Legal battle against rent cuts mooted

Leading lawyers have said associations that lose out could consider taking the Communities and Local Government department to court. They have issued advice to a lender saying the department is open to challenge if it presses ahead with proposed directions to the Tenant Services Authority about how rents should be set.

The argument centres on a CLG consultation paper which states target rents - the rents associations must move towards under government rules - must drop in line with the retail price index in September if it is more than 0.5 per cent lower than the previous year.

September’s RPI, which will dictate target rent levels for the next financial year, is -1.4 per cent, resulting in a 0.9 per cent drop in target rents. Real rents change by the target rent level plus or minus £2 to bring associations within 5 per cent of target rents.

But lawyers consulted by Housing Association Funding, a vehicle which raises money in the capital markets to on-lend to housing associations, said previous papers from the CLG on rents had not compelled associations to drop their rents - instead they had been frozen or had risen.

Leading QC Rhodri Thompson told HAF’s solicitor, Ian Fagelson, senior partner at Reed Smith, that the consultation was based on a false premise - that rents could go down - and therefore the current consultation could be quashed if the government was taken to court.

The government would then have to issue a new paper which made clear that the possibility of reducing rents was a change to the current regime.
Mr Fagelson said: ‘The only thing inflation does under the current policy is operate as a cap on increases.’

David Freud, director of funding arranger Freud Lemos, said forced reduction of rents could leave housing associations in breach of their banking covenants. HAF, for example, prohibits its borrowers from reducing their rents. He added the problem could trigger a wave of loan defaults across the sector.

The TSA has previously said it might waive the requirement to lower rents if it would cause loan covenants to be breached. Mr Freud said this waiver could help HAF borrowers but would not help associations which had to put up additional cash or property as a result of a drop in value of the homes used as collateral on their loans.

He said surveyors had done the original valuations of the homes assuming that rents would never fall and would have to decrease the valuation if the government implemented its proposal.

A spokesperson for the CLG said: ‘The government made clear in the consultation on directions that a key aim of the relevant guidance was to ensure that rents remained affordable for tenants.

‘Maximum increases in rents are linked to RPI in order to take account of wider economic variables (such as wages and prices) that can go down as well as up. We proposed in the consultation paper that for 2010/11 only, if RPI was strongly negative, instead of rents falling in line with RPI we would allow providers a floor at -2 per cent.’

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