Financial Information
Legal Documents
Framework Document - Local Authorities
Framework Document - Private Sector
Leases
Non-Secure Tenancies
Use and Management Marketing Material
Others
Policy & Procedures
Risk Management
Summary
The risks associated with Private Sector Leasing (PSL) impact directly on the financial viability of such schemes. This is because the landlord is guaranteed to receive his rent regardless of whether the property is occupied. If the property is occupied and the Housing Association (HA) does not receive its rent this exacerbates the financial effect upon the HA. This has a particular impact where private rents are high.
The principal risks for HA’s in PSL schemes are:
Further Information
Framework Document
A framework agreement between the Housing Association and the Local Authority set out in a legal document is seen as vitally important for both parties. It is the contract between the parties to supply the required properties in the agreed timescale with the responsibilities of each party clearly set out. The issues that should be covered in the framework agreement include:
More information on what should be included in the agreement is set out below together with other risk sharing suggestions.
Procurement of properties
A service level agreement attached to the framework agreement should set out the number of properties, together with the geographical location and the type of properties that are required by the LA with some indication as to when they will be required. This document should be updated as and when it appears that the details need to change and by agreement between the parties, but in any case the service level agreement document should be updated at least once every 12 months. Financial penalties may ensue if the LA does not update its requirement in a timely manner as an incentive to ensure procurement targets are met. There should also be a provision within the document to change the terms of the contract. This document allows the HA to know what properties are likely to be required and when, so that they can pitch their marketing to ensure that the required number of properties in the desired areas are available.
A sensitive procurement policy should be adopted to avoid concentrations of PSL properties in any one block, street or area. Particular sensitivity is applied in areas where anti-social behaviour is an existing problem.
Projected customer demand
Demand for accommodation may be less than the projected forecasts. However a lack of customers is deemed to be a low risk. Current trends suggest continued high levels of homelessness and housing need.
PSL properties do not have to be restricted to one group of clients but can be extended to different groups in housing need.
PSL is only suitable for customers who are able to manage a tenancy and is not suitable for people who have chaotic lifestyles caused by severe mental health problems, drug or alcohol addictions. Customers with support needs should not be excluded from PSL but these needs have to be assessed and assurances that a support package have been put in place before the client is nominated for a PSL property given. Floating Support should be put in place for those already with a tenancy where it becomes apparent that the tenant cannot manage alone. Customers with a history of anti-social behaviour should not be considered for a PSL property.
Property Location
A concentration of PSL properties in one area could have an adverse effect on the local community. It could also result in the HA paying rent on a property which it cannot re-let.
Housing Associations should take care when taking on properties from private landlords to ensure that it checks with the local authority each time a property becomes available to ensure that it has a prospective tenant for a property in that area. Break clauses within the contract should allow the HA to hand back the property to the landlord near the end of a lease if there is no suitable prospective tenant available.
Maintenance and Repair Costs including ‘White Goods’
Maintenance costs of ’White Goods’ and the cost of repairs at hand-back can expose the HA to high costs. The temporary nature of PSL accommodation can lead to high tenant turnover and this can increase damage and wear and tear to the property. At lease end a property is returned in a condition allowing for reasonable wear and tear rather than as it was when it was taken into management. However this is open to interpretation (and potential dispute) by both the HA and the landlord.
To minimise the potential risks:
Void Management
Excessive void periods place additional costs on the HA which are not recoverable, because the HA is contractually obliged to pay rent to the landlord irrespective of whether the property is occupied.
Poor performance in the management of voids can cause severe financial problems for the HA. To reduce the risk the HA should develop good relationships with the LA. The framework agreement between the HA and the LA should include penalties for forwarding the nomination details late to the HA. Standards of performance should be agreed with the LA at the outset. Also tenants should be reminded at the sign up of their tenancy of the requirement to give the correct amount of notice (four weeks) when they wish to relinquish the tenancy and to keep the HA informed if they want to vacate the property.
Property should be inspected promptly between lettings and repairs and maintenance administration dealt with by specialist staff in the HA.
Contractors should understand that the work needs doing quickly for properties that have been privately leased and they should be liable for all void costs incurred that are not completed within an agreed target void period.
Financial Feasibility
PSL schemes hold considerable risks for HA’s, who may not understand the differences between leasing compared to standard letting of properties. A clear view of the commercial nature of the arrangement and a full evaluation of the risks should take place in each HA to ensure that there is a business case for such a scheme.
