Lease-based housing association admits ‘material uncertainty’ over ability to stay afloat

The lease-based business model has come under increased scrutiny from the Regulator of Social Housing (RSH) in recent years, with a number of associations operating this model being downgraded.

In September 2019, Westmoreland became one of only four housing providers ever to be handed a ‘G4’ for governance by RSH – the lowest grading available.

The regulator’s action came after the organisation temporarily entered its insolvency process following creditor action.

In its latest accounts, Westmoreland said several of its leases, mostly agreed in 2017 and 2018, “have proved ineffective as a result of unsuitable properties, poor stock condition and high rental cost resulting in unsustainable numbers of void units and poor financial returns”.

Since September 2019, Westmoreland has agreed with one of its “superior landlords” to terminate leases for 23 properties containing 136 bed spaces which were “empty and in an unlettable condition”, plus “the release of a £1.6m disputed creditor balance”.

It has also transferred leases on 82 properties to other housing associations or agreed their cancellation with the head landlord, continuing to manage 236 and own one.

Westmoreland attributed a “disappointing” income performance to high void rates and expensive lease payments causing it to struggle to agree matching housing benefit rates with councils.

However, its position is an improvement on the £4.7m loss posted for the 18 months up to September 2018.

It recorded a turnover of £19.4m for the 12 months to 30 September 2019, compared with £25.3m in the previous 18 months, with costs including £14.1m in rents to head landlords.

The association is committed to non-cancellable leases tied to future payments of £177.4m.

The report also reveals that Westmoreland’s previous chair, Mike Doran, died from COVID-19 in March. He was 66.

One Westmoreland resident was also killed by the virus and nine cases were reported.

The RSH installed three new board members at Westmoreland following its G4 regulatory judgement – Susan Hickey, Susan Lock and Lee Sugden – who have agreed to stay on despite their statutory appointment periods ending last month.

Following an overhaul of its governance arrangements, “there are no significant weaknesses” in Westmoreland’s internal control systems, the report said.

However, it acknowledged that achieving compliance with RSH’s standard requires a “significant market shift” in the lease-based supported housing sub-sector.

Fairhome Group’s subsidiary, Fairhome Asset Management, was contracted to handle health and safety work at Westmoreland’s properties, with the association achieving “full compliance across gas, electrical testing, asbestos, legionella, boiler servicing, fire risk assessment and detection systems, hoists and lifts”.

A spokesperson for Fairhome said: “As a specialist developer of care properties for the social housing sector, we have always been willing to financially support not-for-profit housing partners.

“The shareholders of Fairhome Group believe in protecting the housing partners with which we work.

“They unanimously voted to ‘give back’ profits to ensure the sustainability of Westmoreland Supported Housing for the long-term benefit of the vulnerable adults it supports.”

John Russell, executive chair of Fairhome, was chair of Westmoreland between June 2017 and January 2019 and remained a non-executive director at the association until June 2019.

Fairhome’s accounts for the 12 months to 31 July 2019 reported a £1.9m loss, down from a £15m profit the previous year.

Steve Fensom, chief executive of Westmoreland, said: “In 2016 to 2018, Westmoreland, like many other similar organisations, entered into some poor commercial arrangements in support of our aim to provide homes to some of the most vulnerable people in our society.

“Since revitalising the leadership of the business, we have made great progress in resolving the legacy of those arrangements and improving all aspects of the organisation.

“We continue to work closely with our partners and the Regulator of Social Housing on our path to recovery and our financial and regulatory compliance position continues to strengthen. As of September 2020, RSH elected not to extend the positions of the three statutory nominees placed on the Westmoreland Board in 2019. This is in recognition of our progress to date and our ongoing commitment to improve.”