England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE,
QUEEN'S BENCH DIVISION,
ADMINISTRATIVE COURT IN BRISTOL
HHJ LAMBERT
[2014] EWHC 4321 (Admin)

		Royal Courts of Justice Strand, London, WC2A 2LL
		19/10/2017

Lord Justice Beatson :

I. Overview:

1. The respondent, Torbay Quality Care Forum Limited ("the Care Forum"), is an association representing independent care homes in Torbay. It successfully challenged the decision of Torbay Council ("the Council") dated 5 February 2014 setting the fees it was prepared to pay for providing care to care home residents who are eligible under the National Assistance Act 1948 ("the 1948 Act" and related legislation for council-funded care for the year 2014 – 15. The Council set four banded weekly fee rates of £358 and £431 respectively for "standard" and "standard plus" care, and £464 and £504 respectively for "standard" and "standard plus" nursing care. These fees are referred to as "the usual cost(s)".
2. In an order sealed on 20 January 2015 following a judgment handed down on 23 December 2014, HHJ Lambert declared that the Council's decision was unlawful by having regard, in its calculations to fees received by care homes from third-party top-ups, from privately-paying residents, and/or in respect of residents with enhanced needs or on Continuing Healthcare^[1] and quashed it. The unlawfulness was declared to be in departing without good reason from the guidance in Circular LAC (2004) 20 on the National Assistance Act 1948 (Choice of Accommodation) Directions 1992 ("LAC (2004) 20"). The Council appeals against this part of the order with the permission of Briggs LJ.
3. The order also declared that the Council relied on a calculation of weighted average staff hours which was significantly flawed but the Council did not seek permission to appeal against that declaration or the order quashing the decision. Accordingly, the sole issue before this court is whether a council setting the "usual cost" of providing care to care home residents is entitled to take into account fees received by care homes from the sources referred to in the order, and to deduct an amount representing an assumed fee from the actual cost of meeting the assessed care needs of the individual in question.
4. The legal regime governing local authorities' obligations concerning care provision I describe and consider in this judgment is that which applied at the time of the challenged decision. That regime was replaced on 1 April 2015 when the Care Act 2014 came into force and new guidance was issued which replaced that in LAC (2004) 20. Section 5 of the Care Act 2014 creates a duty to promote the efficient and effective operation of a market in services for meeting care needs and requires councils to have regard to the importance of ensuring the sustainability of the market. I do not consider the new regime and express no opinion as to whether, as Mr Charles Bourne QC, on behalf of the Council, suggested, the outcome in this case will have any relevance to decisions under the new regime for future years, or whether, as Mr Mathew Purchase, on behalf of the Care Forum, suggested, this is unlikely because the focus of the new regime is different.
5. In sections II, III, and IV of this judgment, I summarise the legal framework, the background to the challenged decision and the approach adopted by the Council, and the challenged decision. Section V summarises the judgment below. Section VI analyses the submissions of the parties, the meaning of LAC (2004) 20, and gives the reasons for my overall conclusion and for respectfully disagreeing with the Lord Chief Justice and King LJ on the outcome of the appeal. Left to myself, although my reasons differ from the judge's, I would dismiss the appeal on one of the two bases discussed in Part VI, see in particular [53] - [64]. However, since the Lord Chief Justice and King LJ disagree with my interpretation, the appeal will be allowed.

II. The legal framework:

6. Under section 21 of the National Assistance Act 1948 and directions made under that Act in Department of Health Circulars LAC (93)10 and 2004 (20) issued respectively in March 1993 and 14 October 2004, local authorities have a duty to make arrangements for providing "residential accommodation for persons … who by reason of age, illness, disability or any other circumstances are in need of care and attention which is not otherwise available to them". Subject to means-testing (see section 22 of the 1948 Act), local authorities also have a duty to fund the provision of accommodation and personal care. Where the provision of nursing care is ancillary or incidental to the provision of accommodation and personal care, the local authority's duty under section 21 includes providing it, although the NHS makes a flat-rate payment to contribute to the nursing costs.^[2] Section 26 of the 1948 Act permits local authorities to make such arrangements with voluntary organisations and private care home providers, which provide the accommodation and care in exchange for the fees the relevant local authority has agreed to pay for it.
7. The relationship between local authorities and private care homes is a contractual one, but local authorities are required to act under the general guidance of the Secretary of State in the exercise of their social services functions: see Local Authorities Social Services Act 1970 ("the 1970 Act"), section 7. The National Assistance Act 1948 (Choice of Accommodation) Directions 1992 ("the Directions"), issued on 23 December 1992, provide:

"2. Where a local authority have assessed a person under section 47 of the National Health Service and Community Care Act 1990 ... and have decided that accommodation should be provided pursuant to section 21 of the [1948 Act] … the local authority shall, subject to paragraph 3 of these Directions, make arrangements for accommodation pursuant to section 21 for that person at the place of his choice within the United Kingdom …

3. Subject to paragraph four of these directions the local authority shall only be required to make or continue to make arrangements for a person to be accommodated in his preferred accommodation if –

…

(b) the cost of making arrangements for him at his preferred accommodation would not require the authority to pay more than they would usually expect to pay having regard to his assessed needs ..."

8. The requirement in paragraph 3 of the Directions that a local authority is only obliged to make arrangements for accommodation at a person's preferred accommodation if this does not cost more than the local authority would usually expect to pay having regard to his assessed needs involves the authority determining what that would be, and this figure has become known as "the usual cost". There may be different "usual costs" for differing needs; for example, as seen in this case, the Council adopted four banded weekly fee rates.
9. Paragraph 4 of the Directions deals with accommodation chosen by a person assessed to be in need which would cost more than the relevant local authority's "usual cost" for that person's assessed needs . Paragraph 4(1) provides that, subject to specified exceptions:

"… paragraph 3(b) of these Directions shall not apply to a local authority who makes arrangements which cost more than the local authority would usually expect to pay in order to provide a person with their preferred accommodation if a third party's contribution to that person which is treated as that person's resources as assessed under the National Assistance (Assessment of Resources) Regulations 1992 [SI 1992 No. 2977] is such that he can reasonably be expected to pay for the duration of the arrangements an amount that is at least equal to the difference between –

(a) the cost that the local authority would usually expect to pay for accommodation having regard to the person's need, and

(b) the full standard rate for that accommodation as specified in section 22(2) of the National Assistance Act 1948 … or pursuant to section 26(2)2(4) of that Act …"

10. Paragraph 4(2) provides that paragraph 4(1) shall not apply to cases in which the third-party's contributions are made by a person who is liable under section 42 of the 1948 Act to maintain the person (a spouse or children) who wishes to be provided with preferred accommodation. Paragraph 4(3) provides that nothing in the Directions "shall prevent a local authority from making or continuing to make arrangements for a person to be accommodated in his preferred accommodation where the cost of making such arrangements is more than the local authority will usually expect to pay having regard to the person's assessed needs".
11. Paragraph 4 thus recognised that care may be provided at rates that exceed the "usual costs" and may be so provided to individuals who are eligible for council-funded care. In this way, the Directions introduced the concept of the "top-up". Guidance was issued together with the Directions. That guidance was replaced first by the guidance in LAC (2001) 29 and then by the guidance in LAC (2004) 20.
12. Before turning to LAC (2004) 20, I refer to Building Capacity and Partnership in Care, issued in October 2001 by the Department of Health. The cover describes it as "an Agreement between the statutory and the independent social care, health care and housing sectors". Paragraph 6.2 states:

"Providers have become increasingly concerned that some commissioners have used their dominant position to drive down or hold down fees to a level that recognises neither the costs to providers nor the inevitable reduction in the quality of service provision that follows. This is short-sighted and may put individuals at risk. It is in conflict with the Government's Best Value policy. And it can destabilise the system, causing unplanned exits from the market. Fee setting must take into account the legitimate current and future costs faced by providers as well as the factors that affect those costs, and the potential for improved performance and more cost-effective ways of working. Contract prices should not be set mechanistically but should have regard to providers' costs and efficiencies, and planned outcomes for people using services, including patients."