The information from a Housing Corporation Sector Study (undertaken by HACAS Chapman Hendy for the Housing Corporation in 2002) states that methods of appraising a scheme generally focus on ways of determining financial feasibility. Broadly HA’s were using three methods of appraisal.
Financial feasibility based on cost involves:
An evaluation of scheme costs, an analysis of the LA requirement, an assessment of the management input and service level agreement and finally a calculation of the financial elements. This leads to an overall assessment of scheme feasibility.
Financial feasibility based on a minimum return using a modified turnover, it is calculated (after all service costs, overheads, bad debts and voids), as: rent receivable plus fees, less rent payable to the landlord. A secondary measure involves using net present value calculations to test the impact of cost inflation.
Financial feasibility together with an appraisal of risks. This is the most comprehensive appraisal method and takes account of operational, political, commercial and financial considerations. The method includes an evaluation of:
The final step is to evaluate the business case for example it could be a mixture of cost based and minimum return.
Lease Management
Management of leases is important to ensure that they expire in a controlled and planned manner. Failure to monitor lease ends may lead to the HA having to acquire replacement units in unfavourable market conditions.
The volatile nature of leasing programmes means that staffing arrangements need to be flexible to allow for growth and shrinkage in the size of the PSL programme. Risks can be mitigated by the following:
Tenancy Management
Control over who is allocated a tenancy will minimise the risk of tenants that cannot manage a tenancy. Consideration should be given as to whether this is written into the framework document with the LA.
A framework should be put in place for the tenancy management of the properties with the aim of minimising tenancy management problems and to act quickly and effectively with any problems that occur.
Start of Tenancy
At sign up the tenancy agreement should be explained together with the rights and responsibilities of the tenant and those of the landlord to the tenant so that they are fully aware of what is expected of them.
A Housing Benefit (HB) form should be completed and a receipt given to the tenant. It is then the responsibility of the HA to ensure that the form is sent to the LA. Where documents are available to accompany the form these should be verified and a signed form to say what has been verified along with the date and signature of the verifier should be sent to the LA to accompany the form, (provided that the association has been approved to verify HB claim documentation).
Should documents not be available then the tenant should be told what they need to forward to the LA so that their HB form can be processed. The form should be sent to the LA without delay regardless of whether the documents are available or not, as failure to send them promptly may result in loss of entitlement.
Post Allocation Visit
At sign up the tenant should be told to expect a post allocation visit and this should take place within one month after the tenancy has commenced.
On-going Tenancy Management
Drive –bys of the property should take place on a regular basis (at least every three months) to ensure that the property is being cared for and that the property is still occupied.
In addition visits to the property should take place on a regular basis (at least every six months) to see that the property is being maintained to a reasonable standard and that the occupant is not partaking in, nor being subject to any form of anti-social behaviour.
Checks should also be made to see that the property is still let and that no sub-letting has taken place.
Where there are problems such as problems with HB or repairs and maintenance issues visits should take place as necessary, and more frequently than the routine visits to try and resolve the issues. Debt control procedures should be used for non-payment of rent.
When notice has been given a visit to the property should be made as soon as possible after the notice has been served to ensure that there are no outstanding issues and to check the state of the property for re-letting, and to take photographs.
When any major repairs or maintenance have taken place a visit should be done to ensure that they have been completed satisfactorily and to take photographs after they are completed.
Scheduled visits to the property should take place to ensure that the property is being cared for and no damage has been done.
PSL tenants ought to be able to obtain a reference from the HA where they have conducted a satisfactory tenancy for at least six months which would be useful to them when seeking alternative accommodation.
If a tenant is still in a property towards the end of the tenancy and has conducted it satisfactorily then the HA ought to be negotiating with the landlord to see if they will either extend the lease for a short period, say six months or take on the tenant as their own. This would help build sustainable communities and truly give a longer lasting housing option than a temporary housing scheme such as PSL can offer.
Due to the different nature of private sector leasing from the letting of standard general needs housing it is necessary to have competent managers who have a dedicated business unit with its own staff who are trained to handle the legal, financial and commercial issues that are involved. Staff who are skilled negotiators who can liaise with LAs and private landlords and tenants are needed.
There should be a lower number of properties under management by one person than under general needs accommodation, with a maximum of 75 properties under one person’s management at any one time.
