COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
MR JUSTICE KEITH (ADMINISTRATIVE COURT)
Strand, London, WC2A 2LL
B e f o r e :
Vice-President of the Court of Appeal
LORD JUSTICE WALLER
LORD JUSTICE MAURICE KAY
| THE QUEEN on the application of CLAYS LANE HOUSING CO-OPERATIVE LIMITED
|- and -
|THE HOUSING CORPORATION
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Paul Stanley (instructed by Trowers & Hamlins) for the Respondent
Crown Copyright ©
Lord Justice Maurice Kay :
"20(1) The Corporation may direct an inquiry into the affairs of a registered social landlord if it appears to the Corporation that there may have been ….mismanagement….
27(1) Where as a result of an inquiry under paragraph 20….the Corporation is satisfied as regards a social landlord –
(a) that there has been ….mismanagement in its administration, or
(b) that the management of its land would be improved if its land were transferred in accordance with the provisions of this paragraph,
the Corporation may, with the consent of the Secretary of State, direct the registered social landlord to make such a transfer.
27(3)…The Corporation may direct a transfer to be made to the Corporation or to another registered social landlord.
27(4) The transfer shall be on such terms as the Corporation may direct on the basis of principles determined by it. The consent of the Secretary of State is required both for the terms of the transfer and for the determination of the principles on which it is based.
27(5) The price shall not be less than the amount certified by the District Valuer to be the amount the property would command if sold by a willing seller to another registered social landlord."
In addition, by section 9(1), the consent of the Corporation is required for any disposal of land by a registered social landlord.
"13 The Board's approach was to compare the relative merits of a compulsory transfer of [CLHC's] housing stock to Peabody with the voluntary transfer of (its) engagements to [TFHC]. Thus it took into account its belief that
(a) Public funding would be more at risk if [CLHC's] engagements were transferred to [TFHC] because of the 'relative financial strengths' of [TFHC] and Peabody.
(b) Peabody would be more likely than [TFHC] to attract new public funding for the ….housing stock from the London Borough of Newham.
(c) Tenants would have greater security as assured tenants of Peabody than as contractual tenants of a fully mutual cooperative.
(d) Peabody provided the Board with the necessary level of certainty which the Board required that it would be able to discharge its regulatory responsibilities, in view of its 'long history of working in Inner London, its financial strength and its commitment to tenant participation at Clays Lane', whereas [TFHC's] proposals did not give the Board that level of certainty.
The Board recognised that a voluntary transfer of…engagements to [TFHC] 'would ensure continuing mutuality', but it noted that the Peabody proposal ' would also provide the opportunity for tenant involvement in the management and development of the housing stock'.
14. The Board was aware of problems about cross-border regulation which a transfer of…engagements to [TFHC] might raise, i.e. the transfer of housing stock in an area governed by one regulator HC to a body regulated by a different regulator [Communities Scotland]. It noted that Communities Scotland had raised a number of regulatory concerns, in particular those relating to control, policy, planning, risk management, and a complex governance framework….(and) about the potential impact on [TFHC] were its proposed transfer engagements to proceed.' The Board also noted that the London Borough of Newham did not support the proposed transfer of engagements to [TFHC] but did support the transfer of the housing stock to Peabody.
15 Finally the Board had permitted counsel for [CLHC] to address it. It noted that he had submitted that it would be wrong for the Corporation to consider the relative merits of the two proposals because the exercise was not a comparative one. The Board did not agree. And to the extent that a compulsory transfer of its housing stock to Peabody amounted to an interference with its property rights and its rights of association….the Board concluded that 'the public interest concerns in favour of a statutory transfer were sufficient to justify' any such interference."
I now turn to the grounds of appeal.
Issue 1: Article 1 of the First Protocol
"Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provision shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties."
It is common ground that the part of Article 1 which is engaged in the present case is the second sentence. It is a "deprivation" case rather than a "peaceful enjoyment" or "use" case. The primary issue between the parties is as to the test which has to be applied when considering the justification for a deprivation. Keith J concluded (at paragraph 29):
"What the Board had to determine was whether a compelling case in the public interest had been established for the transfer of the….. housing stock to Peabody, having balanced the comparative benefits of the compulsory transfer of the housing stock to Peabody and the voluntary transfer of the housing stock to [TFHC], and [CLHC's] wish for the latter so that its members could continue to enjoy the benefits of a cooperative. If a comparison of the benefits and disadvantages of the two alternative options compellingly shows that the option which results in the deprivation of property is much to be preferred, a compelling case for adopting that option in the public interest will have been established."
