Getting rents right
10 questions Registered Providers should ask themselves to avoid costly rent-setting mistakes
Director, Campbell Tickell
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 also triggering regulatory intervention. So, given the current uncertainty over the introduction of a social housing rent cap for 2023/24 in England, what is the current thinking on how to approach this crucial area?
Rents continued to feature in the Housing Sector Risk Profile for 2021. The Regulator of Social Housing 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”.
If you make mistakes on rents, you cannot offset undercharges and overcharges. It is heads you lose and 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% (although this looks likely to change to a lower rate for at least the next year as a result of the current Social Housing Rents Consultation). You cannot correct the issue until the property is re-let to another tenant.
Alternatively, if you overcharge a rent then you could be putting a vulnerable tenant under extra pressure. If you owe a refund to the tenant then this could lead to regulatory intervention.
“If you make mistakes on rents, you cannot offset undercharges and overcharges. It is heads you lose and tails you lose.”
Over the past two years, CT has helped more than 20 Registered Providers and local authorities rectify issues with the rent they have charged tenants. This includes compliance both with the RSH’s Rent Standard and with the Welfare Reform and Work Act (WRWA) 2016 reductions.
These experiences allowed me to write “How to Comply with the Rent Standard” last year. In this I summarised 10 key questions Registered Providers should ask themselves to give assurance on the rents they set.
How up to date are the rent policy and procedures?
These should be reviewed regularly, at least every two years or whenever there is a major change in the Rent Standard or the Rent Policy Statement. 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 the 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.
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. Has the board received assurance on this?
If you have lost records of your valuations to calculate formula rents, can you 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 re-let. The properties should not be re-let at the previous rents. Different rules apply if it is re-let 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 at the time of letting, 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 do 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 is the board getting that the rents set are correct? Is this through internal audit or through other external assurance? However this is done, it is imperative that the board can demonstrate it has sought and received the necessary assurance on rent-setting.
As stated at the start, rent-setting is complicated. Now more than ever, it is crucial to ask the questions to ensure you get it right.