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You are here: BAILII >> Databases >> England and Wales High Court (Administrative Court) Decisions >> National Community Homes CIC v Regulator of Social Housing [2022] EWHC 3171 (Admin) (12 December 2022) URL: https://www.bailii.org/ew/cases/EWHC/Admin/2022/3171.html Cite as: [2022] EWHC 3171 (Admin) |
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KING'S BENCH DIVISION
ADMINISTRATIVE COURT
Strand, London, WC2A 2LL |
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B e f o r e :
____________________
NATIONAL COMMUNITY HOMES CIC (formerly known as LARCH HOUSING ASSOCIATION LIMITED) |
Appellant |
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| - and - |
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REGULATOR OF SOCIAL HOUSING | Respondent |
____________________
Samantha Broadfoot KC (instructed by Mills & Reeve) for the Respondent
Hearing date: 26 October 2022
____________________
Crown Copyright ©
Mr Justice Cavanagh:
Introduction
Housing
and Regeneration Act 2008 ("the 2008 Act"), against the decision of the Respondent ("the
Regulator")
dated 17 December 2021 to remove the Appellant from the register of
social
housing
providers ("the Register"). At the material time, the Appellant was known as Larch
Housing
Association Limited and, for convenience, will be referred to in this judgment as "Larch".
Regulator's
view that Larch did not meet the
Regulator's
registration criteria, as set out in section 112(3) of the 2008 Act. In particular, the
Regulator
took the view that Larch did not satisfy the requirement to demonstrate its financial viability on an on-going basis.
regulatory
judgment of the
Regulator,
in which a
social
housing
provider had been assessed as being "non-compliant" in respect of financial viability and governance: Inclusion
Housing
Community Interest Company v
Regulator
of
Social
Housing
[2020] EWHC 346 (Admin) ("Inclusion
Housing",
Chamberlain J).
housing
units were leased from two head landlords, known as "Henley" and "SLIL". The units that were leased from Henley were located in Devon and were known as the "Devon Portfolio". Larch had run into financial difficulties in relation to the Devon Portfolio, but contended that, at the time the decision to de-register was taken, Larch was on the cusp of solving the problems with the Devon Portfolio. This was to be achieved by handing the units back to the head landlord, Henley, in return for allocating to Henley the right to recover the debts currently owed to Larch in relation to these properties. Larch said that this would have the effect of cancelling out Larch's liabilities to Henley in respect of outstanding rent for the units. In addition, Larch said that it had reached agreement with SLIL to crystallise SLIL's forbearance toward Larch for failing to pay its debts to SLIL, by means of a loan agreement, and that it had negotiated Heads of Terms for three contracts to provide property management services for some 813 units, retaining £20 per unit as its service fee. Larch contended that the resolution of the problems with the Devon Portfolio, along with these other matters, was likely to mean that its short- to medium- term financial viability was secured.
regulate
it on three grounds:
(1) The decision to de-register Larch on 17 December 2021 in the full knowledge that it was on the cusp of settling the problems with the Devon Portfolio was irrational, disproportionate, premature and improper;
(2) The
Regulator
was plainly wrong to find that no sufficient evidence had been put forward as to its loan agreement with its senior landlord and creditor, SLIL, or alternatively, it should have asked for further information, rather than proceeding to de-register Larch; and
(3) A series of factual findings made by the
Regulator
were incorrect and, therefore, flawed.
Regulator
submitted that its decision to de-
regulate
Larch should stand. The decision to de-
regulate
Larch, notified by letter dated 17 December 2021, had followed a long history of intensive engagement with Larch by the
Regulator.
A non-compliant
Regulatory
Notice had been published in November 2019, and, since then, the
Regulator
had worked closely with Larch in an attempt to resolve its compliance issues. The
Regulator
had accepted a Voluntary Undertaking that had been offered by Larch in July 2020, but Larch had failed to comply with its Undertaking. The
Regulator
said that it had ample grounds for de-registration in December 2021, and that, especially given the long history of engagement, it was under no obligation to delay its decision any further. An extra-statutory internal review of the decision to de-register was conducted at Larch's request, but the decision was upheld and this was notified to Larch on 2 February 2022. (This appeal is, however, against the decision to de-register in December 2021, rather than the against the outcome of the extra-statutory internal review.)
Regulator.
I grant the extension of time.
Regulator
by Ms Samantha Broadfoot KC. I am grateful to both counsel for their helpful submissions, both orally and in writing.
The evidence
Regulator,
I have been provided with two statements from Harold Brown, Senior Assistant Director of Investigation and Enforcement, dated 23 May and 22 June 2022. Further statements on behalf of Larch have been provided, consisting of a statement of Sarah Ferdinand, a director of Larch, dated 22 May 2022, enclosing further documentation, and a statement dated 7 July 2022 from Joy Malyon, the Chair of Larch since March 2022, and, previously Chair and Director of the company during the period from 19 May 2020 to 21 September 2021. The statement of Ms Malyon responded to points made in the second statement of Mr Brown.
Regulator
opposed the admission of this statement on three grounds, namely irrelevance, service so late as to be prejudicial, and an abuse of process in light of the procedural history.
Regulator,
namely relevance. This is because the statement deals solely with developments since March 2022, whereas the appeal is against a decision which was communicated to Larch on 17 December 2021. Evidence about subsequent events cannot retrospectively affect the question whether the decision to de-register Larch in December 2021 was one which the
Regulator
was entitled to take, and so cannot affect the outcome of the appeal. It is open to Larch to apply for re-registration under section 112 of the 2008 Act, and events since December 2021 are potentially relevant to such an application, but that is not a matter with which this Court is presently concerned. I also accept the
Regulator's
submission that this material was filed so late that the
Regulator
was not given a fair opportunity to deal with it, but the principal reason why I have declined to admit this statement is that it contains nothing of relevance to the appeal. I should add that, if I had been otherwise minded to admit the statement, I would not have declined to admit it solely because of points made by the
Regulator
about the somewhat chequered procedural history of this appeal.
The statutory framework, the Standards, and relevant provisions in the Code of Practice
Housing
at paragraphs 3-20. I cannot improve on this summary and so I will gratefully set it out in this judgment:
"3. Part 2 of theHousing
and Regeneration Act 2008 ('the 2008 Act') establishes a
regulatory
regime for
social
![]()
housing.
When the 2008 Act came into force, the functions of the
regulator
were discharged by the Office for Tenants and
Social
Landlords, also known as the Tenant Services Authority. Later, they passed to the
Regulation
Committee of the Homes and Communities Agency ('HCA'), which is now known as Homes England, and then from 1 October 2018 to the Defendant. I shall use the statutory term '
regulator'
to refer to these different entities without distinction."
4. Section 111 of the 2008 Act requires theregulator
to maintain a register of providers of
social
![]()
housing.
'
Social
![]()
housing',
often used interchangeably with 'affordable
housing',
means (a) low cost rental accommodation and (b) low cost home ownership accommodation: s. 68. This case concerns the former, which is accommodation made available for rent, where the rent is below the market rate, in accordance with rules designed to ensure that it is made available to people whose needs are not adequately served by the commercial
housing
market: s. 69. In relation to low cost rental accommodation, the 'provider of
social
![]()
housing'
is the landlord: s. 80(1) .
5.Social
![]()
housing
providers do not have to be registered, but may choose to be, for a variety of reasons. Where
housing
is acquired, built or converted by public grant, the landlord must be registered: s. 31 of the 2008 Act. This is not the reason that Inclusion is registered: its business model does not involve the use of public grant. But there are other advantages of registration. It may cause lenders and rating agencies to view private
social
![]()
housing
providers more favourably. Moreover, many local authorities require
social
![]()
housing
providers to be registered before they will use them to
house
those people on their waiting lists.
6. Section 116, headed 'Entry in the register: voluntary registration', imposes on theregulator
a duty to register anyone who is eligible for registration and applies to be registered. The
regulator
has powers to set standards for the provision of
social
![]()
housing
(see s. 193-198B) and to monitor compliance with those standards (ss. 199-210). Section 195 empowers the
regulator
to issue a code of practice which (a) relates to a matter addressed by a standard and (b) amplifies the standard. By s. 195(2), the
regulator
may have regard to any such code in considering whether the standards have been met.