13. The summary at the beginning of LAC (2004) 20 states that the Directions are intended to ensure that individuals receiving residential care are "able to exercise genuine choice over where they live". It also states that "the Regulations give individuals the right to enter into more expensive accommodation than they would otherwise have been offered in certain circumstances", and that it "is intended to describe the minimum of choice that Councils should offer individuals".
14. Paragraph 1.3 of LAC (2004) 20 reiterates that local authorities must provide care in an individual's preferred accommodation if: (a) it is suitable and available, (b) the provider is willing to provide it subject to the local authority's usual terms and conditions, and (c) it would not cost more than the "usual cost". Paragraph 1.4 states that a local authority must also arrange for care in more expensive accommodation if the individual requests it, "provided a third party or, in certain circumstances, the resident, is willing and able to pay the difference between the cost the council would usually expect to pay and the actual cost of the accommodation (to 'top-up')". It also states that these are the only circumstances where either a third-party or the resident may be asked to top-up.
15. Cost is dealt with as follows:

"2. Preferred Accommodation

…

(b) Cost

2.5.4 …[The usual cost] should be set by Councils at the start of a financial or other planning period, or in response to significant changes in the cost of providing care, to be sufficient to meet the assessed care needs of supported residents in residential accommodation… In setting and reviewing their usual costs, Councils should have due regard to the actual costs of providing care and other local factors. Councils should also have due regard to best value requirements under the Local Government Act 1999.

2.5.5 Individual residents should not be asked to pay more towards their accommodation because of market inadequacies or commissioning failures. Where an individual has not expressed a preference for more expensive accommodation, but there are not, for whatever reason, sufficient places available at a given time at the Council's usual costs to meet the assessed care needs of supported residents, the Council should make a placement in more expensive accommodation. In these circumstances, neither the resident or a third-party should be asked to contribute more than the resident would normally be expected to contribute and Councils should make up the cost difference between the resident's assessed contribution and the accommodation's fees. Only when an individual has expressed an interest for more expensive accommodation than a Council would usually expect to pay, can a third-party or a resident be asked for a top-up (see paragraph 3.1) …

2 5.7 Councils should not set arbitrary ceilings on the amount they expect to pay for an individual's residential care. Residents and third-parties should not routinely be required to make up the difference between what the Council will pay and the actual fees of a home. Councils have a statutory duty to provide residents with the level of service they could expect if the possibility of resident and third-party contributions did not exist.

2 5.8 Costs can vary according to the type of care provided ….

…

3. More Expensive Accommodation

…

3.3 When setting its usual cost(s) a Council should be able to demonstrate that this cost is sufficient to allow it to meet assessed care needs and to provide residents with a level of care services that they can reasonably expect to receive if the possibility of resident and third-party contribution did not exist."

16. Paragraph 3.4 of LAC (2004) 20 expressly recognises that there may be no placements available at the local authority's usual rate. It states that where this is so:

"Councils should not leave individuals to make their own arrangements … [but] should make suitable alternative arrangements and seek no [extra] contribution from the individual …".

17. Paragraph 4 deals with individuals already in residential care. It states at 4.1 that "a self-funder who is resident in a care home that is more expensive than a Council would usually expect to pay [may] later become the responsibility of the Council due to diminishing funds". It also states that "this may result in the resident having to move to other accommodation" unless an assessment shows that "assessed needs can only be met" in that location. Only then should Councils "make up the cost difference".

