19  Rents and Service Charges

Authorities do have an interest in the level of rents and service charges which are set and charged to tenants under a non-HRA Project for two reasons:

(a)  to ensure that it is not paying too high a Unitary Charge and in effect subsidising the rents and service charges for tenants. Authorities should carry out appropriate due diligence with its financial advisers to make sure that this is not the case; and

(b)  to ensure that an affordable rent and service charge is being paid by tenants under the Project.

Rents and service charges will be set by the landlord (which is usually an RSL or RP).  RSLs and RPs are governed by guidance issued by the Tenants Services Authority (TSA) in the setting of rents and service charges.  More guidance is available in relation to rents than service charges.  Authorities can therefore rely upon this guidance to control the setting of rents and service charges.  Suitable drafting utilising such guidance is set out at paragraphs 45 and 46 of this Guidance.

There are, however, a number of issues for the Authority to consider in relation, in particular, to the setting of rents.  Guidance on rent setting requires a target rent to be set in accordance with a formula and also permits a tolerance on that target rent.  Authorities should consider if it requires rents to be set at the target level rent only or whether it will permit the Contractor full use of the tolerance when setting rents (the drafting at paragraph 45 of this Guidance allows the full tolerance to be used).  Authorities will need to consider this issue in detail with its financial advisers to determine the correct level of rent to set to get an appropriate balance as against the level of Unitary Charge payable and the level of rent paid by tenants.  Authorities should also consider this issue in light of the risks the Contractor is prepared to accept under the Project Agreement which are commonly managed by a RSL or RP in a SHG funded scheme (such as general and specific change in law risk).  The more restrictive the Authority is in setting rents at target, for example, may restrict the RSL's or RP's ability to accommodate and fund the occurrence of such risks and may impact upon VfM and Residual Value and such restrictive rent arrangements will not be supported by CLG/HCA including in respect of PFI credit support.

In a non-HRA Project the Unitary Charge, Rents and Service Charges represents the full income generated by the Project to the Contractor.  It is therefore necessary to ensure that when references are made in the Project Agreement to the Contractor being able to recover loss of revenue that this also includes Rents and Service Charges.  Suitable drafting is set out at paragraph 47 of this Guidance.