7. An English body is eligible for registration if it meets the conditions set out in s. 112 and does not fall within the exceptions in s. 113 : s. 112(1) . Condition 1 is that the body (a) is a provider ofsocial
![]()
housing
in England or (b) intends to become one. Condition 2 is that the body satisfies any relevant criteria set by the
regulator
as to (a) its financial situation, (b) its constitution and (c) other arrangements for its management. The exceptions in s. 113 are local
housing
authorities and county councils.
8. Section 92K defines theregulator's
'fundamental objectives'. It requires the
regulator
to perform its functions with a view to achieving (so far as is possible) (a) the economic
regulation
objective and (b) the consumer
regulation
objective. By s. 92K(2), the economic
regulation
objective is:
'(a) to ensure that registered providers ofsocial
![]()
housing
are financially viable and properly managed, and perform their functions efficiently and economically,
(b) to support the provision ofsocial
![]()
housing
sufficient to meet reasonable demands (including by encouraging and promoting private investment in
social
![]()
housing),
(c) to ensure that value for money is obtained from public investment insocial
![]()
housing,
(d) to ensure that an unreasonable burden is not imposed (directly or indirectly) on public funds, and
(e) to guard against the misuse of public funds.'
By s. 92K(5) :
'Theregulator
must exercise its functions in a way that—
(a) minimises interference, and
(b) (so far as is possible) is proportionate, consistent, transparent and accountable.'
9. The Governance and Financial Viability Standard, published in April 2015 ('the Standard'), provides as follows at §1 under the heading 'Required outcomes':
'1.1 Governance
Registered providers shall ensure effective governance arrangements that deliver their aims, objectives and intended outcomes for tenants and potential tenants in an effective, transparent and accountable manner. Governance arrangements shall ensure registered providers:
(a) adhere to all relevant law
(b) comply with their governing documents and allregulatory
requirements
(c) are accountable to tenants, theregulator
and all relevant stakeholders
(d) safeguard taxpayers' interests and the reputation of the sector
(e) have an effective risk management and internal controls assurance framework
(f) protectsocial
![]()
housing
assets.
1.2 Financial viability
Registered providers shall manage their resources effectively to ensure their viability is maintained while ensuring thatsocial
![]()
housing
assets are not put at undue risk.'
10. So far as governance is concerned, there are four possible grades, which are set out at §4.2 of a document entitledRegulating
the Standards , published in April 2018: G1, which is awarded where the provider 'meets our governance requirements'; G2, where the provider 'meets our governance requirements but needs to improve some aspects of its governance arrangements to support continued compliance'; G3, where the provider 'does not meet our governance requirements' and there are 'issues of serious
regulatory
concern and in agreement with us the provider is working to improve its position'; and G4, where the provider 'does not meet our governance requirements' and there are 'issues of serious
regulatory
concern and the provider is subject to
regulatory
intervention or enforcement action'.
11. As to financial viability, the Standard provides as follows:
'2.4 Registered providers shall ensure that they have an appropriate, robust and prudent business planning, risk and control framework.
2.4.1 The framework shall ensure:
(a) there is access to sufficient liquidity at all times
(b) financial forecasts are based on appropriate and reasonable assumptions
(c) effective systems are in place to monitor and accurately report delivery of the registered providers plans
(d) financial and other implications of risks of the delivery plans are considered
(e) registered providers monitor, report on and comply with their funders' covenants.
…
2.5 In addition to the above registered providers shall assess, manage and where appropriate address risks to ensure the long-term viability of the registered provider, including ensuring thatsocial
![]()
housing
assets are protected. Registered providers shall do so by:
(a) maintaining a thorough, accurate and up to date record of their assets and liabilities and particularly those liabilities that may have recourse tosocial
![]()
housing
assets
(b) carrying out detailed and robust stress testing against identified risks and combinations of risks across the range of scenarios and putting appropriate mitigation strategies in place as a result
(c) before taking on new liabilities, ensuring that they understand and manage the likely impact on current and future business andregulatory
compliance.'
12. As with governance, there are four possible grades for financial viability: V1, which is awarded where the provider 'meets our viability requirements and has the financial capacity to deal with a wide range of adverse scenarios'; V2, where the provider 'meets our viability requirements' and has the 'financial capacity to deal with a reasonable range of adverts scenarios but needs to manage material risks to ensure continued compliance'; V3, where the provider 'does not meet our viability requirements' there are 'issues of seriousregulatory
concern' and 'in agreement with us, the provider is working to improve its position'; and V4, where the provider 'does not meet our viability requirements', there are 'issues of serious
regulatory
concern' and the provider 'is subject to
regulatory
intervention or enforcement action'.
13. At §4.9 ofRegulating
the Standards, the following guidance is set out:
'Providers at V2 can often share some of the following characteristics, amongst others:
- A material reliance on relatively uncertain cash flows, often relating to the type of activities being undertaken (for example, sales versus rental products) or the types of markets in which the provider operates
- A material change in the business model being pursued by the provider, this involves taking on more risk. This could be moving into new business areas or scaling up existing operations, including taking a step change in new development aspirations or significant increase in debt levels
- A significant financial event in the short term (typically one to two years) that could change the profile of the organisation, for example a refinancing requirement or a material peak in sales exposure
- A business plan that is built on assumptions that are difficult to achieve or justify on the basis of past experience or current operating conditions
- A weaker financial profile with less headroom against covenants or insufficient cash generation for the level of risk being undertaken. Using debt or sales income to meet interest costs is a concern for theregulator
- A business plan that does not cope with severe but plausible adverse stress testing: and/or can't absorb a limited amount of stresses without enacting mitigations.'
14. At §4.10, it is said that providers at V3 will have been 'unable to provide theregulator
with sufficient assurance that they meet the requirements of the Standard' and will be 'working closely with the provider to try and remedy the issue as soon as possible'.
15. The matters set out in the standards are amplified in the Governance and Financial Viability Standard Code of Practice published in April 2015 ('the Code'). It provides, materially, as follows:
'2…The Code fits with the co-regulatory
regime by allowing registered providers to innovate and develop their own approaches to achieve the outcomes and expectations set out in the standard.'
16. By way of amplification of the financial viability required outcome, the Code provides as follows:
'10. Theregulator
recognises every business decision will carry risk and sometimes those risks will crystallise. There is, however, a difference between managed risk and uncontrolled loss. The
regulator
expects boards to manage the business to promote the former and avoid the latter. In addition, the
regulator
does not intend that all
social
![]()
housing
assets should remain in the sector forever. However, the value in the assets should not be lost to the sector. Under the Value for Money Standard, registered providers are expected to consider how to make best use of their assets.'
17. By way of amplification of §2.5(b) of the Standard, the Code provides as follows:
'Theregulator
expects registered providers, as part of the risk management approach, to stress test their plans against different scenarios across the whole group. The scenarios used to vary according to the size, type and structure of the organisation. Registered providers should go beyond simple sensitivity testing and include multi-variate analysis which tests against potential serious economic and business risks. Registered providers should explore those conditions which could lead to failure of the business, even if planned mitigations and controls are successfully implemented. They should assure themselves that the scenarios are consistent with what they consider to be acceptable levels of risk and their obligations. Stress testing should employ scenarios that are designed to assess resilience.'
18. Section 22 of the Legislative andRegulatory
Reform Act 2006 authorises the making and revision of a code of practice in relation to the exercise of
regulatory
functions. Any person exercising a
regulatory
function to which s. 22 applies must have regard to the code in determining any general policy or principles by reference to which the person exercises the function. Regard must also be had to the code by any such person in the exercise of the function of setting standards or giving guidance generally in relation to the exercise of other
regulatory
functions. Section 24 confers power on a minister of the Crown by order to specify
regulatory
functions to which s. 22 applies. It is common ground that s. 22 applies to the functions now exercised by the
regulator,
though the latter points out that the duty imposed by s. 22 applies only when determining general policy or principles and when setting standards or giving guidance generally in relation to the exercise of other
regulatory
functions.
19. ARegulator's
Code was made under s. 22 in April 2014. It provides as follows at §2.2:
'In responding to non-compliance that they identify,regulators
should clearly explain what the non-compliant item or activity is, the advice been given, actions required or decisions taken, and the reasons for these.