Keith J was satisfied that that was the test which the Board had applied. In reviewing the Board's decision, he said (at paragraph 30):
"It cannot be said that the Board made the wrong judgment as to where the 'fair balance lay', nor can it be said that the Board did not have rational grounds for concluding that the public interest in favour of a transfer to Peabody was such that it outweighed [CLHC's] right (subject to [HC's] consent) to dispose of its housing stock as it wished."
In a nutshell, the criticism which Mr. Wolfe, on behalf of CLHC, makes of these passages is that they fail to apply a sufficiently rigorous test of proportionality, having regard to the decisions of the House of Lords in R (Daly) v. Secretary of State for the Home Department  UKHL 26,  2 AC 532 and R v. Shayler  UKHL 11,  1 AC 247 and the decision of the Court of Appeal in Samaroo v. Secretary of State for the Home Department  EWCA Civ 1139.
"In very broad terms the Convention requires that a fair balance must be struck between the public interest, in the present case in securing much needed redevelopment of the western sector…., and an individual's right to the peaceful enjoyment of his possessions. Any interference with that right must be necessary and proportionate.
Although the Human Rights Act 1998 does not come into force until October 2, I am satisfied that for present purposes the Secretary of State's policy, as set out in Circular 14 of 94 that a Compulsory Purchase Order should not be made unless there is 'a compelling case in the public interest', fairly reflects that necessary element of balance."
Soon after the coming into force of the Human Rights Act Harrison J expressly approved that approach in London Borough of Bexley v. Secretary of State for the Environment Transport and the Regions  EWHC (Admin) 323, at para. 46.
"According to the applicants, the security of tenure that tenants already had under the law in force…provided an adequate response and the draconian nature of the means devised to give effect to the alleged moral entitlement, namely deprivation of property, went too far. This was said to be confirmed by the absence of any true equivalent to the 1967 Act in the municipal legislation of the other Contracting States and, indeed, generally in democratic societies. It is, so the applicants argue, only if there was no other less drastic remedy for the perceived injustice that the extreme remedy of expropriation could satisfy the requirements of Article 1. This amounts to reading a test of strict necessity into the Article, an interpretation which the Court does not find warranted. The availability of alternative solutions does not in itself render the leasehold reform legislation unjustified; it constitutes one factor, along with others, relevant for determining whether the means chosen could be regarded as reasonable and suited to achieving a legitimate aim being pursued, having regard to the need to strike a 'fair balance'. Provided the legislature remained within these bounds, it is not for the Court to say whether the legislation represented the best solution for dealing with the problem or whether the legislative discretion should have been exercised in another way….The occupying leaseholder was considered by Parliament to have a 'moral entitlement' to ownership of the house, of which inadequate account was taken under the existing law…The concern of the legislature was not simply to regulate more fairly the relationship of landlord and tenant but to right a perceived injustice that went to the very issue of ownership. Allowing a mechanism for the compulsory transfer of the freehold interest in the house and the land to the tenant, with financial compensation to the landlord, cannot in itself be qualified in the circumstances as an inappropriate or disproportionate method for readjusting the law so as to meet that concern."
This approach was followed in Holy Monasteries v. Greece (1994) 20 EHRR 1 and Chassagnou v. France (1999) 29 EHRR 615. It was also followed by Lightman J in Fisher v. English Nature  EWHC 1599 (Admin) in which James was cited by the judge as authority for the proposition that "the fact that there may be other even better methods of achieving the same ends does not necessarily mean that any particular measure is disproportionate under Article 1" (Paragraph 46). It is evident that in the present case Keith J founded his conclusion on this line of authority.
"The contours of the principle of proportionality are familiar. In de Freitas v. Permanent Secretary of Ministry of Agriculture Fisheries Lands and Housing  1 AC 69 the Privy Council adopted a three stage test. Lord Clyde observed, at page 80, that in determining whether a limitation (by an act, rule or decision) is arbitrary or excessive the Court should ask itself 'whether: (i) the legislative objective is sufficiently important to justify limiting a fundamental right; (ii) the measures designed to meet the legislative objective are rationally connected to it; and (iii) the means used to impair the right or freedom are no more than necessary to accomplish the objective'."