III. The background to the challenged decision:

18. The evidence before the judge on behalf of the Care Forum consisted of a statement of Alan Beale, the Managing Director of South West Care Homes Ltd. That on behalf of the Council consisted of statements of Caroline Taylor, the Director of Social Care, Lisa Finn, a Finance Manager, Children's and Adult Services, and Frances Mason, the Head of Adult Partnership Commissioning. Only that concerning the Council's methodology is relevant to this appeal.
19. The Care Forum was dissatisfied with the processes used to set care home fees in 2011. It commissioned a study by Bishop Fleming Chartered Accountants, with some funding from the Torbay Care Trust, acting on behalf of the Council. Bishop Fleming recommended three banded weekly fee rates: residential care, £469-£560, residential care including dementia, £500-£600, and nursing care £610-£710. These were substantially higher than the rates set by the Council.
20. After Bishop Fleming's study was published, in a report on social care commissioning dated 14 December 2011 to the Torbay and Southern Devon Care Trust Shadow NHS Trust Board, the Chief Executive Officer of the Torbay Care Trust stated (at page 1) that Bishop Fleming's study "provides a solid basis for a shared and agreed understanding of the issues and costs facing the market and commissioners upon which negotiations and solutions can be built" and that "the independent model indicates that there is a significant variance in the cost of care and the fees paid for public sector funded residents". It also stated (§§5.1 and 5.3) that "many Care Home businesses in Torbay are struggling in the current climate …" and that, "based on the Laing & Buisson^[3] survey of baseline fee rates from April 2009, Torbay Care Trust is in the bottom four for the fee levels". The report also referred to a questionnaire the Care Trust sent to care homes in Torbay to which 63 of the 115 care homes responded. It stated that the key findings were that "approximately 63% of Torbay homes in the bay rely on state funding for more than 60% of their income compared to 41% of South West Homes" and that "36% of Torbay Homes rely on state funding for more than 80% of their income compared to only 15% for South West Homes".^[4]
21. In the light of this, the Council recognised that there had been deficits in the processes used in 2011 and decided to review the basis for setting the usual fees for 2012/13. The model that was adopted following that review was also used when making the decision dated 5 February 2014 that is challenged in these proceedings, albeit with adjustments for inflation and taking account of some points about staff ratios made in consultation. I therefore summarise the methodology, as described in the detailed officers' report for the Council meeting on 6 February 2013 and the material parts of the 10 Appendices to it in some detail. That meeting adopted the model and the recommendations in the report for four bands of weekly care home fees for 2012 – 2014.^[5]
22. The review had regard to several of the existing cost tools for assessing the "actual costs" of providing care.^[6] Ms Mason states (§5) that it was decided to develop a Torbay model for the cost of care, dividing care costs between care, accommodation and return on capital. She states that costs were assessed on a set of reasonable assumptions. The Council consulted providers and developed a revised banding structure which was communicated to providers on 6 September 2012. I have stated that the model had four bands; "standard" and "standard plus" care, and "standard", and "standard plus" nursing care. Information was sought from care home providers to establish an evidence base for the assumptions that were to be built into the model which the Council was developing with the assistance of an external accountancy consultant, Mr Geoff Thomas. Mr Thomas sadly died in 2013, before the institution of these proceedings. Ms Finn and Ms Mason were respectively able to explain how the model worked and to comment on the rationale behind its approach to a number of issues including top-up and other fees. But Ms Finn observed at (§4) that she was not an expert on how the model was constructed and the basis for some of the initial assumptions and rationales used in it.
23. As to the methodology, it will be seen from the summary of the relevant parts of the officers' report below that the Council's model determined the "usual cost" i.e. the fees it was prepared to pay in two stages. The first stage ascertained the weekly "actual costs" of providing care to residents in each of the four categories. These were intended to represent the minimum amount at which a care home would be viable as a business, so that the Council accounted for a "return on capital" which was supposed to be "reasonable and sustainable".
24. The second stage was for the Council to determine the amount it would pay. The Council's calculation includes consideration of the income which a care home can expect to receive from (1) residents placed by the local authority, (2) privately funded residents paying higher rates, (3) "resident and third-party contributions", i.e. top-ups,^[7] and (4) sums paid by the NHS for residents in the Continuing Health Care Scheme. The Council then set-off the fees that it assessed were received by care homes from other sources against the costs. At the second stage, therefore the Council essentially deducted a number of assumed income streams from the "total home costs" determined at the first stage to produce the "usual cost".
25. I turn to the officers' report. Paragraph 4.5 stated:

"[T]o arrive at the "usual cost" of care it was necessary to establish the cost of delivering care in Torbay, as well as accommodation related costs and appropriate contribution to the cost of capital. The proportion of beds in the market currently purchased by local authorities, the level of vacancies, capital abatement, land values and profit multiples were taken into account."