Regulators
should provide an opportunity for dialogue in relation to the advice, requirements or decisions, with a view to ensuring that they are acting in a way that is proportionate and consistent.
This paragraph does not apply where theregulator
can demonstrate that immediate enforcement action is required to prevent or respond to a serious breach or where providing such an opportunity would be likely to defeat the purpose of the proposed enforcement action.'
20. In April 2018, theregulator's
predecessor issued a document entitled
Regulating
the Standards , outlining its operational approach to assessing providers' compliance with the economic and consumer standards. At §2.30, it provides:
'Where our assessment has changed or if the [in-depth analysis] confirms a providers existing non-G1/V1 grades, then we will discuss this with the provider and publish a report explaining the reasons for the assessment.'"
"8 Registered providers should take all such steps as are reasonably necessary to ensure that any activities they undertake do not placesocial
![]()
housing
assets, activities relating to the provision of
social
![]()
housing
or their own financial viability at undue risk. The
regulator
recognises that registered providers should have the flexibility to consider risks in light of their individual circumstances. Boards of registered providers have the responsibility to satisfy themselves and provide assurance to the
regulator
that:
they have considered the requirement appropriately in relation to their own external and internal operating environment
they are satisfied they will comply withregulatory
requirements now and in the foreseeable future.
…
21 Registered providers need to ensure their business planning, risk management and control framework is effective. It should cover all areas of the registered provider's business. This should demonstrate the registered provider fully understands and has considered its operating environment, so it can deliver its business plan and organisational objectives. It does not need to be captured in a single document…
25 Registered providers need to build their business on robust and prudent assumptions. Registered providers should assure themselves the assumptions used are reasonable. For example these may be based on:
past performance
market conditions
deliverability and forecasts of possible future condition
…
29 Boards are the custodians ofsocial
![]()
housing
assets and the financial viability of the registered providers that hold those assets. The responsibility for managing risks, and specifically risks to
social
![]()
housing
assets, lies with boards. As
social
![]()
housing
is a long term asset, normally funded by long-term debt, it follows that boards need to maintain a longterm perspective on managing risk. They need to ensure that their decisions do not put short-term gains ahead of the long term sustainability of the business and the security of their
social
![]()
housing
assets."
"118 De-registration: compulsory
(1)Theregulator
may remove from the register a private registered provider which the
regulator
thinks—
(a) is no longer eligible for registration,
…
(2) Before removing a body under subsection (1)(a) … theregulator
must—
(a) take all reasonable steps to give the body at least 14 days' notice, and
(b) consider any representations it makes in that period.
(3) After removing a body under subsection (1)(a) … theregulator
must take all reasonable steps to notify the body.
…"
"121 Appeal
(1) A body may appeal to the High Court against a decision of theregulator—
(a) to refuse to register it,
(b) to de-register it, or
(c) to refuse to de-register it.
(2) Theregulator
shall not de-register a body while an appeal is pending.
…"
Regulator
provides a non-statutory internal appeal scheme, pursuant to which certain decisions of the
Regulator,
including a decision to de-register, can be subject to review. An application under this scheme must be made within 10 working days of receipt by the
social
housing
provider of the notification of the decision made by the
Regulator.
If the review panel considers that the decision under challenge was flawed, it is able to remit the matter back to the decision-maker for a further decision. The internal appeal scheme expressly recognises that the internal process is not intended to substitute or undermine the statutory right of appeal. In the present case, Larch exercised its right of internal appeal, and the review panel concluded that there were no errors in the decision to de-register, and that the decision was reasonable.
The approach to this appeal
Regulator.
Section 118(1)(a) provides that the
Regulator
may remove from the Register a private registered provider which the
Regulator
thinks is no longer eligible for registration. The use of the word "thinks" makes clear that it is for the
Regulator
to exercise its judgment and to take the decision. It follows, in my judgment, that the test that the High Court should apply to an appeal is essentially (and subject to the "proportionality" point, below) the same as it would apply to the judicial review of an administrative decision. An appeal should succeed if the
Regulator
has acted irrationally, or if there has been a procedural irregularity which means that there has been a breach of natural justice. The appellate Court should also consider whether the
Regulator
took into account some irrelevant matter or had disregarded something to which they should have given weight. See John Dee Limited v Commissioners of Customs & Excise 1995 WL 1081889 (CA), at page 11, per Neill LJ, approved by Lord Reed PSC, giving the judgment of the Supreme Court, in R(Begum) v SIAC [2021] AC 765, at paragraph 48. In the John Dee case, the statutory provision in question was similar to section 118(1)(a), in that it made clear that the decision should be based on the view of the Customs & Excise: "Where it appears to the Commissioners requisite to do so for the protection of the revenue".
Regulator,
has a specialist expertise. The significance of this was explained by Chamberlain J in Inclusion
Housing
at paragraph 88:
88. It is well established that, when entertaining a rationality challenge by way of judicial review to a decision that involves a judgment, the court is not the primary decision-maker. This point has been given special emphasis in challenges to specialistregulators:
see e.g. R v Director General of Telecommunications [1999] ECC 314, [26] (Lightman J); Fraser v NICE [2009] EWHC 452 (Admin) , [47]-[48] (Simon J). However, it is also important not to erect so unrealistically high a hurdle as to render success in an irrationality challenge effectively impossible. As Sedley J said in R v Parliamentary Commissioner for Administration ex p. Balchin [1996] EWHC 152 (Admin):
'[Counsel for the claimant] does not have to demonstrate, as respondents sometimes suggest is the case, a decision so bizarre that its author must be regarded as temporarily unhinged. What the not very apposite term "irrationality" generally means in this branch of the law is a decision which does not add up – in which, in other words, there is an error of reasoning which robs the decision of logic.'
"144 … It is an error to suggest that simply because the subject matter of a decision, or the evidence used to justify it, is "economic" or "technical" that courts should recoil in terror and move gratefully into judicial reticence mode by reference to "margin of appreciation". If this were the judicial default position courts would find it hard indeed to hold in favour of claimants in clinical negligence cases where, almost invariably, the case turns on complex scientific evidence. In R (Rotherham MBC) [2015] PTSR 322 the Supreme Court recognised the dangers of "judicial timidity": para 65, per Lord Neuberger of Abbotsbury PSC. Decisions of the utmost importance to individuals, to companies and to society are routinely "economic" and "technical" and errors in those decisions should be as much susceptible to judicial review as other equivalent but less technical decisions. There should be no lacuna in judicial review simply because the nature of the decision under challenge is a difficult one."
Regulator
that considerable weight should be given to the
Regulator's
views because it is a specialist
regulator
exercising a judgment in an area in which it is expert and the Court is not.
Regulator.
As decision-making in relation to de-registration is one of the
Regulator's
statutory functions, the
Regulator
must, in taking a decision under section 118(1)(a), act (so far as is possible) in a way that is proportionate, consistent, transparent, and accountable (see section 92K(5)(b)). There is, therefore, an express statutory duty to act proportionately when taking de-registration decisions. The proportionality duty is qualified by the words in parentheses in section 92K(5)(b), "(so far as possible"), but this has no significance in relation to a decision under section 118(1)(a): I do not see why it would not be possible for the
Regulator
to act proportionately in taking a decision under section 118(1)(a). Accordingly, in an appeal under section 121, the appeal may be allowed on the basis that the decision to de-register was disproportionate. This is an obligation of result, in contrast to statutory provisions which merely require a public authority to "have regard" to the principle of proportionality. I agree with the observation of Chamberlain J in Inclusion
Housing,
at paragraph 108(c), that even where, as here, it is for the court to assess whether
regulatory
action is proportionate, the weight to be given to the decision-maker's view will depend on the context, and may be considerable.
regulators
to whom the duty is applied to have regard to the desirability of promoting economic growth and, in that regard, to consider the importance of exercising their
regulatory
functions in a way which ensures that (a)
regulatory
action is taken only when it is needed, and (b) any action taken is proportionate. The obligation in section 108 applies to the functions performed by the
Regulator
(see Inclusion
Housing
at paragraph 95). Mr Gajjar did not specifically rely upon section 108. In my view, he was right not to do so. I agree with Chamberlain LJ, at paragraph 96 of Inclusion
Housing,
that section 108 was not intended to preclude
regulatory
action where the
regulator
considered it necessary in the public interest. In any event, section 108 does not add much, if anything, to the statutory framework in the 2008 Act, and, in particular, to section 92K(5)(b).