Mr. Wolfe emphasises the "no more than necessary" requirement. In Shayler, Lord Hope adopted a passage from an article by Professor Jeffrey Jowell QC, Beyond the Rule of Law: Towards Constitutional Judicial Review  PL 671, 679. Professor Jowell described proportionality in this way:
"It starts by asking whether the breach is justifiable in terms of aims it seeks. Some Convention rights can only be violated for specific purpose such as national security and therefore other aims would not be legitimate, whatever their rationale. It then proceeds to consider whether in reality those aims are capable of being achieved. Spurious or impractical aims will not suffice. It then goes on to consider whether less restrictive means could have been employed. The breach must be the minimum necessary. Finally it asks whether the breach is necessary (not merely desirable or reasonable) in the interests of democracy. Only a 'pressing social need' can justify the breach of a fundamental right."
Again, Mr. Wolfe emphasises consideration of whether "less restrictive means could have been employed" and the requirement that "the breach must be the minimum necessary".
"…in deciding what proportionality requires in any particular case, the issue will usually have to be considered in two distinct stages. At the first stage, the question is: can the objective of the measure be achieved by means which are less interfering of an individual's rights?….
At the second stage, it is assumed that the means employed to achieve the legitimate aim are necessary in the sense that they are the least intrusive of Convention rights that can be devised in order to achieve the aim. The question at this stage of the consideration is: does the measure have an excessive or disproportionate effect on the interests of affected persons?"
"Proportionality is not simply whether at the end result the balance is fair, but whether, in getting there, it has been decided that the most appropriate course of conduct is also the least interfering with human rights, having regard to the public benefit to be achieved and the different means of achieving it."
On this basis, it is suggested that the Board of HC and Keith J failed to ask the right question. It was not enough to decide in favour of Peabody and against TFHC simply because a compelling case in the public interest had been established. It was necessary also to consider whether such a decision was the least intrusive of CLHC's rights under Article 1 of the First Protocol. That in turn required a consideration of the relative intrusiveness of a decision in favour of Peabody and a decision in favour of TF but that was never carried out by the Board or by Keith J, who specifically rejected such an approach.
"The concept of proportionality is inherent in the approach to decision-making in planning law. The procedure stated by Dyson LJ in Samaroo….is not wholly appropriate to decision-making in the present context in that it does not take account of the right, recognized in the Convention, of a landowner to make use of his land, a right which is, however, to be weighed against the rights of others affected by the use of land and of the community in general. The first stage of the procedure stated by Dyson LJ does not require, nor was it intended to require, that, before any development of land is permitted, it must be established that the objectives of the development cannot be achieved in some other way or on some other site. The effect of the proposal on adjoining owners and occupants must however be considered in the context of Article 8, and a balancing of interests is necessary…..Dyson LJ stated, at paragraph 18, that 'it is important to emphasise that the striking of a fair balance lies at the heart of proportionality'."
Keene LJ, agreeing, said (at para 55):
"….the process outlined in Samaroo, while appropriate where there is direct interference with Article 8 rights by a public body, cannot be applied without adaptation in a situation where the essential conflict is between two or more groups of private interests. In such a situation, a balancing exercise of the kind conducted in the present case by the Inspector is sufficient to meet any requirement of proportionality."
I interpret this as signifying that what is "necessary" is driven by the balancing exercise rather than by a "least intrusive" requirement.
"….the TFHC proposals did not provide the necessary level of certainty that the Board required in order to properly discharge its regulatory responsibilities in the public interest"
"….a statutory transfer to Peabody would provide the certainty that it required."
It further considered that any interference with the right enshrined in Article 1 of the First Protocol was "lawful, in the public interest and proportionate".
Issue 2: regulatory concerns
"In essence, (1) HC's concerns about the practicality of regulation were an important factor in its decision; and (2) HC failed to explain these concerns to CLHC and TFHC or to give them a reasonable opportunity to deal with them by meeting to discuss them."
The first of the enumerated points takes issue with the following conclusion of the judge (at para 38):
"Since the legal and practical problems said to have been posed by [TFHC's] presence in Scotland, though referred to at the meeting on 24 September 2002, did not play, on my reading of the minutes, any part in the Board's ultimate decision to direct the transfer of [CLHC's] housing stock to Peabody, the challenge to the Board's decision on this topic must fail."
