Guidance

The Reissue of Shared Ownership Model Leases (accessible version)

Published 9 May 2013

1. The Reissue of Shared Ownership Model Leases

1.1 The Reason for the Reissue

It has come to our attention that there is a minor discrepancy in the rent review formula set out in Paragraph 3(a)(ii) of the Fifth Schedule of the Shared Ownership Lease (flat version) and Paragraph 3(a)(ii) of the Fourth Schedule of the Shared Ownership Lease (house version) (‘the Existing Leases’).

The intention of the formula is to increase the rent by RPI plus 0.5% but the effect of the existing wording is to permit a rent increase which is very slightly above this. To standardise the position as between the guidance and the formula we are therefore issuing revised leases with a change to the formula (‘the New Leases’).

1.2 Action to be taken

Due to the small amounts involved, grant recipients may decide that no action needs to be taken in respect of completed leases or sales currently in progress. The rent review clause in the Existing Leases does permit increases in line with the guidance. Grant recipients must take caution, however, to ensure all future rental increase do not breach the guidance of a maximum increase of the increase in RPI+0.5%.

Grant recipients may wish to vary their existing leases when the opportunity arises (for example upon an assignment) but this is not mandatory.

Going forward, grant recipients will be expected to adopt the New Leases for all other new developments from the date of the issue of the New Leases.

1.3 Is there a breach of HCA Guidance?

The agency does not view the use of the rent review formula in the Existing Leases as a breach in guidance. However, all grant recipients should be mindful of any representations made to their leaseholders in respect of rent increases. All future rental increase must not breach the guidance of a maximum increase of the increase in RPI+0.5%.

1.4 Other Changes

No other changes have been made to the model leases as part of this reissue

2. Worked Examples

To demonstrate the impact of the reissue we have set out comparative worked examples of the rent review formulas in the schedules in the Existing Leases and in the New Leases overleaf.

2.1 Assumptions

The following assumptions have been made for the worked examples:

i. Gross Rent is £1200

ii. Relevant Review Date is 1 April 2013

iii. Relevant Month means September

iv. Relevant Month for “A” would therefore be September 2011

v. Relevant Month for “B” would therefore be September 2012

vi. RPI Indexation for September 2011 was 237.9

vii. RPI Indexation for September 2012 was 244.2

2.2 Comparison of the Existing Leases and the New Leases

EXAMPLE A: Existing Leases – the formula

The reviewed Gross Rent is to be the greater of:

1. the Gross Rent under this Lease immediately preceding the Relevant Review Date x 1.005; and
2. (the Gross Rent under this Lease immediately preceding the Relevant Review Date x B/A ) x 1.005.

EXAMPLE A: Existing Leases – worked example

Using the above assumptions in this formula will result in the following reviewed Gross Rent.

The reviewed Gross Rent will be the greater of:

1. £1200 x 1.005 = £1206; and
2. (£1200 x 244.2/237.9) x 1.005 = £1237.93

Thus, under the above clause, the reviewed rent would be £1237.93

EXAMPLE B: New Leases – the formula

The reviewed Gross Rent is to be the greater of:

1. the Gross Rent under this Lease immediately preceding the Relevant Review Date x 1.005; and
2. (the Gross Rent under this Lease immediately preceding the Relevant Review Date x ((B/A ) + 0.005).

EXAMPLE B: New Leases – worked example

Using the above assumptions in this formula will result in the following reviewed Gross Rent.

The reviewed Gross Rent will be the greater of:

1. £1200 x 1.005 = £1206; and
2. (£1200 x ((244.2/237.9) + 0.005) = £1237.78

Thus, under the above clause, the reviewed rent would be £1237.78