The facts
social
housing
providers, not including local authorities. Of these, only a relatively few operate the long-term lease model that is operated by Larch, and which is described below. The sector is generally well-managed.
housing
accommodation. Of these, only five were general needs
social
housing,
and only three of them were occupied. The remaining 261 units consisted of supported, non-
social
housing.
These units were spread across 87 properties in England.
housing
units were
social
housing,
as defined in the 2008 Act (although Mr Gajjar said in oral argument that these figures may have underestimated somewhat the number of units that were
social
housing
units in 2021 and that the numbers have increased in 2022).
Social
housing,
as defined in section 68 of the 2008 Act, is low cost accommodation which is provided below market rate. Other
social
housing,
in the broader sense, consists of supported
housing
which is generally provided at above market rents and which is provided to recipients of
Housing
Benefit. This does not count as "
social
housing"
for the purposes of the 2008 Act.
social
housing,
it is not in dispute that Larch's place on the register of
social
housing
providers is very important to it. This is primarily because registration makes it easier to deal with local authorities: whilst local authorities are not legally obliged to place their supported
housing
(ie non-
social
housing)
tenants with registered
social
housing
providers, in practice many local authorities seek to engage only with those who are on the Register. They will only place tenants on their waiting lists with registered providers. This is partly because registration provides comfort and assurance to local authorities that providers meet certain minimum standards and are subject to
regulation.
It is also because registered provider status makes it easier for the supported
housing
to be classed as "exempt accommodation", as defined in Schedule 2 of the
Housing
Benefit
Regulations
2006. Since the accommodation is exempt, the maximum eligible rent for
Housing
Benefit purposes is based on the contractual rent charged (subject to determination by a rent officer if, for example, it is considered to be unreasonably high). Usually, this means that 100% of the rent charged will be covered by
Housing
Benefit, in respect of which the local authority can claim 100% subsidies from the Department of Work and Pensions (DWP) . In contrast, the level of DWP subsidy that a local authority can claim in respect of
Housing
Benefit expenditure on tenants occupying Private Rented Sector accommodation, which is not provided by a Registered Provider is determined by a Rent Officer Determination. This may not amount to 100% of the
Housing
Benefit. Put simply, therefore, it can be financially beneficial for local authorities to deal with Registered Providers.
Housing
Benefit, and so, in principle, the provider can have a good degree of confidence that funds will be available. In addition, lenders and ratings agencies take comfort from providers being subject to registration and
regulation.
Regulator
takes a "co-
regulatory"
approach to its relations with registered providers. This means that responsibility is placed with providers to demonstrate their compliance with the
regulatory
regime. The co-
regulatory
approach has been successful, and it is very rare for the
Regulator
to take formal enforcement action. Registered providers which own fewer than 1,000
social
housing
units are, generally, subject to a different and less intensive level of
regulatory
engagement than those which own 1,000 or more
social
housing
units.
social
housing
provision. The long-term lease model was explained in Mr Brown's first witness statement. It involves property funds, private equity investors, and individuals providing property on long term leases (typically 20 years or more) to a registered provider, which then lets accommodation to a tenant via nomination arrangements with a local authority. The local authority or NHS commissioners usually commission an individual care package for the tenant alongside the accommodation. Generally, the commissioning of the care package and the accommodation happens on a three- to five-year cycle. Typically, the registered provide makes a charge for rent – for the right to occupy the property – and also levies service charges for specific property related services, such as maintenance of communal areas and security. The service charge should reflect the actual cost of the services provided. The care package is arranged with a care provider (not normally the registered provider), and the care package is funded separately.
social
housing
properties are generally higher than those for general "needs" properties. Tenants are often eligible to receive
Housing
Benefit to cover their
housing
costs. The local authority administers the
Housing
Benefit payments on behalf of the Department of Work and Pensions, and can review claims to ensure that they are not unreasonably high. This means that
Housing
Benefit is often assumed by investors to underwrite the rental stream and reduce the risk of non-payment. However, for any part of the gross rent not covered by the
Housing
Benefit, the landlord is exposed to non-payment by the tenant (or to the credit risk of the tenant).
Housing
Benefit, and the business should be run so that there are sufficient funds left over after the registered provider's lease payments to manage and maintain the properties over the long term and to cover the registered provider's overhead.
Housing
Benefit. It is a feature of this model, as I have said, that registered providers are subject to long-term lease obligations with head landlords, so, if something goes wrong with any of these variables, the consequences for the registered provider can be very significant. If a provider does not receive rent, or does not receive sufficient rent, in relation to properties, the provider is still under a long-term obligation to make payments to the lead lessor. Registered providers such as Larch did not have the ability unilaterally to exit the head lease.
Regulator's
Registration Advisory Committee (RAC) meeting in July 2012, and Larch's registration was approved on the basis that it intended to provide 30 units of
social
housing
within 12 months of registration. Larch was registered on the basis that it was on a path to compliance with the governance element of the Governance and Financial Viability Standard – which the registration criteria allowed in 2012.
Regulator
in the Summer and Autumn of 2019. There were complaints about breach by Larch of the consumer standards, and in particular that it was in breach of governance and viability aspects of the standards. There were allegations that Larch's head landlords had not been paid since April 2019. The
Regulator
conducted an investigation and came to the conclusion that there was compelling evidence that Larch's Board had not managed Larch's affairs with an appropriate degree of skill, diligence, effectiveness, prudence, and foresight. The
Regulator
was particularly concerned that, as Larch had not kept up with its lease payments, it was reliant, in order to remain financially viable, upon the continued support of its head landlords in agreeing to forego lease payments.
Regulator
issued a
Regulatory
Notice in November 2019. The Notice stated that:
"a) Larch is non-compliant with the Governance and Financial Viability Standard. Larch has not managed its resources effectively to ensure its viability can be maintained, and has not ensured its governance arrangements deliver an effective risk management framework.
b) Larch has not been able to demonstrate that it has managed its affairs with an appropriate degree of skill, independence, diligence, effectiveness, prudence and foresight.
c) Larch has failed to ensure that it has an appropriate, robust and prudent business planning, risk and control framework that ensures sufficient liquidity at all times.
…
Larch's business model relies on continued cash income at the right level, and at the right time, to enable it to meet its obligations. Theregulator
has evidence that Larch has been unable to achieve its income forecasts and this has placed significant stress on its cashflow. As a result, Larch has been unable to meet its obligations under its lease arrangements as and when they fall due. Larch is currently reliant on the continued support of its head landlords forgoing lease payments while solutions are explored.
A required outcome of the governance element of the Governance and Financial Viability Standard is that a registered provider shall ensure it has an effective risk management framework. We lack assurance that Larch has an appropriate risk management framework in place.
One of Larch's key risks is it not receiving the required rental levels from relevant local authorities in order to meet its lease obligations as they fall due. This risk has crystallised and Larch has been unable to achieve its planned rental income. The risk management framework which Larch has in place has not been effective and the lease terms it has entered into mean it has been unable to effectively mitigate and control the impact of this cashflow risk crystallising.
These outcomes mean we lack assurance that Larch is managing its affairs with an appropriate degree of skill, independence, diligence, effectiveness, prudence and foresight.
Larch has committed to work with theregulator
to address the issues outlined in this
Regulatory
Notice and to develop a recovery strategy. The
regulator
will continue to engage with Larch and is considering whether further action should be taken, including whether to exercise any of its powers."
Regulatory
Notice, the
Regulator
continued to engage intensively with Larch to assist it to achieve compliance with the standards. The two largest creditors provided Larch with stays on lease payments, one until 30 November 2019 and one until 31 December 2019. In an email to the
Regulator
on 30 October 2019, Mr Feltham stated that these stays would give Larch time to catch up on all outstanding rent payments with Devon councils which will clear all outstanding rent obligations to SLIL and Henley. However, on 29 November 2019, West Devon Borough Council emailed the
Regulator
to say that the Council had a number of concerns about Larch, which meant that
Housing
Benefit claims were still pending. In summary, West Devon Borough Council was concerned that the properties for which Larch was responsible in West Devon had been sold to a Jersey company at an inflated value, with the properties then being leased to Larch for rents which the Council believed were vastly above the market value. The Council was concerned that these transactions had been contrived to take advantage of the
Housing
Benefit Scheme ("contrivance"). As a result of these concerns, Larch experienced the non-payment or reduced payment of
Housing
Benefit claims across Devon. On 7 February 2020, the
Regulator
was advised that West Devon Borough Council had decided to refuse 69
Housing
Benefit applications on the primary grounds of "contrivance". These difficulties did not relate only to the very small number of units of
social
housing,
strictly so called, that were provided by Larch. The
Regulator
was also advised that other outstanding claims for
Housing
Benefit were 'dead' due to a lack of information.
