Housing Delivery Vehicles and the Right to Buy

On 21 December 2016 the High Court handed down judgment in the case of R (Plant) v Lambeth LBC. This was the second judicial review of Lambeth's consultation on the refurbishment / redevelopment of the Cressingham Gardens Estate ("the Estate"). In the earlier case the court found that the Council's decision to stop consulting on three (of five) options for the Estate was unlawful. Following that judgment the Council conducted a re-consultation in relation to all five options.

Mr Plant sought to challenge the conduct of that re-consultation. Seven grounds of challenge were advanced, all of which were dismissed. This alert considers the arguments raised about the loss of the existing secure tenants' Right to Buy and what this means for housing authorities intending to deliver rented accommodation via a "special purpose vehicle" such as a council-owned company or joint venture, particularly where that involves the demolition and redevelopment of existing stock. 

Factual background

Mr Plant was a secure council tenant of a property on the Estate. As a secure tenant he had the Right to Buy ("RTB"). Following its re-consultation the Council decided to demolish all 306 homes on the Estate and redevelop it with 464 new homes. As far as the Estate's secure tenants were concerned the Council intended to seek possession of their properties on Ground 10 of Schedule 2 of the Housing Act 1985 ("the Act"). Ground 10 is a discretionary ground for possession that is made out if the court is satisfied that the landlord intends to demolish the property and that "suitable alternative accommodation" will be made available to the displaced tenant.

The Council did not have sufficient funding to build the new homes. It therefore proposed to set up a 100% council-owned company ("Homes for Lambeth") as a special purpose vehicle ("SPV") which could borrow from financial institutions the funds needed to undertake the redevelopment.

The Council offered existing secure tenants a guarantee that they could either:

1. take a lifetime assured tenancy of a new property on the Estate, at Council rent levels; or
2. be given high priority to bid for a Council property elsewhere in the borough (in which case that tenancy would be a secure tenancy (which means they would continue to have RTB).

The Council's consultation document made it clear that the assured tenancies of the new properties on the Estate would not confer RTB. That was a correct summary of the statutory position but the consultation documents did not address the possibility of the SPV granting a contractual RTB to the displaced secure tenants who wished to take an assured tenancy of a new property on the Estate.

This issue was raised by residents during the consultation. The Council stated to its Oversight and Scrutiny Committee that "the Council will consult with tenants on the proposed assured tenancy in due course". That further consultation had not taken place at the time of the hearing.

A Written Ministerial Statement delivered to the House of Commons on 20 March 2015 by the then housing and planning minister Brandon Lewis stated that:

"It is not acceptable for local authorities to establish new wholly owned or controlled housing companies deliberately to avoid the government's reinvigorated Right to Buy Policy … Specifically, the government will not support the establishment of such companies where they are developing or acquiring and retaining new social or affordable units for rental purposes." 

The Claimant's arguments

In relation to the RTB issue the Claimant raised three arguments:

1. The Council's proposal involved a breach of Article 1 Protocol 1 ("A1P1") of the European Convention on Human Rights (right to peaceful enjoyment of possessions) in that it interfered with the ability of existing secure tenants to exercise RTB at some stage in the future;
2. The Council's cabinet was misled or misdirected as to the options open to the Council; and
3. The consultation failed to provide consultees with adequate information about the effect of the Council's proposal on RTB and the options for maintaining such a right.

The Court's judgment

1. In relation to the first argument the court reached the clear view that A1P1 was not engaged. A secure tenancy may be terminated on any of the grounds in Schedule 2 of the Act, of which demolition is only one. As soon as the tenancy is terminated (for whatever reason) RTB ceases to exist. The ability to exercise the statutory RTB at some point in the future was therefore not a "possession" within the meaning of A1P1.
   
