What do shared owners need to know about rent? In this Q&A Kevin Edwards, Partner at Geoffrey Leaver Solicitors, explains ‘initial rent’ and ‘subsidised rent’; how monthly rent is calculated; differences between ‘old’ and ‘new’ model leases; and what you get (and don’t get) in return for paying rent on a shared ownership home.
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Here are the key takeaways:
Initial rent: Rent is usually based on the market value of the landlord’s share. However, different housing providers may take different approaches. It’s vital to check your own lease.
Maintenance and repairs: Private sector tenants don’t pay for maintenance and repairs on top of their rent. But shared owners are responsible for these costs via service charges, meaning comparisons between shared ownership rents and private sector rents aren’t necessarily like-for-like.
Subsidised rent: Some people describe shared ownership rent as ‘subsidised’ or ‘discounted’. This doesn’t necessarily mean that it will stay cheaper than local private rents for similar properties over the long term.
The new model lease: Under the new model lease, housing providers are responsible for some repair and maintenance costs. This is not the case under older leases. And, even with the new model, the benefit ceases if you staircase to 100% during the 10-year Initial Repair Period.
Read on….
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What is ‘Initial Rent’?
‘Initial Rent’ is the monthly rent you pay when you purchase an equity share in a new-build shared ownership home. It is also sometimes called ‘specified rent’.
Homes England say: ‘Shared ownership leases are assured tenancies and as a result are not subject to rent control under the Rent Act 1977.’ Adding: ‘The setting of rents for shared ownership is a matter for the provider to agree with the leaseholder at the point at which the lease is granted.’
Homes England’s Capital Funding Guide sets out a maximum initial rent level, which we’ll explain below. Their guidance applies to grant funded homes, outside London. (The GLA oversees shared ownership homes in the capital, though often with similar guidance to Homes England). Rent arrangements may be different when it comes to shared ownership homes developed under S106 arrangements or sold by ‘for-profit’ housing providers. Older Persons’ Shared Ownership (OPSO) also has different rent arrangements to ‘standard’ shared ownership.
In short, it’s vital to check the rent terms in your own lease and take legal advice from your solicitor as applicable.
How is Initial Rent calculated?
New-builds
How is Initial Rent calculated on grant funded new-build homes? Homes England provides the following guidance.
4.1.3 The total initial rent must not exceed 3% of the capital value of the unsold equity at the point of initial sale, but it can be less. In this respect ‘initial sale’ refers to the first sale of a new Shared Ownership home and does not refer to future resales to a new shared owner.
4.1.4 Providers are encouraged to set total rents that average no more than 2.75% of the value of the unsold equity at the point of initial sale across their portfolio of new Shared Ownership homes.
Most providers tend to therefore set an Initial Rent of 2.75% on shared ownership homes so as to avoid the risk of missing this target should they vary it from scheme to scheme.
EXAMPLE
Say you purchase a 45% share in a shared ownership home with a total value of £300,000. Your share would have a value of £135,000 (£300,000 x 45%), and your housing provider’s share would have a value of £165,000 (£300,000 x 55%).
You pay rent to your housing provider on their 55% share. If your lease specifies initial rent at 2.75%, then you would pay your housing association an Initial Rent of £378.13 a month (£165,000 x 2.75% divided by 12).
Purchasing a resale shared ownership home
If you purchase a resale, your rent is at the same level paid by the previous shared owner, and subject to the same annual rent reviews. You should seek confirmation of this from the seller, along with confirmation of the value of the unsold equity, to project up to 10 years of rent increases to assess ongoing affordability. (We will provide scenarios in future rent articles to help you do this).
Does it make any difference whether the lease is the new model lease or an older version of the lease?
For the Initial Rent – no. The new model lease and most older leases generally take the same approach to calculating Initial Rent (though the further back you go, the less prescribed this was).
However, in terms of the annual review of the rent there are important differences between the new model lease and older leases. We will explore this aspect in our next Q&A on shared ownership rent.
What does ‘subsidised rent’ mean?
To “subsidise” something means to pay part of the cost of it to keep the price/cost low. A subsidised rent is therefore a rent partially paid for by someone else (usually a registered provider) to reduce the cost for the tenant.
People sometimes describe shared ownership rent as ‘subsidised’ or ‘discounted’. For example, in this Share to Buy Q&A:
This is not accurate. The rent on a shared ownership home is not subsidised at all. It is simply a lower rent as the tenant only pays rent on the share held by the housing association. The rent is not truly “subsidised” albeit the provider is restricted as to how high the Initial Rent can be set (as above). For this reason, some housing professionals dislike the term ‘subsidised’ as it can give a misleading impression of ongoing affordability.
What does shared ownership rent include?
Take a look at the section of your lease titled HM Land Registry Prescribed Clauses. It’s likely to contain wording similar to the term below, making it clear that shared owners are tenants / leaseholders.
However, it’s important to understand that shared ownership rent is different to private sector rent.
Private sector tenants don’t pay separately for repairs and maintenance. Their rent includes these costs. It’s important to understand that this is not the case when it comes to shared ownership, which has separate rent and service charge payments. So, while a shared ownership rent may look a lot cheaper on paper, in reality once these costs are taken into account the difference can be less stark.
The difference is that shared owners are considered the owners of the property, whereas normal tenants are not. Shared owners are tenants in the sense that they pay rent on the landlord’s share in equity. But as ‘homeowners’ as well, they pay costs including buildings insurance, and cleaning of communal areas. This also extends to repairs and maintenance costs, which shared owners pay 100% of regardless of the size of their share, unless an “Initial Repair Period” applies as set out below.
Initial Repair Period
The new model lease (from 2021 onwards) includes an ‘Initial Repair Period’ of 10 years, during which the Landlord is responsible for major external or structural repairs. The intention was to protect new shared owners from large, unexpected repair bills in the crucial first years of homeownership, and to help bridge the gap between renting and full ownership by making landlords responsible for those major external/structural repairs and essential system replacements for the first 10 years (or until 100% ownership if the tenant staircases sooner).
As this was only brought in in 2021, leases before and up to 2021 will not contain this provision. It is also worth noting that it ceases to apply in the event that a tenant staircases to 100% during the 10-year period, so if a tenant looks to fully staircase during the initial 10 years, this should be borne in mind and advice sought as to the potential financial implications of proceeding, as opposed to waiting until the end of the Initial Period.
Shared owners in both flats and houses will be liable for some service charges: for example, buildings insurance. However, service charges are generally much higher on flats than houses. This is because people in flats will be liable for costs relating to any communal spaces and shared facilities: for example, lobbies and lifts.
Some shared owners report that service charges in flats increase at a faster rate than inflation, or household income, over time – particularly in complex developments.
Consequently, if you’re comparing shared ownership rent with private sector rent, don’t forget to take account of service charges, now and in the future.
In this Q&A, we’ve discussed service charges in relation to rent. Service charges are different to estate service charges, as discussed elsewhere on this website. For example, shared owners living on developments where estate service charges apply will be charged the costs of maintaining facilities such as private roads and children’s play facilities. Estate service charges are payable regardless of whether the property is a house or a flat. You should seek to confirm whether estate service charges apply, and obtain expert professional advice accordingly.
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We are extremely grateful for the support of Geoffrey Leaver Solicitors in creating this content.
Additional Resources
GOV.UK Shared ownership homes: buying, improving and selling – Paying rent
Shared Ownership Resources: Estate service charges: Should I be worried?
Featured image: tirachardz on Freepik
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