IT systems that can specifically handle this type of property so that management information can be easily obtained to enable problems to be picked up and acted on quickly and effectively, are required.
Housing Benefit and Rent Arrears
Delays in processing Housing Benefit could mean loss of income and overall net higher costs to the HA. The framework document with the LA should cover Housing Benefits and good working relationships should be developed with the LA through liaison and contact officers at an operational and strategic level. Staff in the HA should have a clear understanding of HB administration within each of the LA’s with which it deals, and regular training on Housing Benefits should be made available to staff in the HA who deal with PSL, so that HA staff have a basic understanding of Housing Benefits and what is required to process a new claim, change of circumstances and a cancellation of entitlement.
A named officer within each LA should be available to deal with queries from the HA. High interaction and monitoring together with good welfare rights advice would also help to minimise risk.
It would be helpful if as well as having a fast track for approvals with the LA, the HA could be trained to undertake the verification process so that they can verify documents on behalf of the LA as this will help speed up the HB process.
Negotiations with the LA to include the cost of delays in the administration of HB should be written into the framework agreement.
An early termination clause in the lease in the event of HB or other difficulties arising would further help to minimise the risk.
An early approval from the prospective tenant such as in their application for housing to be able to talk with the LA about their Housing Benefit claim would ensure that time is not wasted in getting approval at a later date.
The framework agreement with the LA should also include an opportunity to talk with HB Managers to find out the local reference rents for each type of property so that HA’s are aware of the amount that the LA is willing to use as a base for calculating HB entitlement. This should be considered when setting up a leasing scheme and talks with HB managers should be engaged in at an early stage as housing benefit restrict rents charged under PSL Schemes.
An undertaking to process claims on a timescale of no more than 14 days should be written into the framework agreement with the LA.
An agreement to pay HB by Direct Debit on a four weekly basis should be negotiated so that money is paid directly into the HA’s bank account and is available to pay out to landlords when due. Where entitlement is late in being assessed and there is a large amount outstanding this should be paid as soon as possible on the first occasion to bring payments up to date and then on a four weekly basis within the cycle of payments in future. This may already be in place but if not it is worth organising.
It would be helpful if details of HB cancellations where there is no new claim or the entitlement is nil could be notified to the HA as soon as the HB Department becomes aware of the situation.
If losses in entitlement occur that are down to an LA computer system failure then this should be borne by the LA. This may occur where data has been lost or entitlement has been incorrectly calculated resulting in less entitlement than a claimant may otherwise have had.
Housing benefit forms should be completed when the tenant signs up for the tenancy and left with the HA for them to forward onto the LA. Consideration should be given to with-holding the keys to a property where there is a failure to complete an application form for HB.
The use of interim Housing Benefits payments to the HA where there appears to be delays in processing (where all the relevant information to assess the claim is with the HB office) should be put in place so that the HA is not financially compromised because of slow administration.
PSLS HB claims should be coded differently so that they are directed to the Manager of the Leasing Scheme who can then check that payment has been received.
Timely rent increases paid to landlords need to take place and the method of application and calculation in the way these take place need to be considered. Also it is unfair when renegotiating a lease for the rent charged to the tenant to be increased by too big an amount as this can lead to hardship. Steady rent increases charged to the tenant throughout the life of the lease would ensure that this did not happen.
A contingency for HB losses should be built into the rents paid to private landlords.
Housing Benefit and Rent
Rents paid to owners in Private Sector Leasing Schemes are often based on the Local Reference Rent (LRR) for such accommodation. However if current changes going through Parliament are made law the LRR will be replaced for private tenants by Local Housing Allowance (LHA). It is likely that LHA will be based on the median rents for different types of accommodation within a Broad Rental Market Area (BRMA). The BRMA is an area defined by the Rent Service and is an area of residential accommodation within which a person could move and still have access to similar services of a similar standard. Each BRMA has its own set of LHA rates. In the current Pathfinder areas postcode defines the BRMA in which you live. BRMA ‘s will replace the neighbourhoods that form the basis for calculating the LRR and will result in different figures than those allowed at the present time.
LHA is not based on how much rent is actually charged but is based on the size of a family and the ages of each of its members, so if the rent is higher than the LHA the tenant will have to make up the difference, whereas if the rent is lower than the LHA the tenant can keep the difference up to a maximum amount, which is likely to be £15 a week.
