Written evidence submitted by West Devon Borough Council [EXA 110]

Overview

West Devon Borough Council (the ‘Council’) has seen a rise in housing benefit claims relating to Exempt Accommodation over recent years. The Council operates as a two-tier authority, with Devon County Council (the ‘County’) being responsible for the provision of social care services in the region. The Council is responsible for the administration of housing benefit.

In West Devon, a number of new schemes have entered the market over recent years, claiming to provide Exempt Accommodation. In line with patterns that we understand can be seen widely across the Country, these schemes involve an investment fund owning the property and a small registered housing association acting as the landlord. From the Council’s experience, it appears that these types of scheme are carefully designed with their primary aim being to maximise the amount of housing benefit that can be claimed.

The West Devon Schemes

In West Devon, a portfolio of around 12 supported living properties had for several years been owned and run by a private landlord. Those occupants who were entitled to receive housing benefit payments towards their rent were receiving the applicable local housing allowance. Following a series of complex back to back legal transactions, the properties were sold and taken over by a registered housing association. Following the take-over, the housing association attempted to get all tenants to sign new agreements with vastly increased rent figures, submitting those new rent figures to the Council to claim in housing benefit. As the new landlord was a registered provider, they met the landlord criteria to claim Exempt Accommodation thus removing the cap on the amount of housing benefit that could be paid. Claim values across the portfolio increased by around 50% despite the tenant’s accommodation and levels of care remaining the same.

The following transactions took place resulting in the take-over:

• 12 properties were sold by the previous private landlord for £5,754,324.00 to an intermediary company (having undertaken independent valuations it is estimated that this figure is in the region of open market value);

•              The properties were subsequently transferred on the same day to an offshore registered investment company for £17,917,579; and

• Also on the same day the offshore registered investment company then leased the properties to the registered housing association for what we consider to be significantly above general market rents.

Several other similar schemes with different providers have also set up in West Devon recently. They appear to have acquired their properties in the same way as set out above and have the same investment fund freehold owner.

The Providers

The providers that operate under this type of scheme situated in West Devon have all got notices/judgements against them made by the Regulator of Social Housing. It is the Council’s experience that these providers have little or no connection with the area before the scheme takes over a property, and generally appear to have very few staff based in Devon. Evidence relating to what support they are providing in order to meet Exempt Accommodation requirements has been very limited. The regulations and case law in this respect however are complex and currently are not providing local authorities with the support needed to prevent such abuse of the system. In West Devon, it is clear that what limited support is provided, is done with the intent of meeting the minimum requirements for exempt status, rather than because the tenant actually needs it. Legal advice has however suggested that based upon current regulations and case law, it would be very challenging for the Council to try and argue that the provider was not delivering sufficient support.

The Council’s view is that these providers are inexperienced; they often fail to provide basic claim documents such as tenancy agreements and quite clearly do not understand legal issues they would be expected to deal with such as capacity to sign a tenancy and completing a Housing Benefit application fully. They also often struggle to provide sufficient evidence of their service charge and rent breakdowns.

The Rents

If paid at the claimed amounts, the West Devon properties alone in this scheme could have potentially now been costing around £1,690,313.04 per year in housing benefit in comparison to the previous amount being claimed by the private landlord of around £754,000.00 per year.

When questioned about the prices and values contained in the transactions and new rent figures, the scheme advised that they consider Exempt Accommodation to have its own specific market and that these figures were in line with that market.

The Council believe this argument of a specific ‘market’ for Exempt Accommodation is relied upon by many of these types of schemes. However it appears that a lot of the schemes across the Country may in fact be linked, meaning in effect, they have created the market themselves. One of the issues with the current regulations and subsidy regime that has contributed to this market being created, is that questioning rent levels can in some scenarios result in loss of subsidy for a local authority. If claims are approved, full subsidy is paid and therefore there is little appetite to challenge high rents.

The Council’s view is that the rent levels claimed, should be a true and reasonable reflection of the actual cost of the landlord providing the accommodation. This view is shared by many other Authorities and was discussed with the DWP. Unfortunately the regulations do not currently support this.

The Current Regulations

The exemption to rent caps applies to registered housing associations and not for profit organisations and the Council believe it was intended to enable those types of landlord to provide specialist accommodation and support that is tailored to individual’s needs. It is accepted that this type of accommodation may cost more than the local housing allowance rents which is why the cap does not apply. It appears however to have been anticipated when enacting the regulations, that because the cap is only removed in respect of non-profit making landlords, that it would not be possible for profit making companies to exploit the regime.

These schemes have however found a way around the current regulations; a profit making company buys the freehold of the property, they then work with a small registered housing association who is granted a long lease that requires them to pay a disproportionally high rent for the size and nature of the property. The housing association in turn needs to charge high rents to their tenants to enable them to cover their lease costs, resulting in claims for housing benefit that are excessively high. The housing association still meets the requirements of the landlord criteria for Exempt Accommodation and the freehold owner to whom the housing association pays their rents, sits outside of the requirements of the regulations thus being able to make vast profits.