Regulator
was informed that an agreement had been reached in April 2021 whereby West Devon Borough Council would pay
Housing
Benefit to Larch to cover a significantly lower core rent of £156 (instead of the rent sought by Larch, which was in the range of £260-£315 per unit per week).
Regulator
received notice that a winding up petition had been issued against Larch for non-payment of debts. Larch's sole shareholder, Mr Feltham, granted Larch a loan and Larch also used its cash reserves to reach a settlement with the creditor.
Regulator
notified Larch that the
Regulator
had taken a decision to issue an Enforcement Notice under sections 219-225 of the 2008 Act. This would have been the first time that the
Regulator
exercised its statutory power to issue an Enforcement Notice. In response, Larch proposed a Voluntary Undertaking under s125 of the 2008 Act which committed Larch to completing similar actions to those set out in the draft Enforcement Notice, and provided an action plan with timescales. The
Regulator
accepted the Voluntary Undertaking on 24 July 2020. The
Regulator
appreciated at the time that this was not without risk.
• Appointing a reputable consultant to undertake an independent financial review of Larch's financial standing and non-financial
housing
management systems;
• Commissioning a Statement of Affairs which would provide the Board with a detailed snapshot of Larch's financial status at a specific date;
• Obtaining formal written advice from Devonshires Solicitors LLP on compliance with insolvency laws; and
• Recruiting two additional board members.
Regulator
wrote to Larch on 27 August 2020, 18 December 2020, and 18 January 2021 about its failure to comply with the Voluntary Undertaking. In a letter to Larch dated 12 February 2021 the
Regulator
set out its detailed assessment of the material provided so far and invited representations on that analysis. A key problem identified by the
Regulator
was that its analysis of rent and service charge income on leases entered into by Larch for non-
social
housing
showed that core rent income was lower than lease payments. The letter emphasised the
Regulator's
concern over Larch's on-going viability and ability to manage and mitigate the risks associated with entering into long term full repairing and insuring leases.
Regulator
continued to engage intensively with Larch on its ongoing viability position, action plan and governance arrangements, including following the resignation of two board members and an advisor to the board in September 2021. There was a great deal of correspondence between the parties. Further concerns were raised by third parties. For example, Wolverhampton Council raised concerns about letting practices and
Housing
Benefit claims on 11 March 2021, which Ms Malyon, then Chair of Larch, was asked to investigate. Ms Malyon reported back on the results of her investigation into the Wolverhampton matter. She found that the sharing of pre-signed documents and poor communication had led Larch unwittingly to enter into arrangements that were not subject to Board consideration, as was required. As basic internal governance controls were not observed, Ms Malyon concluded that this represented a failing of the Chief Executive, Mr Feltham. In addition, Ms Malyon advised the
Regulator
that progress in resolving the "Devon portfolio issues" had been frustrated by the Chief Executive's failure to fulfil requests made by the Board, ultimately leading to a breakdown in trust. The letter confirmed that as a result of this, Mr Feltham would step down as Chief Executive, but this would not affect his shareholder rights.
Regulator
and Larch on 12 May 2021. The
Regulator
reiterated its concerns in relation to the viability of Larch, namely that there were a significant number of leases in which the core rent was lower than lease costs. The
Regulator
confirmed that it was considering its future
regulatory
engagement strategy with Larch. Larch responded on 24 May 2021, acknowledging the
Regulator's
concerns regarding the viability risk of core rents not being in line with lease costs, and confirming that Larch would continue to manage this risk by entering into rent reviews, and negotiating with head landlords.
Regulator
wrote formally to Larch on 12 August 2021. This letter expressed concern with the lack of progress across the key risk areas and explained that Larch's on-going registration as a
social
housing
provider required it to comply with the
regulatory
standards. The letter said that long-term non-compliance without a coherent route to achieve compliance was not acceptable. The letter further said that this may call into question Larch's eligibility to be registered. In the letter, the
Regulator
set out its detailed assessment of the material that Larch had provided so far, and invited representations on that assessment. Larch responded on 31 August 2021, stating, inter alia, that the Board noted the
Regulator's
concerns regarding financial viability and that the Board was operating on the basis that a reasonable settlement would be reached with regard to the Devon Portfolio.
Regulator
considered Larch's position to be precarious. It continued to operate with low levels of cash (set out in the management accounts reported to the Board) – as at the end of May 2021 it was circa £19k in credit. Furthermore, there was an increase in debtors and creditor balances which indicated that cash was not being received and payments were not being made. There was also a lack of evidence on how the Board was assured on the accuracy of the debtor balances reported. Rent and service charge were reported as one income figure, which is contrary to good practice, and Larch had not provided the
Regulator
with an adequate response to the concern expressed in its letter of 12 February 2021 about the core rent income appearing to be lower than lease costs. Larch acknowledged that there was a lack of transparency in relation to income.
Regulator
was also concerned that the problems with the Devon Portfolio had not been resolved, despite assertions by Larch in 2019 that they would be resolved by the end of that year. On 21 September 2021, the
Regulator
spoke to the Chief Executive of Larch, Wayne Feltham, and was notified that two directors had resigned; one of the directors was the Chair, Joy Malyon. Mr Feltham confirmed that they were seeking to recruit new board members but was unable to provide a timescale for this.
Regulator
carried out a detailed review of its
regulatory
strategy in relation to Larch and a decision was taken to explore steps towards compulsory de-registration. The core reason for this decision was that Larch was no longer able to meet the eligibility criteria for voluntary registration set out in section 112 of the 2008 Act, because it could not demonstrate that it could sustain its financial viability on an ongoing basis. A significant factor in this was Larch's long-term lease operating model, through which the viability issues had arisen, primarily as a result of Larch's non-
social
housing
provision. The
Regulator
also considered that Larch's engagement with the
Regulator
was characterised by very limited progress, a lack of transparency, missed deadlines, and broken commitments. In addition, the
Regulator
had on-going concerns about governance, with there being a repeated pattern of board members being appointed and then resigning. Half of the Board had resigned within the last few weeks, citing an inability to work with Mr Feltham.
"It is our judgement that Larch is unable to demonstrate it can sustain viability on an ongoing basis. A significant factor in this is the operating model Larch has chosen to adopt where its viability issues are caused by the non-social
![]()
housing
provision being on long term Full Repairing and Insuring leases; the risks of which it cannot adequately control or mitigate, and where it is not in receipt of HB income for a significant proportion of units. Evidence that supports Larch not being able to demonstrate viability on an ongoing basis is:
• An absence of a business plan based on reasonable and appropriate assumptions.
• The independent financial review reported that c92% of gross rental income is paid as lease costs – which means an inherent low margin on its non-social
![]()
housing
activity.
• This is further amplified by our recent analysis of rent and service charges income on leases entered into for non-social
![]()
housing
identifying core rent income is lower than lease payments.
• For the Devon portfolio HB has not been paid for a significant period – dispute on-going since September 2018. (please note there was a short period of time between April and July 2021 where a small number of units were put into payment at a lower HB rate, but these have been subsequently suspended due to an alleged contrivance matter where self-payers are charged lower rents than those who claim HB)
• The current financial situation where Larch is reliant on ongoing third-party support and forbearance of creditors; a situation that has been the same since 2019. Larch is unable to provide written evidence of third-party support, and one significant creditor confirmed on the 22 September 2021 that there is no written agreement in place.
• The independent financial review questioning the accuracy of the debtors' balance, and the reliance on debtors being settled on the HB dispute for the non-social
![]()
housing
stock at almost full levels and the board unable to effectively control this scenario."
Regulator
commenced compulsory de-registration proceedings on the 25 October 2021. This was communicated to Larch's CEO in a phone call on the 25 October 2021, which was followed by a letter sent to Larch on the same date. In addition, the
Regulator
published a further
Regulatory
Notice on the 8 November 2021, reflecting its updated position.