Before this Court it is common ground that the implications of dual, cross-border regulation were of concern to the HC and did play a part in the Board's ultimate decision. To that extent the judge was in error in stating otherwise. However, the real issue is whether HC failed to comply with the requirements of procedural fairness when considering the problem. Mr. Wolfe relies on the common law requirement of procedural fairness and also Article 1 of the First Protocol which has a procedural component: Jokela v. Finland (2003) 37 EHRR 26, at para. 45. However, I perceive no significant difference between the requirements of the common law and of the First Protocol in this regard. His complaint is that HC failed to comply with the requirements of procedural fairness in that it did not communicate its concerns to CLHC with sufficient clarity and it did not hold a meeting with CLHC's representatives to enable those concerns to be considered. In order to address these points it is first necessary to refer to more of the factual background.
"The problem is the exercise of what are very similar regulatory functions in respect of the same body by two separate regulators…..In summary, they are potentially inconsistent regulatory actions or approaches in relation to the same [Registered Social Landlord], and inevitable administrative complexity which will be involved in 'dual' regulation."
These are extracts from a lengthy letter which went into some detail before inviting comment. Six days later HC's assistant chief executive wrote to CLHC referring to "unique regulatory problems" arising from the cross-border implications. The letter communicated a decision in the form of a resolution of the Board that there should be a transfer following the findings of the statutory inquiry but the question whether it should be to TFHC or to Peabody should be deferred to enable HC to assess the regulatory implications in concert with Communities Scotland and to allow CLHC more time "to work up their proposals". It was made clear that the matter would not be allowed to drift and that there must be "a strong commitment to rapid progress from all parties".
"…..we have heard nothing, apart from the brief statement by Counsel instructed by your firm that it is not a 'significant problem' as it is…merely 'an administrative challenge'."
The reference to the statement by Counsel relates to the Board meeting of HC which had taken place on 22 June and which had been attended by members of CLHC, its solicitor and counsel (in fact, Mr. Wolfe), who had been permitted to address the Board.
"…it is also relevant for the Board to consider whether it believes it will be possible to achieve satisfactory arrangements for the dual regulation of a single legal entity operating on both sides of the border. The Board needs to consider whether it will be possible to put in place satisfactory arrangements on fundamentally important issues such as the protection of the public funding invested in the housing stock at CLHC, or the protection of the interests of CLHC's tenants. It also needs to consider the danger of potentially inconsistent and contradictory regulatory action and the administrative and legal complexity involved in dual regulation by [HC] and Communities Scotland. Solicitors acting for CLHC have argued that these concerns could be overcome through negotiation and agreement between [HC] and Communities Scotland following any transfer of engagements." (Emphasis added)
It also disclosed a letter from Communities Scotland dated 10 September stating that "we remain unclear about the issue of dual regulation and whether this is a) legally possible or b) practicable".
Issue 3: Peabody
"The £5.6 M of public funding would be at more risk on TFHC's balance sheet, because of the relative financial strengths of the two registered social landlords.
[The Board] further noted Peabody's…..financial strength…."
As a regulatory body, HC is engaged in informing itself about the position, including the financial position, of its regulated subjects. It carries out assessments, the results of which are categorised as green, amber or red under a "traffic lights" system. At the time of the decision of 24 September 2002, the current assessment of Peabody's financial position was dated 24 February 2002. It stated:
"Financial performance has been satisfactory and we have no concerns regarding the financial health of this association."
That remained the current assessment until 1 September 2003, when a further assessment resulted in Peabody remaining in the green category but in a lower sub-category which meant that its:
"financial condition is presently acceptable but exposures exist which make it vulnerable to deteriation."
The September 2003 assessment described the position as follows:
"Whilst the financial position is acceptable, there are areas of potential vulnerability. However, the group operates in areas where demand for housing is likely to remain high and it has a strong asset back. It will also benefit financially from the impact of rent restructuring.
A key challenge facing the Trust is the condition of its stock and the costs involved in meeting the Decent Homes Standard, with the age of the stock being a relevant factor. An updated asset management strategy is being prepared and the associated costs will feed into the next business planning round. Any significant increase in costs could affect the financial position adversely. Another challenge is the Trust's need to make continued efficiency savings in operational costs year on year. "
"In our view, the time has now come to accept that a mistake of fact giving rise to unfairness is a separate head of challenge in an appeal on a point of law, at least in those statutory contexts where the parties share an interest in cooperating to achieve the correct result…….Without seeking to lay down a precise code, the ordinary requirements for a finding of unfairness are…First, there must have been a mistake as to an existing fact, including a mistake as to the availability of evidence on a particular matter. Secondly, the fact or evidence must have been 'established' in the sense that it was uncontentious and objectively verifiable. Thirdly, the appellant (or his adviser) must not have been responsible for the mistake. Fourthly, the mistake must have played a material (not necessarily decisive) part in the Tribunal's reasoning."
