Provider of specialist supported housing loses legal challenge to adverse regulatory judgment

A provider of specialist supported housing (SSH) for adults with physical disabilities and/or mental health needs has failed in a legal challenge to a regulatory judgement of the Regulator of Social Housing (RSH) in which it was assessed as ‘non-compliant’ in respect of financial viability and governance.

In Inclusion Housing Community Interest Company v Regulator of Social Housing [2020] EWHC 346 (Admin) the claimant advanced five grounds of challenge. They were that the regulator:

1. failed to give adequate reasons for its decision;
2. reached conclusions on risk, governance, financial viability and growth that were irrational;
3. took an unlawful approach to risk, in breach of its own policy;
4. unlawfully departed from its own policy on the grading of financial viability; and
5. took a decision that was disproportionate, in breach of its statutory duties.

The RSH did not accept that any of these grounds was made out.

Mr Justice Chamberlain dismissed the claim. On the reasons challenge, he said that those challenging regulatory decisions often complained of a breach of natural justice on the basis that the regulator had failed to identify its concerns sufficiently clearly to enable meaningful representations to be made.

“No such complaint was made here,” he said. “The fact that there had been a fair process of engagement prior to the RJ does not absolve the regulator of its duty to give properly intelligible reasons. But it does form part of the backdrop against which the intelligibility of the reasons ultimately given are to be judged..... the reasons here were addressed to a party (Inclusion) that must be taken to be well aware of the issues involved.”

The judge paraphrased the reasons given in the regulatory judgment as:

• Inclusion's business model involved entering into long, index-linked leases, on full repairing and insurance terms, of between 20 and 25 years. This meant income collection, maintenance and repair and maintenance cost risks were transferred to Inclusion. While it was contractually committed to meet index-linked lease premium payments over the long term, it did not have the same level of protection for its income or associated costs.
• Inclusion's stress-testing and scenario planning indicated that there was a reasonable range of adverse scenarios in which Inclusion's ability to operate over the long-term was profoundly affected. If one of these scenarios were to eventuate, Inclusion would try to renegotiate leases, but this would be reliant on the goodwill of third parties, failing which it would have to explore insolvency procedures, which would leave tenants exposed.
• Inclusion's growth aspirations compounded these exposures.
• Although Inclusion was able to meet its commitments as and when they fell due (i.e. it was not currently insolvent or at imminent risk of insolvency), it had not demonstrated that the risks could be adequately mitigated if they were to crystallise. Its mitigations would be reliant on multiple third-party agreements being reached.

Mr Justice Chamberlain said it was true that the reasons did not engage in detail with the risk mitigation measures described in Inclusion’s representations. They did, however, explain in broad terms why the regulator considered those mitigation measures to be insufficient to demonstrate compliance.

The judge said: “The regulator's duty was to explain adequately why it reached the conclusions it did about Inclusion, not to explain why its business model was more concerning or risky than that of other providers. Against the background of engagement between the regulator and Inclusion over the course of the IDA [In-Depth Analysis], the reasons given were in my judgment intelligible and adequate. They enabled Inclusion to understand why the conclusion expressed in the RJ [regulatory judgement] had been reached.”

On the rationality challenge Mr Justice Chamberlain found that:

• He could detect no error of logic or approach in the regulator's conclusion in the regulatory judgement that a change in the policy applicable to those requiring SSH was one of the 'reasonable risks associated with economic and policy cycles', rather than what might be termed a 'black swan event'.
• The conclusion in the regulatory judgement that there was a ‘reasonable risk of adverse scenarios’ in which there would be ‘profound effects on [Inclusion’s] ability to operate in the long term’ was properly open to the regulator.
• Insofar as the regulator reached a view that a model which involved the provider holding no assets but incurring increasing numbers of long, index-linked liabilities with no break clauses was inherently riskier, it was in his judgment entitled to reach that view.
• As to the conclusion on financial viability, the regulator was aware that Inclusion's reserves had increased, but it properly took into account the fact that Inclusion's liabilities had also been increasing substantially. Inclusion's total exposure to contractual lease payments was some £431m as at March 2019, having increased by 30% since the previous year. “That was plainly relevant to Inclusion's compliance with the financial viability standard. The conclusion that Inclusion was non-compliant with the financial viability standard involved no error of logic or approach. It resulted from a judgment, made by a specialist regulator, which was properly open to it on the evidence it had.”
• As to growth, it was true that Inclusion had demonstrated that its surpluses had grown (both in raw and in percentage terms) with its business. “But, as noted above, so had its liabilities. Inclusion's plan was to continue to enter into long-term leases with no break clauses in respect of some 350 new units per year. If it was rational to conclude that these liabilities gave rise to a substantial risk, not adequately addressed by mitigation measures (as I have concluded it was), it was rational to conclude that adding more units on precisely the same terms would 'compound these exposures'.” On the evidence, there was no illogical assumption that growth was inherently likely to increase risks. The conclusion was that growth on the same model already identified as risky would increase risk. “In my judgment, that conclusion involved no error of logic or law.”
• The regulator was entitled to conclude that a provider whose business model was judged to involve too much risk had failed to ensure an effective risk management framework, “particularly where, as here, the flaws were identified very clearly in 2015 and, in the regulator's view, have not been sufficiently addressed since.”

On the RSH’s approach to analysing risk, the judge said the regulator “did not find that the risks were ‘extremely unlikely’. On the contrary, it described the risks with which it was concerned as 'reasonable risks associated with economic and policy cycles'. For the reasons I have given, that conclusion was rationally open to it, as was the conclusion that Inclusion was not managing the risks effectively. There was nothing in the RJ that could properly be characterised as a departure from the general terms of §10 of the Code.”

Mr Justice Chamberlain said ground 4 (unlawful departure from the Regulator’s policy on grading financial viability) similarly added nothing to ground 2.

On ground 5 (disproportionate interference), the judge said his conclusions on the proper approach were as follows:

(a) Section 92K(5) of the Housing and Regeneration Act 2008 Act (which established a regulatory regime for social housing) “on its face imposes on the regulator an obligation of result – to exercise its functions in a way that (so far as possible) is proportionate. This wording differs from that of other provisions imposing a duty to 'have regard' to the principle of proportionality…..The difference cannot have been accidental.”

(b) The words 'so far as possible' did not transform an obligation of result into a 'have regard' obligation. They simply qualified the result that was to be achieved. “This means that Parliament intended the court to decide whether the Regulator did, or did not, exercise its powers in a way that was so far as possible proportionate – and not merely whether the decision-maker rationally concluded that the result was so far as possible proportionate.”

(c) But, even where it was for the court to assess whether regulatory action was proportionate, the weight to be given to the decision-maker's view would depend on the context and might be considerable.

(d) Two factors present here suggested that considerable weight should be afforded to the regulator's view. “First, it was a specialist regulator exercising a judgment in an area in which it is expert and the court is not. Second, the decision being taken did not constitute a direct interference with the fundamental rights of Inclusion.”

Mr Justice Chamberlain said that the regulator’s conclusion that its actions were proportionate – based as it was on a rational and lawful analysis of its ‘serious concerns’ – was entitled to considerable weight.

He added that in awarding a G3/V3 grading, the regulator was not stopping Inclusion from trading. “It was merely saying – publicly – that there were 'serious issues of regulatory concern' and that, 'in agreement with [the regulator], the provider is working to improve its position'. I accept that this is likely to have, and in this case has had, a practical effect on Inclusion's relations with certain third parties, but a G3/V3 grading is not a 'striking off'. It is intended to encourage changes that will lead to compliance. Looking at the matter as a whole, I consider that in awarding the grading in this case, the regulator exercised its functions in a way that was (so far as possible) proportionate.”

Responding to the ruling, the Regulator of Social Housing said: “We welcome the decision the High Court dismissing Inclusion Housing’s challenge to our regulatory judgement following the Court’s careful consideration of this matter.

“Our judgement on Inclusion Housing remains in place and we continue to work with the organisation and hope it will take steps to address our concerns. This will help ensure that the long term interests of the tenants of Inclusion can be best protected.”