26. Appendix 1, the October 2012 Consultation Paper for the Review, after setting out paragraph 5.2.4 of LAC (2004) 20, stated (at page 2) that setting a cost of what the authority "expects to pay" should be a market based price and should be "sufficient to meet the assessed care needs of supported residents". It is also stated that a market based price implied that the resources required to meet their needs are delivered by an efficient and well run home. The price reflected direct care costs and associated accommodation costs, and the price "does not, therefore, necessarily need to include the profit element or return on capital employed, however this may form part of a commercial pricing strategy". The usual cost in each band was to cover the cost of care and accommodation (including a provision for capital maintenance which reflected an allowance on capital costs over a long period), to be no lower than average fee set currently, and was to provide a reasonable and sustainable return for a home given average fee rates secured in the market.
27. I have stated that in calculating the cost of care in Torbay, existing cost tools, including Laing & Buisson's 2012 Market Survey and the 2011 Torbay survey by Bishop Fleming, were taken into account, as was the recommendation of the Dilnot Commission^[8] that cost of care and of accommodation be treated differently. Costs were assessed on a set of assumptions including staff hours per bed, rates of pay (wages in the Torbay area were recognised as being below the national average), management and administration costs, other staff costs, repairs and maintenance, and non-staff current costs such as utilities. Many of the assumptions are not relevant to the precise issue in this appeal.
28. As to the local position, the approach reflected the fact that the proportion of the market that the Council purchased was about 45%.^[9] It is stated in Appendix 1 page 2, that in Torbay the ratio of residential as opposed to nursing homes is 85:15, which is higher than the national average of 52:48 and that placement trends indicated this represented an over-supply of residential care rather than an under-supply of nursing care. §4.5 of the Report and Appendix 1 state that the number of beds purchased is likely to fall by 4% per annum on average. The Report also took account of an economic situation which made it easier to recruit staff in Torbay as a result of redundancies, and the fact that, in August 2012, 4.3% of Torbay's working population was out of work and claiming job seeker's allowance as compared with a national average of 3.8%, and an average for Devon of 2.01%.
29. Appendix 5 to the Report, "Assessing the 'usual cost' of care in Torbay" provides important understanding as to the issue in this appeal: third-party payments. Section 2, on assessing contribution to return on capital, states that a market based approach was used. It reflected the proportion of the market that the Council purchased or which is purchased at rates linked to the Council's, the cost of care and accommodation, the existing average fee rate set, and the need to provide for a reasonable and sustainable return for a care home given the average fee rates secured in the market. Taking the price per bed per week for standard residential care as an exemplar, the Torbay market rate was £332, the cost of care £341, the existing rate £341, and "selected Torbay banded rates" £341. This appears to reflect the first stage of the Council's approach. There is then a figure under each of the four categories of cost for third-party payments representing the average receipt per bed per week from such payments which is deducted from the earlier figures. The highest figure is £10 per week each for standard residential care and for standard nursing care. The rates were cross-referenced against the estimated income and other capital costs for the model home. It is stated that the figures "show that the selected rates in combination with estimates of income from other sources (private and individually negotiated other public sector) more than cover the estimated cost of operation including profit".
30. Appendix 2, which is headed "issues for clarification" and gives answers to certain questions, contains the following:

"Is the Council relying on cross-subsidisation from private residents? The Council is proposing a usual cost, or price it will pay, for care. In doing so it is taking a market based approach in recognition of the fact it is not the only purchaser of care home bed spaces in Torbay and the historical tendency for home owners to charge different fees for privately and publicly funded residents."

31. In her evidence, Ms Mason stated (paragraph 27) that the top-up and other fees were relevant when quantifying the further income which a care home needed to earn from local authority funded residents in order to provide a reasonable and sustainable return on capital because they were part of the income a care home can expect. She stated that the model took them into account by assuming, over time, a home of an average size will receive an average quantity of such revenue but the Council's officers were quite clear that the top-ups and other payments "do not affect the day to day running costs of a home". They are "for additional items such as a better view/room or additional services, and they are not to pay for assessed care needs".
32. Appendix 9 contains the Council's Equality Impact Assessment. Section three, "steps required to manage the potential impacts identified" states that the considered opinion of Torbay and Southern Devon Health and Care NHS Trust ("TSDHCT") and the Council is that "the fees levels proposed are sufficient to avoid the closure of homes that are run efficiently, run at a good level of occupancy, and which do not over-rely on publicly funded placements". It also stated that:

"[I]t is not possible for TSDHCT and the Council to set fees at levels that eliminate all risk of home closures, or that meet all the aspirations of all home owners to make substantial returns on their investments. There is an over-supply of bed spaces within Torbay, and the market will have to adapt to ensure efficiency. This may mean that some homes choose to close. As custodians of public money, Torbay Council and TSDHCT need to obtain value for money with its statutory duties, and can not compensate for an oversaturated and/or inefficient market. It is important to note that closures are not anticipated to occur as a result of the level of fees paid." (emphasis added).

33. After the Council's decision about the model and the "usual costs" for 2012 – 2014, in a letter dated 15 April 2013, the Care Forum's solicitors informed the Council that they intended to apply for judicial review of the decision but, in the event, they did not pursue this.

