Social Housing Rents: Reductions and the Fall Out

The Government lost no time in following up the Chancellor's summer budget announcement of a four-year reduction in social rents from April 2016 with provisions in the Welfare Reform and Work Bill designed to give effect to this policy.

The wider implications for social landlords have been well documented. The Office for Budget Responsibility (OBR) estimates 14,000 fewer affordable homes will be built over the coming six years. The OBR also raises the possibility that housing associations will be reclassified as part of the public sector as a result of increased government control of their affairs through the rent reduction policy and the imposition of the right to buy.

At the same time, customers will benefit from reduced rents at a time when more and more will be grappling with the welfare changes involved in the sweeping up of housing benefit into universal credit.

In this alert, we focus on the implementation of the rent reduction policy through the Bill. We highlight a number of practical issues for registered providers to consider should the Bill become law as drafted, and areas where they might look for changes as the Bill proceeds through Parliament.

• Registered providers "must secure" that the amount of rent payable by a tenant of their social housing is 1% less than in the preceding 12-month period using the rate payable at 8 July 2015 as the benchmark (unless the Secretary of State consents otherwise). This marks a radical change from the current Rent Standard Guidance, which took effect as recently as this April. This had confirmed that rent increases would be limited to CPI plus 1% for the next 10 years.
• Social housing is defined by reference to the Housing and Regeneration Act 2008. It will include housing let on "affordable" rents and other sub-market rented properties, but the Bill specifically excludes rents reserved by shared ownership leases. Student accommodation and care homes are referred to below.
• The Secretary of State will have power to exclude specific descriptions of accommodation, tenants or tenancies and will do so for tenants with a household income exceeding that set out in regulations (presumably linked to the "Pay to Stay" provisions referred to in the summer budget - £40,000 in London, and £30,000 outside London). The government has said that it will publish more details about how this will work in a consultation paper 'in due course'.
• What other exclusions might come forward or be proposed, bearing in mind that the focus will be on the circumstances of the tenant rather than the landlord? The indications at the moment are that supported housing, temporary accommodation, student accommodation, residential care homes (to the extent that they are social housing) and nursing homes will be excluded.
• How will rent reductions work for properties built or acquired after 1 April 2016, or which only come into the stock a short time beforehand where there is no benchmark July 2015 rent? Section 19(4) of the Bill tries to answer this conundrum in a fog of impenetrable language. Providers will make "reasonable assumptions" and the Homes and Communities Agency (HCA) may publish a document saying what those might be.
• What is "rent"? The Bill relies on the definition in the 2008 Act and will include service charges if defined as rent in the tenancy agreement.
• The HCA, with the consent of the Secretary of State, may direct that the rent reduction duty is not to apply to a particular private registered provider if the HCA considers that compliance jeopardises the financial viability of the provider or otherwise satisfies requirements prescribed in regulations. The HCA will no doubt be alive to viability issues in the sector and we expect to see close monitoring and indeed intervention from the regulator as RPs remodel their business plans to take account of the substantial reduction in income over the next 4 years at least.
  
  Julian Ashby, the Chair of the HCA Regulation Committee, wrote to the chairs and chief executives of large of registered providers on 20 July reiterating the HCA's focus on the assurance boards have of compliance with the regulatory standards, and in particular the viability aspect of the Governance and Financial Viability Standard, and requesting that a revised Financial Forecast Return (FFR) be submitted by no later than 30 October 2015.
  
  The HCA direction may be time-limited and modify the duty so as to require a less than 1% reduction or a nil increase in rents. The Bill does not allow the HCA to modify the duty for some tenants and accommodation and not others. This is the function of the Secretary of State, who may only do so across the sector generally and not by reference to categories of provider, e.g. local authorities and housing associations.
  
  What "financial viability" means is unclear. Should the bill expand on the definition? We expect that the Secretary of State will want to make sure that a provider has taken all reasonable steps to reduce expenditure before giving consent. We also think providers will be reluctant to approach the HCA given the message such an approach will send to the HCA and the credit rating agencies. Equally we expect to see the HCA alive to that issue and it will be interesting to see how that dynamic works itself out and whether the pessimistic noises from the rating agencies are carried through into action.
• There is a parallel provision allowing the Secretary of State to issue similar directions to local authority providers, but only if he considers that the local authority would be unable to avoid serious financial difficulties by complying with the duty. It is hard at this point to see what those difficulties might be, given that local authorities have a statutory duty not to operate their housing revenue account at a loss. The Secretary of State has nonetheless taken power to publish a document setting out measures local authorities can take to comply with the new duty and avoid serious financial difficulties.
• Is there a future for the HCA rent standard? It is still relevant to the few private registered providers who will be exempt from the reduction duty entirely. But in other cases the standard is overtaken by the Bill and we would expect it to be modified accordingly. This is especially as the enforcement of the new duty is with the HCA in the same way as the enforcement of the rent standard.

Plenty to think about as the bill progresses through Parliament, and we expect to see challenges both in the House of Lords and the Commons, but not much time before April 2016!