerns around shared ownership leases and how the reforms affect you? Talk to our housing and regeneration team by completing our contact form below.