IV. The challenged decision:

34. I have stated that when setting the fees for 2014-15 on 5 February 2014, the Council essentially used the model I have described. Ms Mason's evidence (paragraph 20) is that the decision to do so was made in order to allow time to plan for the introduction of the changes to the way in which residential care is funded that were made by the Care Act 2014. There was a consultation between October and December 2013. The Care Forum attended one of the meetings, on 5 December 2013, and were also given an executable version of the fees model. Ms Mason stated that the executable version provided the Care Forum with a further opportunity to comment on the assumptions in the model. I have said the Council "essentially" used the model: the figures were adjusted for inflation and account was taken of some points that arose on consultation. One of the differences appears to be that the assumed figure for third-party payments per bed per week for standard residential care and standard nursing care was £12 each, and not £10 as in the 2012-2014 model.
35. These proceedings were issued on 2 May 2014. The Council had conceded that it had erred in its approach to calculating food costs, so the hearing was concerned only with the challenges to the rationality of the calculation of staff costs, and the legality and rationality of taking account of fees paid to homes by other sources.

V. The judgment below:

36. The judge carefully summarised the facts at §§ 7-23 and set out the law at §§ 24-35. He referred to Sedley J's statement in R v London Borough of Islington ex p. Rixon [1997] ELR 66 about the approach to guidance in circulars, to the decision of this court (per Sullivan LJ) in R (Members of the Committee of Care North East Northumberland) v Northumberland County Council [2013] EWCA Civ 1740, [2014] PTSR 758, and that of the Administrative Court in in R (South Tyneside Care Home Owners Association) v South Tyneside Council [2013] EWHC 1827 (Admin). In South Tyneside, HHJ Belcher stated (at [75]) that taking account of resident and third-party contributions "is contrary to the guidance in [LAC (2004) 20], and results in a skewed calculation which does not pay due regard to actual costs". Earlier in his judgment (at § 31), the judge referred to what he described as "a very significant health warning" in Care North East Northumberland (at [34]) that the five cases cited in that case^[10] turned very much upon their own particular facts. He stated (at § 33) that, while not an authority in any sense of the word as purporting to decide any point of general principle, the decision in the South Tyneside case "does give an example as to how one judge dealt with a similar situation".
37. The judge set out the submissions of the parties at §§ 36-59 and turned to his decision at §60. There is no need to summarise his decision on "ground 1", the calculation of staff costs. Before making it, the judge (at §60) set out his general approach to both grounds. He referred to the statement in R (Bevan and Clarke) v Neath Port Talbot County Borough Council [2012] EWHC 236 (Admin), [2012] LGR 728 at [56], approved by this Court in Care North East Northumberland (at [2] and [26]) which I set out at [48] below, that it is generally for the decision-maker to decide on the manner and intensity of the inquiry to be undertaken. He also referred to the statement in Care North East Northumberland that the circular does not prescribe any particular methodology which local authorities must adopt, observed that some local authorities produce an arithmetical calculation and others may look at comparables, and reminded himself of the need for particular circumspection in engaging with the conclusions of the primary decision maker where the decision involves complex economic and technical questions and a judgment about the proper allocation of scarce resources.
38. On the question of fees from third parties, "ground 2", the judge stated (at §61):

"… Adopting all the cautions I have applied to my decision on ground 1 I cannot, with the best will in the world, see that the Defendant provides any justification for departing from the plain wording of the Circular. Guidance is, of course, just that and a decision maker is free to depart from it if there is a good reason to do so and if the decision maker articulates that particular reason. What the decision maker, it seems to me, cannot do is to say "I shan't comply with the guidance because I don't agree with it." Nor can the decision maker fail to take into account the guidance because it considers its duty lies elsewhere. Whilst referring to best value principles the guidance is utterly explicit as to what can and cannot properly be taken into account. The local authority's approach here failed to take any proper account of the guidance concerned and therefore fails to take into account a highly relevant matter. On the facts of this case I am convinced, as HHJ Belcher was in similar facts, that taking these fees into account in the cost analysis does not pay due regard to actual cost and amounts to a significant error in the decision making process."

39. The judge (at §62) rejected the Council's submission that the normal relief of a quashing order should be refused because of delay and detriment to good administration. The delay in this case was not undue "bearing in mind the fiendish complexity of matters" and the large number of other issues.

VI. Analysis

40. (a) The grounds of appeal: The Council advanced four grounds of appeal.

