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Is 'Rent Convergence' Ripe for Judicial Review?

About The Author

Amy Ling (Former Private Law Manager)

Amy graduated with a first in Philosophy from The University of Manchester in 2012. Following three years working within the social housing sector, Amy is currently studying for her LPC and will begin a training contract at a city firm in September 2016. Amy is an accomplished mooter, and was on the winning team in the 2015 JustCite International Mooting competition. Outside of the law, Amy is a keen runner.

The proposed end to rent convergence for social housing has the potential to cost millions of pounds to housing associations and stall development of thousands of new homes. As a result, there are calls from within the industry for providers to mount a legal challenge if the decision following consultation is to press ahead with this move.

What is Rent Convergence?

Section 197 of the Housing and Regeneration Act 2008 gives the Secretary of State for Communities and Local Government (currently the Right Hon Eric Pickles MP) the power to direct the social housing regulator to set certain rent standards, which are then binding on the regulator, the Homes and Communities Agency (HCA), to enforce.

Introduced in 2002, rent convergence is the process by which housing providers, such as housing associations, have been able to steadily increase rents in properties below the ‘target’ charges by an additional £2 a week per financial year. This has typically affected local authority properties or ‘council houses’ which have typically had comparatively low rents due to historic rent protection policies.

The original aim was for rents to have completed this convergence by 2015/2016, although in a 2011 paper Implementing Self-Financing for Social Housingthe Department for Communities and Local Government (DCLG) conceded that because ‘this [£2] limit prevents excessively high increases in the rents of individual properties... it will prevent some rents converging with formula rent in 2015-16’.

Changes to Rent Setting and Convergence 

In a letter sent to bodies such as the Chartered Institute of Housing, the National Housing Federation, the Local Government Association and the Association of Retained Council Housing in July 2013, the DCLG explained that ‘[h]aving considered the issue carefully, we are minded not to extend rent convergence beyond 2014-15’. This was on the basis that, after 15 years of being able to raise rents in this way, ‘we expect most landlords to have achieved rent convergence by 2015’. 

The department argued that the change is:

‘[I]ntended to ensure that all tenants, in future, see their rents increase on the same basis. We think it is fair, transparent, and will easily understood by tenants. It will also provide tenants and landlords with stability - which should allow landlords to lever in further investment, in order to improve, renovate and build more housing’.

As a result, the proposal was made to move from a rent setting policy of annual increases at Retail Price Index + 0.5% + £2 per week, to Consumer Price Index + 1% for all social properties, regardless of whether they had reached target rent.

Responses to Consultation – What is the Potential Impact?

As summarised in the response to the consultation, the topic of convergence raised key concerns among social housing providers, local authorities, tenant representative bodies and other organisations.

Such concerns were mainly focussed on the impact on the financial viability of housing providers and their ability to continue to deliver their business plans, including development of new homes. The changes are likely to result in a loss of income, which may endanger the ability to service debts and create a potential disincentive to take on stock transfers from local authorities. These concerns have been echoed in papers by relevant trade organisations such as the National Housing Federation (NHF) which argues that for some ‘this will impact on loan agreements, risking the viability of their whole organisation, and for others it will severely constrain the number of new affordable homes they are able to build’.

For example, Southwark Council estimates that 55% of the borough’s homes will not have achieved rent convergence by 2015. The council’s 30 year business plan was based on the assumption that convergence would continue into the future: they now face a “potential black hole” in their business plan to the tune of £300-430 million.

Further, impacts on communities and tenants were considered.  It was felt by those who responded to the consultation that the end of convergence, taken in context with the introduction of higher ‘Affordable Rent’ (80% market value), could result in an inequitable situation where tenants living in the same types of properties in the same locality would pay vastly different rents. Movement around properties may also be disincentivised as people benefiting from the lower rents would be unwilling to, for example, downsize.

DCLG’s Response - Pushing Ahead

DCLG published its responses to the consultation in May 2013, confirming that they ‘will end the policy of rent increases of up to £2 above the annual increase’. The response argued that there had been no rent policy set for after 2014-2015 and in the light of a ‘very challenging Spending Round’, which required £11.5 billion to be reduced from the Government’s budget; allowing convergence to continue would have meant ‘higher rents across the board [which] would therefore require public spending reductions to be made elsewhere’.