Although the present case involves a regulatory decision and not a statutory appeal, Mr. Stanley, rightly in my view, is content to accept that, as a matter of law, the principles articulated by Carnwath LJ are capable of applying in the present context.
"[The] approach and assessment was entirely based (at least from the point of view of HC's Board – which took the decision – and the Secretary of State) on the understanding that there was nothing which cast any doubt at all on Peabody's financial strength. In fact there was such information. Not information which would suggest that Peabody's is/was financially insecure in absolute terms…but information which might…have led the Board and/or the Secretary of State to shift the balance in relation to relative financial strength and thus….where the overall balance in the decision – making process lay. The information was known to HC's officers but not disclosed to the Board, or the Secretary of State or CLHC…..As a result, the Board made its decision ignorant of a material fact, namely the existence of material which might shift the balance of relative financial strength….The threshold is whether HC's view on relative financial strength might have been different, which plainly it might. And the court is not in a position to say that it would not have been."
I am bound to say that these submissions, which were reiterated with confidence before us, are, in my judgment, utterly unsustainable. They are built upon the proposition that HC's officers were in possession of material before July 2003 but failed to disclose it to the Board. The thread upon which this proposition hangs is that the assessment of September 2003, which kept Peabody in the green category but on the basis that "exposures exist which make it vulnerable to deteriation", was based on material which was derived at least in part from contacts, meetings and reviews to which HC officials had been party in 2002 and the first half of 2003. The September 2003 assessment says as much. However, that takes the submission nowhere. The clear evidence is that Peabody retained green status in September 2003 on the basis of the totality of information then in possession of HC. The witness statement of Adrian Rowland, a senior adviser in the employment of HC, makes it clear that the subsequent relegation of HC to amber in January 2004 was the result of the asset management strategy pursued after 1 September 2003 and meetings held between HC officials and Peabody between September 2003 and 29 January 2004.
Lord Justice Waller
Lord Justice Brooke :
"That is obviously again something which will need to be worked up in discussion between [HC, CLHC, TFHC] and Communities Scotland. So there is another process to be gone through there."
"You are of course aware that [HC] had serious reservations about the regulatory implications of the proposed transfer of engagements to TFHC. Since I last wrote to you, we have continued to explore these issues with our lawyers, and we have commenced our dialogue with Communities Scotland. We await a response to the letter from [HC's] solicitors to [CLHC's] solicitors dated 20th June 2002, in which we asked them to explain how the many regulatory difficulties which we perceive could be overcome. Given that our colleagues at Communities Scotland share our serious concerns, it is, I think, essential that we receive a very early and satisfactory response to that letter, particularly as we now have some doubt that (notwithstanding our satisfaction that the Industrial and Provident Societies Act would not prevent what is being proposed) when read together, the English and Scottish legislation actually enables [HC] to consent to the de facto registration of a Scottish registered social landlord.
You will appreciate that unless you are able to rapidly satisfy those regulatory concerns there would seem to be little point in your committing time and expense in pursuing your proposals."
"It appears, therefore, that any difficulties which might arise would be practical rather than legal, and would involve co-ordination between the respective regulators. It is not unreasonable to expect the regulators to resolve such matters between them, with appropriate consultation with our clients and [TFHC]. Our client's counsel submitted to the Board that the existence of practical difficulties would not be a good reason for refusing consent for such a transfer and instead directing transfer to Peabody.
In its letter of 26 June [HC] indicated that it would assess the regulatory implications of the proposed transfer in concert with Communities Scotland. We look forward to hearing from you further when your clients have made some progress on this aspect of the matter."
Unknown to the writer, this point had been dealt with by HC's letter to CLHC of the same day, which placed the ball firmly back in CLHC's court.
"…[W]e would refer you to our letter to you of 20 June as to the regulatory aspects. We have had no substantive reply in relation to the concerns raised in that letter.
Our client's position is that there is real doubt as to whether the Board has power to consent to a Transfer of Engagements to a Scottish society under the statutory scheme, particularly given the 'dual' regulation by two regulators that this would involve. But in any event, even if the power to give the consent is available in principle, the Board has to consider whether it is appropriate to exercise that power in view of, inter alia, the regulatory difficulties."