Housing association fails in High Court challenge to removal from register of social housing providers

The Regulator of Social Housing was entitled to remove Larch Housing Association from its register of social housing providers, the High Court has found.

Larch, now called National Community Homes CIC, argued it had been on the brink of resolving its financial problems when it was de-registered and therefore this step by the regulator was irrational.

In National Community Homes CIC v Regulator of Social Housing [2022] EWHC 3171 (Admin) Mr Justice Cavanagh heard the regulator had decided Larch did not satisfy the requirement to demonstrate its financial viability on an on-going basis.

He noted the case was the first in which an appeal under section 121 of the Housing and Regeneration Act 2008 would be determined by the High Court.

The court was told that about 95% of Larch's housing units were leased from two head landlords, known as Henley and SLIL.

Those leased from Henley were in Devon and Larch had run into financial difficulties with them.

It claimed though to be on the cusp of solving the problems by handing the units back to Henley, in return for allocating to Henley the right to recover the debts currently owed to Larch in relation to these properties.

Larch said it had reached agreement with SLIL to negotiate heads of terms for three contracts to provide property management services for some 813 units.

It argued that the regulator’s decision to de-register was “irrational, disproportionate, premature and improper” and that 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” and that certain factual findings were incorrect.

The regulator said it had accepted a voluntary undertaking by Larch in July 2020, with which the landlord failed to comply, and “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”.

Most Larch units were supported non-social housing and only a small proportion general needs social housing.

Despite this, “Larch’s place on the register of social housing providers is very important to it”, Cavanagh J said.

This was because registration made it easier to deal with local authorities, who in practice would usually engage only with landlords on the register and so would have been unlikely to place tenants from their waiting lists with Larch were it not registered.

Housing benefit rules also made it financially beneficial for local authorities to deal with registered providers.

Larch operates the long-term lease model of social housing provision, which involves property funds, private equity investors, and individuals providing property on long term leases to a registered provider, which then lets accommodation to a tenant via nomination arrangements with a local authority.

The local authority then usually commissions an individual care package for the tenant and the provider makes a charge for rent and collects service charges for maintenance of communal areas and security. The care package is funded separately.

Cavanagh J said: “The problems in relation to Larch first became apparent to the 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 found “compelling evidence that Larch's board had not managed Larch's affairs with an appropriate degree of skill, diligence, effectiveness, prudence, and foresight” and was particularly concerned that Larch had not kept up lease payments.

Cavanagh J said in his judgment: “The 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.”

This was because the regulator’s main motive was that Larch’s submissions “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.”

The judge said the regulator felt that even if all Larch’s proposals were successful, it had still not demonstrated its ongoing financial viability.

“In my judgment, it is equally clear that there is no valid basis upon which the court could hold that the conclusion that Larch did not satisfy the on-going financial viability requirement was irrational or disproportionate,” Cavanagh J said.

He went on: “The operating model that was adopted by Larch was a risky one. The effect of the long leases was that Larch was at grave financial risk if it could not find tenants for all of its units, or could not obtain rents which exceeded the lease payments that were due on the properties.”

The regulator was entitled to take into account problems with financial controls and “a history of resignation of directors”.

Cavanagh J concluded: “The central point is that the 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.”

Mark Smulian