Other rules as to income, capital and rent liability will continue to apply.
These changes will have an effect on the rent charged for accommodation that will attract Benefit and could significantly affect the viability of a Leasing Scheme as if the rents that can be collected are low because they don’t attract LHA and people can’t afford to pay them then what can be paid to landlords would be reduced and so they are unlikely to want to offer their accommodation for use on a leasing scheme.
Rents in the social sector will continue to be treated differently than private rents (more information can be found elsewhere in this pack) and it may be more appropriate that RSL’s let the property to local authorities who then let it out to a sub-tenant and employ the RSL to manage the property on their behalf.
Obviously the way Housing Benefit is paid and subsidised has a significant impact on the success of a Scheme.
Rent Increases
Any increase in the rent that a sub-tenant is charged will not before 52 weeks have elapsed since the beginning of a tenancy.
Rent increases within an RSL may take place at a particular time, for example, April or October, so it can be longer than 12 months before the rent is increased on a particular property, depending on what time of year the tenancy is taken out.
As it is a contractual obligation within the lease to review the rent on every anniversary of the date of the lease and adjusted upwards by reference to any percentage change in the Retail price Index this needs to be allowed for when calculating the rent paid to the owner.
A better solution may be to increase the rent to the sub-tenant on the anniversary of the date that the tenancy commenced and also when each new tenancy is created at the property. This will minimise the loss to the RSL as otherwise the RSL may be in the position of having to increase the rent paid to the owner without receiving a corresponding increase from the sub-tenant.
Damage to property
It is important to have regular visits to view the property. This can be done as part of the ongoing tenancy management. As issues arise a photographic record can be taken and copies given to the tenant for these to be addressed prior to the next tenancy visit. If the issues are not addressed then a notice can be served.
The cost of wilful neglect or damage to a property can be expensive and care should be taken when signing up tenants that the HA fully explains that this will be charged to the tenant.
The HA should seek insurance to cover the cost of wilful neglect or damage and the repairs and replacement that may ensue.
Public Relations
Sensitive management of issues relating to Private Sector Leasing is essential to minimise damage to the reputation of the HA. This is particularly important where accommodation is sited close to owner occupiers who do not always appreciate having homeless families living close by.
A sensitive procurement policy should be adopted to avoid concentrations of PSL properties in any one block, street or area. This is particularly important where anti-social behaviour is already a problem.
Floating support should be set up where tenants need support in maintaining their tenancy, and at the beginning of a tenancy it should be clearly explained to new tenant’s their obligation to live peacefully in the premises and the consequences of anti-social behaviour. Where they are the victim it should be explained that they should quickly report problems to the HA so that these can be dealt with.
An inspection of the premises should be done on a regular basis and always when one tenant moves out and another one moves in.
Once a lease is signed it is good practice to let the neighbours either side of the property know in writing that the HA are the managers of the property so that complaints can be reported promptly.
Safety
Gas and electricity safety checks are the responsibility of the landlord but to ensure that these are done to the same standard across all the leased properties they should be done by the Housing Association (even on initial approach to the HA by the landlord to come onto the Scheme, and the costs recovered from the landlord). As well as uniformity of the standard required this will ensure a good price which can be passed on to the landlord, as they may be done through existing maintenance contracts.
HA’s need to ensure that proper mechanisms and staff are in place to be able to promptly recover the costs.
Nomination Agreements
The nomination agreement with the LA should be a service level agreement and form part of the overall legal framework document. It should clearly state the responsibilities of the LA and the HA. If nominations are received late there should be financial penalties in place so that the costs to the HA are minimised through a situation that is not of their making. Strict records of what has been requested, from which LA and when should be kept at all times and staff and systems put in place to follow up quickly where there are delays.
Peculiarities can arise where asylum seekers are housed as well as when Social Services are involved or where a property has been abandoned and nomination agreements should be worded so as to deal with specific issues that could arise from this.
In view of the risks associated with private sector leasing it is important that HA’s considers the issue of the size of their PSL commitment within their overall risk assessment process. An HA’s PSL operation should be in proportion to their other activities so core business is not destabilised by financial or other difficulties experienced in the PSL programme.
This list is not a definitive list of all the risks that could occur in running a PSLS, but if the above points are followed then it will minimise and share the risk.
Downloads
Private Sector Leasing Study 2002 Report – Housing Corporation
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