(1) Larch expected to resolve the issues relating to the Devon Portfolio in a satisfactory manner. Larch said that it expected the agreement with Henley to include a write-off of £4.7m in lease payments owed to Henley in return for the transfer to Henley of some £4.8m which Larch considered to be owed to it by tenants on these properties;
(2) Larch's ongoing viability was demonstrated by the 2-year cashflow forecast. Larch said that this had been subjected to independent review (the Begbies Report); and
(3) Larch said that in future it would not be dependent on the forbearance of its creditors. This was because the agreement with Henley (referred to at (1)) would eradicate its indebtedness to Henley, and because it had entered into an agreement with the other head landlord, SLIL, pursuant to which SLIL would advance a loan to Larch to cover outstanding indebtedness.
Regulator
of Larch's representations. The
Regulator
noted that there was no business plan, nor any scenario analysis, nor stress testing. Larch had acknowledged in its representations that it operates under the terms of various long-term leases which are on a full repairing and insuring basis with no break clauses. The paper for the RED meeting on 8 December 2021 said:
"Larch fundamentally lacks control over the ability to renegotiate or exit leases, and the lease terms means that c85% (based on Larch's representations) of gross rental income is paid as lease costs to head landlords. Larch has sought to renegotiate in the past without success, and it is our view that Larch lacks a credible plan to become a compliant provider. We also consider Larch has been non-compliant for a significant period of time and has had ample opportunity to resolve these issues, with little material progress made."
Regulator
was as follows: As for (1), no binding agreement had been reached with Henley. The
Regulator
had not been provided with written Heads of Terms, let alone a binding agreement. As for (2), the
Regulator
took the view that the 2-year cashflow forecast that had been put forward by Larch was based on unverified and unsubstantiated assumptions, which had not been stress tested, and was not supported by an "appropriate, robust and prudent business planning, risk and control framework", and so did not meet the requirements of the Standard. The Begbies Report had made clear that the writers had not verified the information and assumptions provided by Larch. The Begbies Report said that if Larch failed to achieve its growth forecast, it would be unable to meet the capital loan repayments with SLIL that were scheduled to commence in March 2022, and this would result in a monthly cashflow deficit. As for (3), no documentary evidence had been supplied to support an agreement with SLIL. Furthermore, Larch acknowledged in its representations that if its predicted growth forecast was not achieved, it would be reliant upon SLIL's further forbearance in agreeing to delay the start of the capital repayments.
Regulator
concluded that Larch's representations did not demonstrate how it could meet and manage the risks associated with its long-term lease obligations, and so how it could sustain its on-going viability. The
Regulator
took the view that, on the basis of its extensive engagement with Larch since the non-compliant judgement in November 2019, and Larch's failure to address the issues identified in the
Regulator's
letter of 25 October 2021, weaknesses in Larch's governance had resulted in a position where the provider did not demonstrate ongoing viability. The Board had failed to maintain a long-term perspective on managing risk and to ensure that its decisions did not put short-term gains ahead of the long-term sustainability of the business. This meant that Larch was not compliant with the requirements of the Code of Practice in respect of risk management (paragraph 29) and stress testing (paragraph 39), and was not compliant with the viability required outcome of the Standard (section 1.2) as amplified by paragraphs 8 to 10 of the Code of Practice.
Regulator
accepted that if points (1) to (3) bore fruit, i.e. if Larch successfully wiped out all liabilities associated with the Devon Portfolio, entered into a loan agreement with SLIL, and met all of the cashflow assumptions in the 2-year cashflow forecast, then this would provide a path to resolution of Larch's immediate solvency issues. However, the
Regulator
did not consider that this would be sufficient to demonstrate Larch's ongoing viability and so that it did not demonstrate Larch's compliance with the financial viability requirements of the Standard. Accordingly, even if the assumptions put forward in Larch's representations were correct, Larch could not demonstrate its on-going financial viability and so could not satisfy Condition 2 for registration, as set out in s112 of the 2008 Act, namely that the body satisfies any relevant criteria set by the
regulator
as to (a) its financial situation, (b) its constitution and (c) other arrangements for its management.
Regulator
to consider the use of less severe powers. This was also considered at the RED on 8 December 2021, which concluded that further use of powers, even in combination, would be unlikely to be effective in addressing the breadth of issues or assist Larch in demonstrating that it could sustain its ongoing viability.
Regulator's
decision to de-register were set out in a letter to Larch dated 17 December 2021.
Regulator
agreed to extend the time limit for Larch's internal appeal and said that it would not object to an extension to 22 January 2022 for Larch's statutory appeal.
The grounds of appeal
(1) The decision to de-register Larch on 17 December 2021 in the full knowledge that it was on the cusp of settling the problems with the Devon Portfolio was irrational, disproportionate, premature and improper.
Larch's submissions
Regulator
had been good. The agreement with Henley would clear Larch's liabilities in relation to the Devon Portfolio and would mean that there would be no future liabilities in relation to the Portfolio. The Begbies' Report said that non-Devon Portfolio properties would generate an annual surplus income of about £100,000, allowing the company to meet any liabilities as they fell due. Moreover, Larch had negotiated Heads of Terms for three contracts to provide property management services for (eventually) 813 units, and would retain £20 per week as its service fee. The agreement would not cover the full 813 units from the outset, but would grow at 40 units per month. When the Devon Portfolio liabilities were jettisoned, Larch would be able to trade without further funding in the short- to medium- term.
Regulator
jumped the gun. Larch was not asking the
Regulator
to wait for an indefinite period. The
Regulator
had been kept
regularly
appraised of the ongoing negotiations with Henley since March 2020. There was no urgency about de-registration and the
Regulator
should have waited for the deal to be done between Larch and Henley before coming to a decision about financial viability. This would have been consistent with the
Regulator's
obligation to exercise its functions in a way that minimises interference and is proportionate (see sections 95K(a) and (b) of the 2008 Act).
housing
solutions to the elderly and vulnerable for whom market rates of rent are unattainable. In those circumstances, it was wholly unreasonable and disproportionate for the
Regulator
to behave as it did. In practice, local authorities will only enter into agreements for supported accommodation with registered providers.
Regulator
was told in Larch's representations that Devonshires Solicitors was in the process of drawing up Heads of Agreement. The Begbies Report said that Begbies Traynor had been shown correspondence between Larch, Devonshires and Henley, including Henley's response to initial proposed heads of terms. Much of the information that Larch disclosed to the
Regulator
on 22 November 2021 was commercially sensitive and confidential, but Larch had offered in its representations to let the
Regulator
see email correspondence with Henley in which Henley had agreed to the reduced
Housing
Benefit offered by West Devon Council, following the conclusion of the contrivance allegation. The
Regulator
did not take up this offer. Moreover, in the (undated) letter from Mr Feltham which was received on 8 December 2021, Mr Feltham said, "Heads of Terms (on the basis set out in the Submission) have now been agreed and signed with Henley." The
Regulator
did not ask to see the Heads of Terms.
Regulator
seeks to justify the timing of the decision to de-register by reference to the history of the matter, this paints an inaccurate picture. Previous difficulties were either irrelevant, or were the result of Mr Feltham's actions and not reflective of the Board. Mr Feltham is no longer a member of Larch's Board. An example of the problems caused by Mr Feltham is the failure of Larch to comply with the commitment in the Voluntary Undertaking in July 2020 to appoint a reputable independent consultant to undertake an independent financial review of Larch's financial standing and non-financial
housing
management systems. A firm of consultants, the David Tolson Partnership (DTP), was duly appointed, but was unable to complete its work adequately because of Mr Feltham's attitude and unwillingness to share the information needed to complete the report. The
Regulator
could have exercised its powers under sections 266-269 to remove Mr Feltham (and other members of the Board) and to replace them or supplement them with statutory directors, who would have enjoyed the protection of being able to operate unencumbered by threats of removal by Mr Feltham.
Regulator's
decision to de-register was profound and was capable of plunging an otherwise financially viable and solvent company into insolvency or, at least, serious financial difficulties.
