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Re-lets at Formula Rent and 1% rent reduction 06/08/2015

Some authorities who have properties which have not yet reached convergence to "Formula Rent" may face the prospect of having to reduce some property rents in April 2016 by more than one percent if the Welfare Reform and Work Bill is passed as drafted.

 

The current guidance on Rents for Social Housing published in May 2014, and effective from April this year, was intended to provide long term certainty and stability to council tenants and landlords. It was expected to stay in place for ten years. The announcement of a compulsory one percent reduction over the next four years represents a complete U-turn on a policy that only came into force in April this year. For some properties in some councils the rent reduction could be greater than one percent.

 

At present, where local authorities have not achieved 100% "rent convergence" to Formula Rent, paragraph 2.17 of the DCLG Guidance on Rents for Social Housing encourages councils to move the rent of any property not yet at Formula Rent up to the formula rent when the property is re-let following vacancy. 

 

Within the Welfare Reform and Work Bill, there is a proposed provision that if social landlords increase rents on any properties "in year", they will have to be reduced back down again to the pre-increase rent minus 1% from April 2016. 

 

We can understand why the government would wish to ensure councils don't implement an across the board mid-year rent increase before April 2016. However the wording of the Bill as it stands seems to suggest that those councils who have individual properties that are not yet at Formula Rents and who are following current guidance (as per para 2.17) will be penalised for doing so in that they will then need to reduce the rent again in April 2016 by more than one percent.

 

While we may be misinterpreting the wording of the Bill as drafted, we believe that if the government press ahead with legislation to force councils to reduce rents there should be an exemption to ensure that where councils have increased rents of properties as they have become vacant to Formula Rent "in year" (in accordance with current DCLG guidance) then the one percent reduction should apply to the higher Formula Rent charged to the new tenant on re-let and not the rent charged to the previous tenant on 1 April.

 

If the legislation goes ahead, we will also lobby to allow councils to continue to move the rent of any property, not at Formula Rent, up to Formula Rent where the property is re-let following vacancy and then apply the one percent reduction for the incoming tenant to the new Formula Rent. 

 

John Bibby, ARCH CEO, has been in touch with DCLG officials to seek clarification on this point. In the meantime, councils who have properties below Formula Rent and who are applying the provisions in the current DCLG guidance to increase rents as those properties become vacant may need to factor this as a potential risk in their business plan assumptions.

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