Ground 1: The judge misconstrued circular LAC (2004) 20 as requiring it to disregard the effect on care homes' profitability and return on capital of all income streams other than fees paid by local authorities.

Ground 2: Even if the reference in § 3.3 of LAC (2004) 20 to "resident and third-party contributions" requires top-ups to be disregarded, the judge erred in construing it to refer to fees paid by privately funded residents or by the NHS.

Ground 3: The judge did not give adequate reasons for his ruling, as §61 does not engage with the wording of LAC (2004) 20 or the Council's submissions as to its meaning.

Ground 4: Although the judge referred to the guidance of the Court of Appeal in Care North East Northumberland, he disregarded it and wrongly followed the decision of HHJ Belcher in the South Tyneside case.

Since Mr Bourne's submissions on behalf of the Council focussed on grounds 1 and 2, and as I can deal with grounds 3 and 4 briefly, it is convenient to deal with them first.

41. (b) Grounds 3 and 4: As to ground 3, Mr Bourne was critical of the brevity of the "discussion and determination" section of the judgment, but, in the circumstances of this case, did not press this ground as a ground independent of grounds 1 and 2. This was realistic. The section of the judgment entitled "discussion and deliberation" was brief. Given the complexity of the issues and the submissions, it could have been reasoned more clearly and in more detail. But the submissions were set out very fully and, taken together with the discussion and deliberation section, the judgment suffices to allow the parties to understand why they respectively won and lost. It is clear the judge accepted the interpretation of LAC (2004) 20 for which the Care Forum contended.
42. In my judgment, there is nothing in ground 4 as a free-standing ground. It is, in substance, parasitic on grounds 1 and 2 and stands or falls with those grounds, to which I turn at [49] below. The judge did not treat the decision in South Tyneside as binding, only as useful guidance. He recognised (at §50) that, in the light of the observations of this court in Care North East Northumberland about the first instance decisions cited in it are fact specific and do not contain a principle of law. But this case involved very similar circumstances to those in South Tyneside. Given that, judicial comity and the requirement of certainty in the law mean that the judge who hears the second case, although not bound by the earlier decision, should generally follow it and, if not, should explain why: see e.g. Care North East Northumberland at [26].
43. (c) The effect of guidance such as that in LAC (2004) 20: Section 7 of the Local Authority Social Services Act 1970 requires local authorities "to act under the general guidance" of the Secretary of State in the exercise of their social services functions. The classic statement of what this means is that of Sedley J (as he then was) in R v London Borough of Islington ex p. Rixon [1997] ELR 66, at 71. He stated:

"Clearly guidance is less than direction, and the word 'general' emphasises the non-prescriptive nature of what is envisaged… In my judgment Parliament… did not intend local authorities to whom ministerial guidance was given to be free, having considered it, to take it or leave it. Such a construction would put this kind of statutory guidance on a par with the many forms of non-statutory guidance issued by departments of state, … in my view Parliament by section 7(1) has required local authorities to follow the path charted by the Secretary of State's guidance, with liberty to deviate from it where the local authority judges on admissible grounds that there is good reason to do so, but without freedom to take a substantially different course."

44. In R (Members of the Committee of Care North East Northumberland) v Northumberland County Council [2013] EWCA Civ 1740, [2014] PTSR 758, at [18] Sullivan LJ, with whom the other members of the court agreed, stated that LAC (2004) 20:

"… is not to be equated with a statutory duty imposed by an enactment and as would be expected in the case of guidance, it does not prescribe any particular methodology, whether "structured" or otherwise which local authorities must adopt in order to have had "due regard" to the actual costs of providing care".

45. (d) The approach to judicial reviews in challenges to the determination by a local authority of the "usual cost" it will pay for providing care to supported residents: One of the earliest challenges was R (Birmingham Care Consortium) v Birmingham City Council [2002] EWHC 2188 (Admin), [2003] BLGR 119. Stanley Burnton J (as he then was) stated (at [14]) that:

"The [1992] Direction assumes that the rate payable by a local authority will be relevant to a number of homes and will be based on what it pays or expects to pay to a number of homes, having regard to the assessed needs of the resident in question. I see no reason to depart from the literal wording of the Direction. It does not require a local authority to determine whether the cost of arrangements for accommodating a person is fair or reasonable. It simply entitles it to refuse to comply with an indication of preferred accommodation if the cost of it is more than the local authority would usually expect to pay, having regard to assessed needs."

