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Getting it right - Rent Standard compliance

Posted: 06/11/2020

Rent setting is an issue which goes to the heart of the statutory economic and consumer objectives of the Regulator of Social Housing (RSH). Failure to comply with the Rent Standard can lead to tenants being overcharged, an improper use of public funds, reputational damage for the sector and, potentially, unforeseen impacts on the business plans of Registered Providers (RPs).

In its previous guidance, the one area that the RSH stressed in relation to RPs’ requirement (under the Governance and Financial Viability Standard) to “comply with all relevant law” was ensuring that the rent reduction provisions of the Welfare Reform and Work Act 2016 (WRWA) were adhered to. In March this year the RSH published a specific addendum to the Sector Risk Profile, focussing on its concerns over rent setting compliance, especially in light of the much welcomed ability to increase rents again under the new Rent Standard from April this year.

Analysis is showing that almost one in five RPs (18%) were contacted about potential issues with rent compliance and we have seen a spate of Regulatory Notices and Judgements pick up on Rent Standard compliance issues and how this can link to governance concerns. But why has this become such a “hot topic” for 2020?

Common issues

Rent setting can undoubtedly be a complex area, and this has been exacerbated by the further intricacies of the WRWA, in particular in relation to rents which could be charged on re-lets of void properties.

Some common areas where issues can arise include:

  • Formula rent setting – clearly if the baseline rent is incorrect, future increases will also be incorrect, and issues around providers failing to accurately calculate and record formula rents over time are common. Under the Rent Standard 2020, RPs are also required to calculate the “2020 limit” using the average weekly rent in the fourth relevant year under the WRWA and then increasing that by CPI + 1%, which sets a maximum cap on rent increases for the first year.
  • Converting tenure – converting a property from social rent to an affordable rent can only be done in specific circumstances, such as when an existing tenant leaves and a new tenancy is granted, and with express agreement from Homes England (or the Greater London Authority or certain local authorities) which would be set out in a housing supply delivery agreement. Furthermore, affordable and social rented properties cannot be converted to market rent without first declassifying the properties first.
  • Service charges – RPs need to ensure that any service charge increases are calculated and made in line with the terms of the tenancy agreement. RPs also need to consider the impact of service charges when considering if the overall rent is below market rent. For affordable rent properties, rent levels are to be as up to 80% of market rent and this must include service charges. This must be taken into consideration when calculating rent increases.
  • Exemptions – RPs need to be careful when applying exemptions, which are often narrow in scope. In particular, we often see RPs failing to realise how narrowly worded the ‘specialist supported housing’ and ‘intermediate rent’ exemptions are drawn, and not monitoring ongoing compliance with such exemptions.
  • Data – the RSH has emphasised that good quality data represents the “cornerstone of assurance” and certainly a common factor in relation to non-compliance with the Rent Standard has been poor quality data.

Rent setting – a strategic risk

It is the responsibility of RPs’ boards and councillors to ensure compliance with all regulatory standards, including the Rent Standard. Rents are the largest source of income for the significant majority of RPs, and as such rent setting needs to be identified as a strategic risk. A recent regulatory downgrade was linked to rent-setting issues which lead to tenants being overcharged approximately £3 million.

In line with this, boards and councillors need to ensure they are receiving good quality data and information from their executive teams when monitoring compliance, and that they are robust internal control assurance frameworks in place so that they can obtain appropriate assurance on how their organisations are meeting the requirements of the Rent Standard.

Wider considerations

Despite the ability to increase rents by CPI + 1% under the new Rent Standard (subject to caveats!), the RSH has stressed that RPs should consider the affordability of rents for their tenants before agreeing to implement any rent increases. This is perhaps a particularly acute issue given the expected economic turmoil resulting from the COVID-19 pandemic as well as the potential fallout once the UK leaves the European Union at the end of this year. However, anecdotally at a recent sector wide conference this year, approximately 90% of attendees answered that their organisations would be increasing rents in line with the maximum levels permitted. Will this view need to change in light of troubling economic forecasts? What kind of impact would such rent increases have on rent arrears and evictions?

Boards and councillors must also consider the extent to which their strategies and business plans could cope with changes in housing policy, including rent setting, and related areas including welfare reform. We know from over the recent decades how frequently (and often unexpectedly) rent policies have changed. Has your organisation carried out sufficient stress testing if the government were to change its policy? Can your business plans withstand the changes? When the last rent reduction regime was announced it was a shock to the sector, are organisations now better prepared?

Key takeaways

So what steps can you take to make sure your organisation gets things right?

  • Review your rent setting process, controls and assurance mechanisms to ensure these are sufficiently robust and that your rent setting policies and process are compliant with the Rent Standard;
  • Ensure there are mechanisms in place for your Board/councillors to regularly review your processes and that rent-setting is reviewed as a strategic risk for your organisation;
  • Review your rents data to ensure this is accurate and of sufficient quality – consider undertaking a “deep dive” on a sample of properties, potentially with external input;
  • Review the use of exceptions and exemptions by your organisation and ensure you can demonstrate how those exceptions or exemptions apply validly; and
  • Ensure you have properly classified your properties so that Statistical Data Returns / Local Authority Data Returns are as accurate as possible and to avoid errors.

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