The concern over spending is key in understanding the reasons why the government may be minded to prevent further convergence: increases in rents equates to increases in housing benefits claimed (many of these rents will still fall below the welfare cap) and therefore an increased cost to the government in welfare spending. Given the pressure on government departments to reduce their spending, this is likely to have been one of the key drivers behind the decision. 

A Legitimate Expectation?

As a result of this decision, there have been some calls from within the industry for a legal challenge to be raised by housing providers. As reported in Inside Housing, one of the methods would be to claim that housing associations ‘have had a legitimate expectation that [rent convergence] would continue as planned’.

For this type of claim to be successful, it must be proven not only that there was a reasonable expectation that rent convergence would continue, but additionally that this expectation was legitimate. As established in R v North and East Devon Health Authority ex parte Coughlan, legitimacy will consider the nature and context of the promise at hand, whilst acknowledging the clarity of the promise or past practice, the ability for the authority to enforce the promise, the knowledge of the promise and reliance upon that promise.

There are no obvious issues with enforcement, knowledge or reliance here. The DCLG have the authority to set and change the rent policy, enforced by the HCA. Social housing providers are closely regulated and have knowledge of the key policies that control aspects such as rent setting. Reliance is additionally clear, as many providers have included within their long-term business plans the ability to continue convergence until targets are hit.

In terms of clarity, R (Davies) v The Commissioners for Her Majesty’s Revenue and Customs should be considered. In this Lord Wilson held that in order for a settled practice to be considered a clear promise, there needed to be ‘evidence that the practice wasso unambiguous, so widespread and so well recognised as to carry within it a commitment to a group’. The £2 increase formula was certainly unambiguous, and was adopted right across the sector. As argued in the Chartered Institute of Housing’s response to the consultation: there was a clear endorsement of long-term business plans by the DCLG, which contained a reliance on convergence:

Stock transfer arrangements, the Housing Revenue Account self-financing reforms and the current rent regulation standard for the housing association sector have proceeded on this basis and many organisations’ business plans have reflected this. In many cases either the Department for Communities and Local Government (DCLG), or the Social Housing Regulator or both have been actively involved in signing off these business plans.

This is echoed by the NHF:

We believe a significant number of housing associations have… had legitimate expectations of convergence continuing… and have rent plans and business plans which assume continuing increases until well after 2015.

It seems there is a good case to argue that there was a legitimate expectation that the practice would continue to completion. Whether or not the fulfilment of this substantive expectation would be frustrated (blocked) relies on a test from Lord Woolf in Coughlan:

Where the court considers that a lawful promise or practice has induced a legitimate expectation of a benefit which is substantive... authority now establishes that here too the court will in a proper case decide whether to frustrate the expectation is so unfair that to take a new and different course will amount to an abuse of power. Here, once the legitimacy of the expectation is established, the court will have the task of weighing the requirements of fairness against any overriding interest relied upon for the change of policy.

So, is the decision to end rent convergence so unfair that it amounts to an abuse of power? How do the interests of housing providers in delivering on their core objectives weigh against the necessary curb of spending by the government?

The fundamental objectives of the HCA include a commitment to ‘ensure that registered providers of social housing are financially viable and to support the provision of social housing sufficient to meet reasonable demands (including by encouraging and promoting private investment in social housing). It could certainly be argued that it is an abuse of process to use the mechanisms aimed at achieving these goals to engineer ‘black holes’ in the financial plans of providers in order to follow through a political program of austerity.

Inconsistencies

As with so many areas of current (and historical) housing policy, what is so fundamentally irksome about this reform is its inconsistency. 

There is something frankly bizarre about this situation. On the one hand, halting convergence prevents landlords from maximising rent income from their existing properties, which diminishes a landlord’s financial capacity. However, on the other hand, providers are being told that a ‘crucial element in generating additional financial capacity' is to be found by re-letting properties at the new, dramatically higher, Affordable Rent level. Perhaps the fact that those who will be able to afford Affordable Rent, particularly in areas such as London, are unlikely to be able to claim the full amount using Housing Benefit goes some way to explaining this contradiction.

Ultimately, governments are of course entitled to take new courses of action, and must be flexible and responsive to the changing external environment. However, given financial and social implications of what is at stake and the warning signals being given out by industry heavyweights, there is a clear appetite for legal challenge, and, according to the NHF, ‘good prospects of success as matters stand’.

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Tagged: Housing Law, Judicial Review

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