The housing benefit regulations do not explicitly prevent this exploitation currently. The Council has been advised that although these schemes are clearly morally wrong in what they are doing, because there are so many of them now operating across the Country, a change to the regulations is needed to allow Local Authorities to prevent this exploitation. This has been raised with the DWP directly a number of times.

The ‘Care, Support or Supervision’ requirements under the regulations are neither clear enough nor robust enough currently. The providers utilise service level agreements which they put in place with the care provider in an attempt to make it appear that the care is provided on ‘their’ behalf, therefore meeting the requirements. The Council has not accepted this position, the care package is clearly commissioned by the County, and is not therefore provided on the landlord’s behalf.

As the provider does not then meet the ‘Care’ element, they seek to meet the ‘Support or Supervision’ side. The Council has seen providers who insist on providing certain support such as weekly meetings with all tenants regardless of their needs. This is clearly done with a view to trying to meet the ‘Support or Supervision’ element. It is important that the tenant’s needs are properly assessed and met and they should not be being forced to receive certain services just so that their landlord can claim exemption from the rent caps.

There is also a lot of complex case law on the principal of ‘more than minimal’ support which again needs clarification so that Local Authorities do not risk costly appeals if making a decision in respect of this requirement. The regulations do not currently detail what or how much ‘enhanced housing management’ can be taken into account in respect of meeting the ‘Support or Supervision’ requirement.

The Regulations are just not currently enabling Local Authorities to confidently make the morally right decisions without risk either to their subsidy, or costly appeals for which they would receive no support from the DWP.

The Future of Exempt Accommodation

The existence of a private investor head landlord, and a lease to a housing association, is a viable and reasonable structure to enable this type of accommodation to be provided and the Council do not suggest this structure should be prevented.

This market needs investors, who need to make money, but they do not need to make profits three times higher than necessary. If the investment fund in this scheme had paid open market vacant possession value for these properties, the rents would be significantly lower and yet they would still be making the same 6% yield on their investment. The regulations need to be amended to prevent this type of exploitation and ensure that the uncapped amount of housing benefit being claimed represents the true and reasonable cost to the landlord of providing the accommodation and that all figures involved such as purchase prices and rents, are within the region of open market value.

The Council remain of the firm view that there are a number of these schemes across the Country who are grossly taking advantage of the system and are using vulnerable people who may not be properly represented, to make excessive profits whilst at the same time failing to meet the standards required of them by the Regulator of Social Housing.

The provision of this type of accommodation across the Country is hugely important, and it is reasonable to expect that the cost of providing such accommodation will be more than the local housing allowance rates. The Council understand the need to ensure this area is an attractive market to investors, and that any investor will expect to make a profit. However that profit needs to be reasonable, and it is imperative the accommodation and support being provided should be in line with the needs of the tenant, and represent good quality and value for money.

Questions asked by the Select Committee

What is the quality of exempt housing provision?

As the Council has District functions only, we only have sight of the housing benefit claims and it is therefore difficult to comment on the quality of the accommodation in our area. We are not consulted, nor asked to inspect accommodation routinely, only when a complaint is made.

With regards to the main scheme that the Council has raised concerns about in this report, Environmental Health notices were served in respect of some of the properties due to fire safety and other issues. Whilst visiting one of the properties one of the Council’s senior officers noted concerns raised by caring staff regarding repairs and maintenance. A long term leaking roof was observed and commented upon. County staff had also visited other properties, and found an oven that had been broken for over a year, the property was sparsely furnished, and not a welcoming or homely environment for the residents who lived there.

Currently, because this is such an attractive market for these investment funds, they are becoming more and more prevalent. Whilst this continues, the reputable providers cannot enter the market because they cannot compete with the price that these schemes are willing to pay for a suitable property. Whilst this remains the case, the quality of accommodation will not improve.

In addition due to the separation of responsibilities in this sector, currently there is not one body that has oversight of the schemes and the quality they are providing. The County Council is only responsible for commissioning care packages, the Council is only administering housing benefit payments on behalf of the DWP, or dealing with complaints of poor housing and the Regulator of Social Housing has limited powers over this type of supply which is often noted as ‘non-social housing’ on providers registration reports. No one body has clear overall responsibility.

Is the current model of exempt accommodation financially viable, and does it represent value for money?

The Council understands that the Regulator of Social Housing has frequently made statements in formal notices and judgements about specific providers’ lack of financial viability.

Based upon what we have seen in West Devon, it is our view that these schemes offer very poor value for money. Had the investment fund in this scheme paid open market value for the properties, and subsequently leased the properties for figures in line with the prices paid, the charge to the tenants and therefore claims in housing benefit would have been considerably less.

As a whole sector, it is now very difficult to establish whether or not the overall system offers value for money, particularly in a two-tier system. To the County Council, moving people from a care home to supported living offers a significant cost saving. Yet overall that total cost to the tax payer may not necessarily be any less. Budgetary cuts means County Councils may be keen to de-commission care homes and move suitable occupiers to these types of schemes. Whilst the Council do not disagree that for the vulnerable people involved, supported living could offer them much more independence than a care home environment, it is still a factor that the overall cost can be considered along with the quality of the accommodation and support both required and on offer.

Are there significant geographical and regional differences in the provision and the problems of exempt accommodation?