Discussion
Regulator
did not act irrationally, disproportionately, prematurely or improperly in taking a decision to de-register Larch on 17 December 2021, even though Larch had assured the
Regulator
that Heads of Agreement had been reached with Henley, pursuant to which Larch would hand back the properties and would wipe out its debt to Henley by transferring the outstanding debts due to Larch from tenants in relation to the properties to Henley.
Regulator
decided to de-register Larch. In the 17 December 2021 decision letter, the
Regulator
said as follows:
It is our judgement that Larch has failed to supply sufficient evidence to support the Representations or the assumptions on which they are based. Furthermore, even if Larch successfully negotiates the cancellation of all liabilities associated with the Devon Portfolio (point 1 above), successfully negotiates a loan with its corporate landlord (and possible delayed payments) (point 3 above), and all of its cash flow assumptions are achieved (point 2 above), this at best makes out a path to the resolution of Larch's immediate solvency issues. That is not the same thing as demonstrating on-going viability.
Regulator
had grave doubts about the three main points made in Larch's representations, the
Regulator
considered the question of de-
regulation
on the basis of assumptions that (1) Larch would reach an agreement with Henley that would have the effect of wiping out Larch's liabilities in relation to the Devon Portfolio; (2) the 2-year cashflow forecast was a reliable forecast; and (3) Larch would reach an agreement with SLIL pursuant to which SLIL would provide Larch with a loan. Put another way, the
Regulator
took the view that, even if all of these assumptions were made in Larch's favour, Larch had still not demonstrated its ongoing financial viability. Accordingly, a delay would have made no difference: the decision was taken on the basis that the outcome would be the same whether or not Larch was right that it had reached agreement or would shortly enter into agreement with Henley.
Regulator
carried out a very careful analysis of the information about Larch and the notes of the RED meetings show that the
Regulator
thought long and hard about whether to de-register. It was not a precipitate decision. The
Regulator
was fully entitled (and indeed bound) to take account of the events and the nature and extent of the engagement from 2019-2021. The
Regulator
engaged with Larch for a long period and gave Larch an opportunity to make representations and to provide information in response to the notification of a provisional decision to de-register Larch. Larch made full use of this opportunity by filing written representations and evidence on 22 November 2021. It is clear, therefore, that the
Regulator
took account of all relevant considerations, and did not take account of irrelevant considerations. It is similarly clear that the
Regulator
complied with its obligations in relation to procedural fairness.
Housing
Benefit were likely to mean shortfalls on rents. The experience of the last few years had shown that Larch was liable to fall short in terms of income from its properties and was liable to go into debt with its head landlords. This problem was not unique to the Devon Portfolio, nor, indeed, to Larch. The
Regulator
identified the risk that comes from only having long-term, low-margin, inflation-linked leases as a source of finance in a Note issued by the
Regulator,
as an Addendum to the Sector Risk Profile 2018, in April 2019, entitled, "Lease-based providers of specialised supported
housing".
The Note referred, amongst other things, to the risk that comes from only having long-term, low-margin, inflation-linked leases as a source of finance; thin capitalisation; a lack of assurance about whether appropriate rents are being charged; poor risk management and contingency planning undertaken by some of the registered providers; and some inappropriate governance practises that have led to poor decision making. Paragraph 5.23 of the Note said:
" The RSH [theRegulator]
is concerned that weak governance at many of these organisations has led to them to develop business models that are unsustainable in the longer term and cannot withstand foreseeable downside risk. It is currently hard to see how a provider of SSH which is substantially financed by long-term leases and subsequent tight margins can meet the requirements of the Governance and Financial Viability Standard."
Regulator
was entitled to take into account the problems with management that had manifested themselves over the last few years. The accounting controls and financial information were inadequate. For example, the company had not distinguished between core rent and service charges (the latter of which was designed only to cover costs), and so it was difficult to tell how much rent was being received that could be put towards the costs of the lease with the head landlords. There was a history of resignation of directors. Larch had been predicting a resolution of the problems with the Devon Portfolio since 2019, but this had not happened. Whether or not these problems were the fault of Mr Feltham was largely beside the point. He was still Chief Executive Officer of the company when the decision to de-register was taken.
Regulator
in December 2021 to de-register Larch was one that was very carefully considered and was one that cannot be characterised as irrational. There was ample material before the
Regulator
to justify the decision to de-register.
social
housing.
Mr Gajjar's submission that the de-registration was disproportionate because it will reduce the number of
social
housing
providers, and so may reduce the amount of accommodation available to vulnerable tenants, is misconceived. The logical consequence of this submission would be that the
Regulator
should never de-register any provider. In fact, however, Parliament has vested power in the
Regulator
to impose financial and governance standards upon providers and has allocated responsibility to the
Regulator
to review the status of providers in order to ensure that only those providers which meet the standards should continue to be registered. It is clear, therefore, that part of the statutory purpose of the relevant provisions of the 2008 Act is to ensure that only bodies that meet minimum standards should operate as
social
housing
providers. Furthermore, as Mr Brown pointed out in his second statement, it does not follow that tenants will be made homeless simply as a result of a de-registration decision. The security of tenure of residents is determined by their contractual position, and the legislative rules applicable to their particular type of tenancy. There are clear economic benefits to both Larch, and to the head landlords, to tenants remaining in their homes (whether with Larch or an alternative provider). However Larch and the head landlord are independent entities and make their own decisions over the commercial reality. Mr Brown said that the
Regulator
considered this issue carefully in its decision making.
Regulator
is a specialist
regulator
and so that considerable weight should be accorded to its views. This reinforces my conclusions that the decision was neither irrational nor disproportionate, but, even if that had not been the position, my conclusions would have been the same.
Regulator's
decision was not dependent on the proposition that Larch was wrong to expect to reach an agreement with Henley in a month or two, it follows that the question whether Larch was right about this was not relevant to the
Regulator's
decision to de-register. There was no need to delay as the
Regulator
gave Larch the benefit of the doubt on this matter.
Regulator
said that "Larch has not… provided satisfactory evidence to support and corroborate these assertions [i.e. the three points in the Representations]." Even if, contrary to my view, the decision reached by the
Regulator
was dependent upon the conclusion that Larch had failed to supply sufficient evidence to support the representations or the assumptions on which they were based, it was not irrational or disproportionate to have proceeded to a decision in December 2021, without delaying the decision to see whether an agreement was reached with Henley. As I have said, the
Regulator
did not act precipitately. The
Regulator
engaged with Larch for over two years before the decision to de-register was taken. I agree with Ms Broadfoot KC that it was open to the
Regulator
to conclude that suggestion in the representations that Larch was on the cusp of resolving the outstanding issues relating to the Devon Portfolio was wildly optimistic. It was not consistent with the evidence before the
regulator:
(1) Since 2020, if not before, Larch had been saying that it expected to reach an agreement with Henley to wipe the slate clean, but nothing had materialised;
(2) No written evidence was provided of an agreement in the representations;
(3) The Begbies Report did not state unequivocally that a settlement had been reached with Henley. The Begbies Report said, having summarised the proposed agreement:
"As part of this review, we have been provided with certain correspondence between the Company, Devonshires and Henley. The most pertinent of these documents is a response from Henley to the initial Heads of Terms document.4. This suggests that points 1-3 above are broadly agreed by Henley but that a cash payment would be made by Henley in respect of point 4, but limited to certain specific items."
This suggested that Heads of Agreement had not been agreed, and that one matter, at least, was still being negotiated.
(4) The Report also said:
Whilst no formal agreement is yet in place between the parties, the correspondence does suggests that a desire exists between the parties to reach a settlement position and that such a settlement could be reached within the next 7-10 days subject to both sides acting reasonably.
By the time theRegulator
came to take its decision, it was apparent that this had been an over-optimistic estimate. More than 7-10 days had passed (as the Report was provided on 22 November 2021) but no agreement had been reached.
(5) It is true that Mr Feltham informed the
Regulator,
on or about 8 December 2021, that Heads of Agreement had now been signed, but he did not send them a copy, and, in any event, Heads of Agreement are not legally binding. I do not accept Mr Gajjar's submission that it was incumbent upon the
Regulator
to call for a copy. If there were Heads of Agreement, then Mr Feltham should have provided them.
