On the 12 October 2023, Homes England updated the shared ownership model leases, making a shift on the rent calculation from previous reviews based on Retail Price Index (RPI) to Consumer Price Index (CPI) . The aim is to align rent reviews for shared ownership leases to those for social and affordable rent tenancies. RPI is due to be phased out from 2030. We set out the changes and what they mean for Registered Providers (RPs), below.

The Changes to Rent Reviews

The model leases were updated so that the annual rent increase is made by reference to the Consumer Price Index (CPI) + 1.0% instead of the Retail Price Index (RPI) plus 0.5%.

When the index figure for the specified month is nil, any rent increase will be limited to a maximum of 0.5% (where the RPI-based model lease applies to a scheme), or 1.0% (where the CPI-based model lease applies). Where an index figure for the specified month is negative the following applies.

a) for RPI-based model leases any rent increase will be limited to a maximum of 0.5%.

b) for CPI-based model leases, where an index figure is between 0% and minus 1.0% then CPI + 1.0% applies; where an index figure is minus 1.0% or below then a maximum 0% rent increase applies. This means that rents cannot be increased where CPI is minus 1% or lower.

Homes England’s permission will not be required should a landlord wish to charge a lower annual rent increase than is set out in the lease for a given year, or a rent reduction. This means that, for example, an increase can be applied that is less than RPI + 0.5% or CPI + 1%.

The changes made are only relevant to new grant funded Shared Ownership leases provided through either the AHP 2021 to 2026 or SOAHP 2016 to 2021 programmes. It will also apply to Shared Ownership homes funded from a provider’s Recycled Capital Grant Fund (RCGF) without any new grant from this date.

New Shared Ownership leases granted after 12th October should use the CPI-based model leases. However, there is an exemption for homes where funding has been agreed prior to this date. These homes may continue to use the RPI-based model leases.

Shared Ownership homes provided through a Strategic Partnership

Shared Ownership homes provided through a Strategic Partnership must meet the following criteria to use one of the RPI-based rent review model leases:

• the scheme in question is an ‘active site’
• the scheme is in a strategic partner’s pipeline and the partner is able to evidence that they are in a legally binding contract to acquire and / or develop the site /units; this legally binding contract needs to have been entered into prior to the 12th October 2023 and commits them to incur Development Expenditure as defined in their Strategic Partnership Grant Agreement

Where a Shared Ownership scheme meets this criteria, providers should consider offering the CPI-based rent review model lease where it is viable to do so. Providers are also able to amend the rent review basis within older, existing Shared Ownership leases from RPI-based to CPI-based where they think this appropriate or prudent and without the need for Homes England consent.

New homes that are already in contract to be delivered via the Affordable Homes Programme are exempt from these reforms. This is to ensure that providers can continue to deliver these new homes where the terms of delivery have already been finalised with Homes England and the Greater London Authority.

Section 106 Agreements

There is also guidance for any new shared ownership homes delivered through the planning system via section 106 developer contributions.

From 12 October 2023, any new shared ownership lease that is granted to a buyer must include a rent review schedule that enables the specified rent to be increased by a maximum of CPI plus 1%, annually. Previously, the permitted maximum annual increase was RPI plus 0.5%. In addition any Section 106 planning obligations contained in any new planning permissions granted on or after 12 October 2023 must reflect the ability to increase rents annually by this new maximum.

There is an exception to this when the local planning authority considers that substantial work has already been undertaken to agree s106 planning obligations based on the previous rent review provisions (i.e. an annual maximum of RPI plus 0.5%), it may allow the agreement to proceed on that basis.

Will a deed of variation to the existing leases be required?

The short answer is, it depends.

A deed of variation will be required if the provider wishes to adopt the CPI model with immediate effect to all their existing (completed) leases. This may be a costly and unattractive option.

A deed of variation will not be required if the provider wishes to let the RPI model run its course and phase out (as it is planned), the wording of the shared ownership lease allows for the index to be replaced by its predecessor when phased out.

What are the implications for Registered Providers?

At present, the new additions to the model shared ownership lease will not affect Registered Providers (RPs) existing stocks prior to 12 October 2023 as the discretion is on the RP’s on which form of lease to use. There will be no cause for concern regarding the validity of rent increases if they choose to increase to a lower percentage, and the only question would be on affordability and financial viability if a lower increase is in question.

How Capsticks can help

Our Housing and Regeneration lawyers are experts in shared ownership, we provide advice on everything from setting up shared ownership schemes and new build plot sales to shared equity and financing. If you have any questions in relation to the current or the new proposed model lease, please contact either Nalton Stembari or James Howard to find out more about how we can help.