   However, the court went on to say that had A1P1 been engaged, it would have had difficulty in accepting that a decision not to include a contractual RTB in the assured tenancies granted by the SPV was proportionate, applying the third test in the case of Bank Mellat v HM Treasury (No.2) (whether a less intrusive measure could have been used). The court stated that it would have had no basis for concluding that such a contractual term would unacceptably compromise the Council's objectives. However, even in those circumstances the court would not have quashed the Council's decision because of its stated commitment to undertake a further consultation in relation to the terms of the assured tenancies, so no final decision on whether to include a contractual RTB had yet been made.
   
   
2. In relation to the second argument the Claimant's case was that the cabinet had not been fully informed of the option of current residents remaining on the Estate on assured tenancies which contained a contractual RTB, and had not had its attention drawn to government policy in the form of the Written Ministerial Statement. The Council's position was that the Statement was irrelevant because in setting up the SPV the Council was not seeking "deliberately" to avoid the government's RTB policy, but rather as the only means by which private capital could be raised and invested in the Estate. The Court found that argument too restrictive and legalistic and doubted whether "deliberately" was used in the Statement to confine the objective of the policy to arrangements involving something akin to specific intent. In the court's view, a local authority that sets up a SPV to build housing to replace homes held on secure tenancies, being aware that to do so will (in the absence of a contractual right) result in the SPV's tenants not enjoying the statutory RTB, does so "deliberately". That said, the court reached the firm conclusion that it was not a material legal error for the cabinet not to have had regard to the Statement.
   
   
3. In relation to the third argument the Court's view was that the Council's stated commitment to hold a further consultation on the terms of the assured tenancy (which it stated had given rise to a legitimate expectation) overcame the complaint that consultees were given inadequate information about the RTB issue. 

What this means for housing authorities

Only secure tenants have the statutory RTB*. Only entities that satisfy the "landlord condition" in section 80 of the 1985 Act can grant secure tenancies. Neither a council-owned company nor a joint venture with a private partner will, on the face of it, satisfy the "landlord condition". It follows that tenancies granted by the SPV will not be secure, and its tenants will therefore not have the statutory RTB.

Authorities should keep a careful audit trail of the reasons for setting up a SPV (such as an ability to attract private investment). Although the court found that the cabinet not having regard to the Ministerial Statement was not a material legal error, it would be advisable to draw the Statement to the attention of any committee or cabinet considering a proposal to set up a company / SPV to deliver rented housing. 

Where the receipt of private funding by the SPV is conditional upon it not granting tenancies that confer a contractual RTB, this must be scrutinised and properly documented so as to help support an argument that the vehicle is being used as a means of attracting housing investment, rather than as a means of deliberately avoiding the government's RTB policy.

Where a proposed scheme involves the demolition of dwellings let on secure tenancies, possession of those dwellings will first need to be obtained on Ground 10 of Schedule 2 of the Act. Although this case can be relied on in support of the proposition that the statutory RTB is not a "possession" within the meaning of A1P1 (meaning that a possession order made on that Ground will not amount to an unlawful interference with A1P1) a tenant facing a Ground 10 possession claim may seek to argue that alternative accommodation will only be "suitable" (and therefore Ground 10 will only be made out) if it is granted on terms which include a contractual RTB on similar terms to the lost statutory right (see paragraph 2(e) of Part IV of Schedule 2 to the 1985 Act). Where a tenant has a particularly compelling need to continue living on the (redeveloped) estate, it may not be enough to point to the option of a secure tenancy elsewhere.

Authorities should give early and careful consideration to the possibility of including a contractual RTB in any assured tenancy to be granted by a company / SPV to a former secure tenant whose property is to be demolished, and existing tenants should be consulted on this issue.

Bevan Brittan's commercial team has considerable experience advising local authorities on the establishment of housing delivery vehicles and the different ways they can be appropriately used to deliver a range of housing tenures and objectives.

If you would like to speak to one of our team about this please contact Matthew Waters or Trevor Watt.

*This is subject to the provisions in the Act on the "preserved right to buy" which may apply where a local authority transfers its stock to the private sector (e.g. a large scale voluntary transfer), but those provisions did not apply on the facts of this case.