The Council is aware that some unitary authorities in particular have been successful at reducing the number of Exempt Accommodation schemes taking advantage of the system. It may be easier to control and avoid this type of exploitation in a unitary set up. In a two-tier system there is too much separation and budgetary conflict. In West Devon the drive from the County to promote choice and independence and to potentially reduce costs, may have encouraged more Exempt Accommodation schemes to set up here.

There may be a need for different types of Exempt Accommodation in different geographical areas. For example cities and more urban areas may have a need for hostel type accommodation which is less prevalent in Devon. This may cause some level of geographical differences.

The Council considers there to be two different types of exempt accommodation;             

• Hostels and accommodation where occupiers do not receive a commissioned care package but receive additional support from their landlord – for example a homeless hostel for people with low support needs with substance misuse, or difficulties accessing homes or employment independently; and
• Accommodation designed for longer term occupation by people who have specific care needs. Those needs are often met by commissioned care packages.

It is this second type of accommodation that is specifically an issue in West Devon and the wider County.

What is the proportion of exempt accommodation that is provided by registered compared to non-registered providers, and is an appropriate balance being struck?

West Devon currently has more registered providers than non-registered. Registration is not providing a suitable form of regulation presently, due to the lack of powers the Regulator of Social Housing has and so from the Council’s experience there is no direct correlation between poor schemes and their regulatory status.

The Council is aware that some authorities have raised issues with regards to their loss of subsidy in respect of non-registered providers. This may be impacting on their decisions not to challenge rents which in turn helps the schemes argue that a market has been created at that rent level.

What is the proportion of exempt accommodation provided by commissioned compared to non-comissioned providers, and is an appropriate balance being struck?

As the Council operates as a District and does not commission care and support it is generally not aware which schemes are commissioned or non-commissioned.

How does whether a provider is registered or non-registered, or commissioned or non-commissioned, impact the quality of provision?

In the Council’s view a provider’s registration status does not directly impact the quality of their provision. The Regulatory powers are simply too limited. With regards to the scheme in West Devon, the registered provider has continued to provide poor quality accommodation and services, failed to meet the requirements of the Regulator of Social Housing, but yet is still able to operate.

With regards to the schemes in West Devon, the County only commission the care packages to the occupiers of the properties. They do not have any involvement in the accommodation and therefore do not have any legal relationship with the landlord. The County is then unable to exercise any powers or checks over the quality of the accommodation. Unless environmental health issues are raised, the Council also do not have any powers or ability to check the quality of the accommodation.

How should exempt accommodation be provided and what should the service cost?

Exempt Accommodation should be provided by reputable registered housing associations, charities or local authorities. It is important that providers of Exempt Accommodation have a robust and thorough regulatory body overseeing them regardless of their status.

The cost of Exempt Accommodation should be fair and reasonable. Rents should be based upon the true and reasonable cost of the landlord providing that accommodation where the purchase or lease costs involved in the acquisition are in line with vacant open market possession valuations. The service costs should then be a fair proportion of the cost of that service. Service charge costs should be audited and reconciled annually in the same way that any commercial service charge account would be run.

How should the regulatory oversight of exempt accommodation be organised?

Exempt Accommodation requires one regulatory body governing all providers regardless of whether they are a registered provider or not or whether they are commissioned or non-commissioned. A clear central body with oversight of the whole sector is the only way to prevent exploitation in the way that is currently happening. These schemes know the current loop holes in the regulations and are fully aware of the current separation between the different bodies involved.

What should be the regulations governing exempt accommodation and how should those regulations be enforced?

The Regulations need to set out a formula or exact rule as to how rent should be calculated. In addition it should be a requirement that if providers are claiming an amount in respect of services, that they run proper audited service charge accounts providing evidence to the Local Authority. This could mean that provision needs to be made for a reconciliation of payments at the end of each service charge year both with the tenant and the body administering housing benefit payments.

The Regulations need to set out clearly what is needed in respect of the ‘Care, Support or Supervision’ criteria and need to explicitly exclude commissioned care from that. They should also make clear that the providers must evidence that the tenant actually needs the support that is being provided.

Regulations need to make it easier for Local Authorities to prevent this type of exploitation by clearly setting out the regime, not penalising subsidy payments and supporting them to make the right decisions.

The Council has discussed the scheme operating in West Devon on a regular basis with the DWP to inform them as to how the system is being exploited. They are aware that this is a national issue and the Council has suggested that the only way to prevent this exploitation is to change the current regulations. The Council understands that there is a need for private investment in this sector however it is simply not necessary for vastly inflated profits to be made. If regulations were amended to prevent this type of exploitation yet still allow lease based schemes ultimately owned by profit making companies, it would result in a viable model but save significantly large amounts of money. As detailed above, the scheme operating in West Devon is claiming around £900,000 a year more than the previous provider of the same scheme just because they now meet the landlord criteria to enable them to claim Exempt Accommodation status. 

Is there sufficient publicly available information about exempt accommodation?

Exempt Accommodation is a complex area and the current separation of powers and responsibilities add to the complexity. There should be more publicly available information and knowledge of the system.

February 2022