Based on the most common mistakes, Helen Routledge, Director, Campbell Tickell, outlines 10 questions to ensure you get your rent setting right.
Rent setting is complicated. If you get it wrong in one year you may well have to unwind the increases for subsequent years. So not only will you have to refund sums to the tenant or housing benefit, but you run the risk of undermining your business plan and regulatory intervention.
Rents continued to feature in the Housing Sector Risk Profile for 20211. The Regulator stated, “overall compliance appears strong” and “Rent Compliance will continue to be an area of scrutiny and issues with rent setting will continue to be reflected in providers regulatory judgements or through regulatory notices”.
Over the last year I have helped over a dozen Registered Providers and Local Authorities rectify issues with the rent they have charged tenants. This includes both compliance with the Rent Standard and the Welfare Reform and Work Act (WRWA) 2016 reductions.
Mistakes in rent setting
Over a year ago in “How to Comply with the Rent Standard” 2 I summarised 10 key questions RPs should ask themselves to provide assurance on the rents they set. In this article I focus on 10 common mistakes in rent setting.
If you make mistakes on rents, you cannot offset undercharges and overcharges. Its heads you lose tails you lose. If you make a mistake and undercharge rent, you cannot catch up in subsequent years as a tenant’s rent increase is restricted to CPI+1%. You cannot correct the issue until the property is relet to another tenant. Alternatively, if you overcharge a rent then you could be putting a vulnerable tenant under extra pressure, owe a refund to the tenant and there could be regulatory intervention.
So here are some things to look out for:
- How up to date are the rent policy and procedures? These should be regularly reviewed, at least every two years, or whenever there is a major change in the Rent Standard or the Rent Policy Statement3. Does the policy include a requirement for internal audit or an independent review of the rent setting process?
- How up to date are the procedures and do they align with the policy? Do they cover all your stock types, are all the controls documented and is there a segregation of duties between staff preparing the increase and staff signing it off?
- What increase have you applied to rents that are between formula rent plus flexibility and cap? Rents that you charge can in some instances exceed the formula rent plus flexibility but in these cases their increase is limited to a maximum of CPI.
- What about secure rents? The rules for secure rents are complicated and even more so during the WRWA. Now they are a little easier, but the Rent Standard still applies to the units and the maximum rent increase that can be applied is CPI+1% even if the Registered Rent is higher.
- Have you documented the reasons behind exemptions from the Rent Standard? This is to ensure that the organisation is clear on how the unit meets each of the criteria for exemptions from the Rent Standard.
- If you have lost records of your valuations to calculate formula rents, can we revalue? Social formula rents are calculated based on a 1999 valuation of the property. The Rent Standard does not permit social formula rent units to be revalued unless the property has had material structural alterations such as an extra room or extension. Component replacements such as kitchens do not count.
- What about supported housing affordable rents? Affordable rents should be set at up to 80% of the market value. When setting affordable rents for vulnerable and older people, the gross market rent should be based on similar types and models. It is not compliant to add the actual services charges to a market rent.
- What are the reset rents for affordable housing? Affordable rents should be reset at up to 80% of market rents each time the property is relet. The properties should not be relet at the previous rents. Different rules apply if it is relet to the same tenant.
- What about other types of rent such as London Affordable rents? This is a type of affordable rent. There is a cap on the net rental element which is at the rent levels published by the Mayor of London. However, the rent plus service charge must still not exceed 80% of the market rent. The Rent Standard governs the increase so that the maximum increase is CPI+1% to both the rent plus the service charge.
- How does other agreements on rent impact with the Rent Standard? Even if you have agreements with local authorities on rent levels that you can charge, the Rent Standard still applies.
Most important is what assurance are the Board getting that the rents set are correct. Is this through internal audit or through other external assurance.
Case Study: Rents and service charge
To discuss further, do feel free to contact Helen Routledge on: helen.routledge@campbelltickell.com
1 Sector risk profile 2021 (publishing.service.gov.uk)
2 How to Comply with the Rent Standard
3 Policy statement on rents for social housing (publishing.service.gov.uk)
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