Regulator
was entitled to come to the conclusion that it had waited long enough to reach a decision on the question of de-registration. Larch was not able to give a date by which the agreement with Henley would definitely be entered into. The approach adopted by the
Regulator
was consistent with paragraph 2.2 of the
Regulator's
Code (set out at paragraph 13, above), which states that "
Regulators
should provide an opportunity for dialogue in relation to the advice, requirements or decisions, with a view to ensuring that they are acting in a way that is proportionate and consistent." The
Regulator
gave an ample opportunity for dialogue with Larch, lasting over two years. During this period, there were at least 12 detailed substantive letters from the
Regulator,
numerous emails and phone calls, 7 RED meetings, 3
Regulatory
Notices, and one Voluntary Undertaking which was accepted as an alternative to enforcement action. As Ms Malyon, accepted the Voluntary Undertaking was immediately and consistently breached.
Regulator's
decision was not dependent on the
Regulator's
view that Larch had provided insufficient evidence of the proposed agreement with Henley. The
Regulator
decided that, whether or not such an agreement was reached, it could not be satisfied as regards Larch's ongoing viability and, for the reasons I have already given, this decision was neither irrational nor disproportionate.
Regulator
should have taken the less drastic step of appointing statutory directors, I do not accept that this rendered the decision to de-register either irrational or disproportionate. This question was considered and rejected at the RED meeting on 30 September 2021. This is evidenced by the minutes, which state as follows:
"Consideration was given to making statutory appointments to the Board of Larch. It was noted that we may only have the power to appoint the minimum (one person) and because of the insolvency risk it is likely that there would be difficulties in obtaining suitable indemnity for any potential appointee. This may also be a reputational risk for anyone we approached to assist. Furthermore, it was noted that previous board members have stepped down from their position, citing an inability to work with the CEO and shareholder. In conclusion, the meeting agreed that a statutory appointment of a single board member would be unlikely to resolve the serious issues Larch continues to face. Appointing individuals to an organisation with no infrastructure and a dysfunctional board would be in limited ability to reach a satisfactory outcome."
Regulator
was right to decide whether Larch met the long-term viability criterion in light of all the material before the
Regulator,
which included the history of events so far. Moreover, Mr Feltham was still CEO at the time when the de-registration decision was taken.
Regulator's
decision.
(2) The
Regulator
was plainly wrong to find that no sufficient evidence had been put forward as to its loan agreement with its senior landlord and creditor, SLIL, or alternatively, it should have asked for further information, rather than proceeding to de-register Larch
Regulator
had been provided with satisfactory evidence of a loan agreement between Larch and SLIL. It follows that even if the
Regulator
was wrong to consider that there was insufficient evidence of a loan agreement with SLIL, this does not mean that its de-registration decision was either irrational or disproportionate.
Regulator
did not act irrationally or disproportionately or unfairly in failing to ask Larch for further information about the agreement. Mr Gajjar submitted that the procedurally fair and correct course of action would have been for the
Regulator
to call for evidence or to alert Larch to its concerns about the lack of evidence.
"(1) Where a public authority exercising an administrative power to grant or refuse an application proposes to make a decision that the applicant for some right, benefit or status may have been dishonest in their application or has otherwise acted in bad faith (or disreputably) in relation to the application, common law fairness will generally require at least the following safeguards to be observed. Either the applicant is given a chance in a form of interview to address the claimed wrongdoing, or a form of written "minded to" process, should be followed which allows representations on the specific matter to be made prior to a final decision."
Regulator
was entitled to assume that if clear documentary evidence of the loan agreement was available, Larch would have provided it. The
Regulator
had been engaging with Larch for over two years, and Larch was in no doubt about the
Regulator's
concerns about Larch's financial viability.
"It is also noted that Larch acknowledged in its Representations that if its predicted growth forecast is not achieved, it will be reliant upon its corporate landlord's forbearance in agreeing to delay the start of the repayment of the loan."
Regulator.
I should add that it appears from the format and content of Mr Feltham's statement that it was written with some form of professional assistance, which makes it all the more surprising that a copy of the document was not provided.
(3) A series of factual findings made by the
Regulator
were incorrect and, therefore, flawed
The 2-year growth forecast
Regulator's
decision letter dated 17 December 2021 said that the 2-year cashflow forecast provided on behalf of Larch included a growth forecast, but there was no supporting evidence for this forecast, nor information about the assumptions on which it was based. The decision letter also said that the independent review of the 2-year cashflow forecast by Begbies Traynor (in the Begbies Report) made clear that the information and assumptions provided by Larch (on which the cashflow forecast was based), were not verified as part of the review.
Regulator,
and that the author of the Begbies Report had written to the
Regulator
on 2 December 2021, offering to discuss any aspect of the Report but this was not taken up.
Regulator
decided that Larch would not satisfy the ongoing financial viability test, even if the forecasts had been accurate and verified. It follows that even if the
Regulator
should have accepted the growth forecast in the 2-year projection at face value, it would have made no difference to the outcome.
Regulator
was right to say that Begbies Traynor did not verify the information and assumptions underlying the growth forecast. There are no valid grounds for criticising the deadline of 22 November 2021 that was given to Larch to provide its representations about the proposed de-registration. Section 118(2) of the 2008 Act provides that a provider must be given at least 14 days notice of deregistration. Larch was given longer than this, as the
Regulator
agreed to an extension of time. It cannot be said, in my view, that the
Regulator
acted irrationally or unfairly in declining to give a further extension, especially given the length of time that had elapsed since the
Regulator
had started to engage with Larch. In any event, there is no reason to think that, if a further extension had been granted, this would have enabled Begbies Traynor to verify the information and assumptions. Similarly, there is no reason to think that the writer of the report would have been in a position to verify the assumptions if the offer to speak to the
Regulator
had been taken up. The writer did not say that they were in a position to do so.
Regulator
acted unfairly because it was aware that Begbies Traynor and been instructed to undertake a further scenario analysis and stress test, as is evidenced by the note of the RED meeting on 8 December 2021.
"Larch has not provided any scenario analysis or stress testing showing how it can appropriately mitigate and control the downside risk crystalising – it states that it plans to commission Begbies to undertake this at a future point once a business plan is complete."
Regulator
to proceed to a decision in the face of this very vague statement that something more might be forthcoming at some point in the future.
Regulator
failed to view Larch's position "holistically". By this he meant that the
Regulator
did not take sufficient account of the fact that all of Larch's financial difficulties arose from the Devon Portfolio and so everything will change once the Devon Portfolio is removed. However, as I have already said, the
Regulator
took full account of all of the relevant considerations, including Larch's assertion that it was going to divest itself of the Devon Portfolio, and the
Regulator
still came to the conclusion that the company could not satisfy the ongoing financial viability standard. This was neither irrational nor disproportionate.
Regulator
must stand or fall on the information known to the
Regulator
on 17 December 2021. In any event, a single snapshot of income, several weeks later, cannot verify the 2-year growth projection.
Core rental income lower than lease payments
Regulator
that the core rental income of non-
social
housing
was lower than the lease payments that were payable to landlords because (a) the
Regulator
did not explain the basis for this conclusion and it was challenged in the representations dated 22 November 2021; (b) the Begbies Report reviewed that the Cashflow Forecast and Rent Register and concluded that the rental income was sufficient to cover lease payments and generate an overall substantial surplus; the
Regulator
did not deal with this; and (c) Mr Feltham's statement for the purpose of the 22 November 2021 representations said that for 2021, only 85% of rent receipts were paid out to landlords.
Regulator
decided that the on-going financial stability standard would not be met, even if Larch's cashflow forecasts, which assumed that rental income would be higher than lease outgoings, were accurate. Also, the
Regulator
had referred in its letter of 12 February 2021 to an "apparent shortfall of core rental income against lease costs". This conclusion was based on data that had been provided to the
Regulator
by Larch in January 2021, and Larch did not challenge or gainsay this until the representations of 22 November 2021.
Low margin on non-
social
housing
social
housing
would be payable as lease payments. This was only an interim report, and the figures were not approved by Larch.
social
housing,
had been accurate. It follows that a dispute about the likely gross margins on non-
social
housing
makes no difference. Put another way, the
Regulator's
assessment of Larch's rent and service charge for non-
social
housing
was not a deciding factor when it made its decision to de-register Larch. In any event, Larch's position as communicated to the
Regulator in relation to the DTP report was that it accepted the report's interim recommendations, whilst noting that they remained subject to management comments.
Conclusion