What legalities must housing associations consider under the shared ownership commitment on rent increases?

Following Autumn Statement, and the government’s announcement that social housing rent increases would be capped at 7% next year, NHF members representing 80% of shared ownership homes also committed to cap rent increases to match the social housing rent cap.

Since the announcement, more housing associations have agreed to the voluntary cap and the number continues to grow.

Anthony Collins Solicitors have been working with the NHF to share legal advice on the voluntary cap, and as part of our work with the NHF, we recently shared a note with NHF members regarding how the cap might be implemented.

Since the note was shared, there have been a number of questions which we’d like to share some further clarification on.

Can we use a rent waiver/additional hardship funds instead of a cap?

The shared ownership rent cap reflects the outcome of the discussions between the NHF and the government. There is a clear expectation that shared ownership rents will be capped in the same way as social rents.  

There is no expectation on the part of government that housing associations will seek to limit rent increases of shared owners in another manner – for example, through waivers, hardship funds, or another method. The government is expecting the sector to cap shared owners’ rent increases at 7%, in the same way general needs social housing rents are being capped. 

Our note explores how to introduce a cap and proposes a two-letter approach, enforceable by promissory estoppel. There are two letters since a different approach will need to be taken for 2024/2025 also.

Legally it is possible to pursue other routes (or not cap at all) and this decision ultimately rests with the boards of individual housing associations, but these would not be consistent with the approach agreed with the government.

Do we need Homes England consent for our grant funded homes?

Our note referenced the need for Homes England consent where a scheme is grant funded.  Homes England have varied the Capital Funding Guide at paragraph 4.2 within the Rents and Service Charges section of the Shared Ownership Chapter to state as follows:

“4.2.4 For the avoidance of doubt, increases may (i) be set below the RPI plus 0.5% limit; (ii) a rent increase not applied; or (iii) where considered appropriate by the landlord, a rent reduction may be applied. Homes England’s permission is not required should a landlord wish to charge a lower annual rent increase than is set out in the lease for a given year. This means that, for example, an increase can be applied that is less than RPI + 0.5%”

Consequently, Homes England has now given general consent. 

Must we obtain lender consent?

Our note was a general note with regard to funders. Leaving leasebacks and any unusual arrangements to one side, there may be consent or consultation requirements in a housing association’s funding agreements and security agreements where such lending arrangements are secured by shared ownership property either directly (to a lender) or via a security trustee. 

Whether consent is needed depends, as we commented in our note, on the precise terms of the loan and security documentation of your organisation.

We highlighted that some loan agreements will contain restrictions on the provision of ‘financial support’ and housing associations with such restrictions in their lending arrangements will need to either:

Be comfortable that implementing the cap is not the provision of ‘financial support’.

Seek lender confirmation that this is not viewed as financial support.  We understand at least one sector lender has given a general consent in respect of its lending agreements and its secured lending, and it is anticipated that other lenders may follow. 

In terms of bonds and/or private placements, the position will vary depending on the provisions in loan agreements/note purchase agreements, the amount of shared ownership property in the security pool and in particular, the terms of the legal charges that put into security such shared ownership properties. Given timing, and other, challenges in respect of obtaining bond holders consent (if required), the key question may be whether there is discretion for the bond trustee (or security trustee) to consent. This is likely to come down to whether or not the impact of the shared ownership rent cap has a material impact on the property value. 

Of course, it is accepted that a rent cap is a reduction in the increase that would otherwise be payable, but the issue is whether the shared ownership rent cap is material, especially in light of the fact that it was part of a wider understanding with the government acknowledging that it has permitted a rent increase of 7% - much higher than that on which it had previously consulted.

The NHF have also been working with leading sector valuers, JLL and Savills, who have shared some advice around the impact the voluntary cap might have on valuations.