But he does not appear entirely to have excluded considerations of fairness. He stated (at [18]) that:

"The determination of a fair cost is by no means straightforward. Assumptions have to be made as to occupancy rates and returns on capital. Occupancy rates will depend in part on the local authority's placement policy: a policy to use out of town placements will of course tend to lower occupancy rates in town. Where there is no finance charge incurred by the home, the fair return on the value of the property itself may be controversial, given that in current economic conditions its capital growth may provide a substantial return of itself."

46. It is clear from the second of these statements (and accepted by the Care Forum) that return on capital and/or equity is recognised as part of the 'actual costs' of providing care although the amount of that element of the costs will be reduced if there has been capital growth. Subsequent decisions also recognise this, although the point was not disputed: see R (Forest Care Home Ltd.) v Pembrokeshire County Council [2010] EWHC 3514 (Admin) at [112], per Hickinbottom J, and R (Mavalon Care Ltd.) v Pembrokeshire County Council [2011] EWHC 3371 (Admin) per Beatson J, albeit implicitly. These three decisions refer to Laing and Buisson's widely used "toolkit" econometric model^[11] which provided for a rate of return on capital as part of the calculation of the actual costs of providers. They were followed on this point in South Tyneside at [47]-[56]. In Mavalon Care the reason the decision was found unlawful was that the Council had adopted the model but then deviated from it. In the present case, the parties accept that a return on capital and/or equity is part of the 'actual costs' of providing care. In Care North East Northumberland, Supperstone J, whose decision and approach was upheld by this Court, stated that usual fee rates should not be set without considering whether it is viable to provide care at those rates: see [2013] EWHC 234 (Admin) at [36], [2013] EWCA Civ 1740, [2014] PTSR 758 at [37]. It may well therefore be necessary to assess the profitability of a care home to determine whether the income from local authority funded residents will provide a reasonable and sustainable return on capital for a home care provider. The question is whether that is all that the Council did in the present case.
47. Since 2010 there have been about ten judicial reviews challenging different aspects of determinations of the "usual cost". The challenges have been to alleged failures to assess the actual cost of care by failing to take account of relevant factors. These include the cost of capital or of specific aspects of it; failing to meet the public-sector equality duty; and departing from the model the local authority had adopted. Many of the cases involved considering what is required so as to comply with the duty to have "due regard" to the guidance in LAC (2004) 20. So, for example, Care North East Northumberland concluded (see [18] and [31]) that a "structured" approach is not required to demonstrate that a council's usual cost was sufficient to meet the actual costs of the care. The claimants in that case did not succeed, but they did in six of the other "usual cost" judicial reviews. They did so although the challenges were to decisions on complex economic and technical questions in which a judicial review court will generally adopt a cautious approach.
48. In Care North East Northumberland, Sullivan LJ stated (at [36]) that he was surprised at the extent to which the judges in some of the cases were prepared to delve in great detail into the facts in cases that were claims for judicial review rather than appeals on the merits. I respectfully agree. It should be borne in mind that, although the complexity of the questions can require a detailed consideration of the decision challenged in order to ascertain what factors were taken into account and what factors were not, the court must take care not to step beyond the proper boundaries of a reviewing court. "Provided that which it is legally relevant for the decision-maker to know is brought to its attention, it is generally for the decision-maker to decide upon the manner and intensity of the inquiry to be undertaken into any relevant fact" and "the weight to be given to a relevant factor is for the decision maker and not for the court in the absence of irrationality": see Bevan & Clarke's case at [56] – [57] and R (South West Care Homes Ltd) v Devon County Council [2012] EWHC 1867 (Admin) per Singh J at [24] – [25], which were approved by this court in Care North East Northumberland. In South West Care Homes Singh J also stated that it will frequently be the case that the relevant factors to which the decision maker must have regard do not all point in the same direction but pull in different directions. In such cases a balance must be struck, and that "is quintessentially a function of the public authority concerned, subject always to judicial review on the ground of irrationality".
49. (e) Ground 1, the role of income streams other than fees paid by local authorities: Mr Mr Bourne submitted that, read in full and considered in the context of earlier guidance, LAC (2004) 20 clearly recognises the realities of the market in which residential care is provided. §§ 2.5.4 and 3.3 simply require that a local authority pays a level of fees at which care can be found in the market to meet the assessed care needs (the "actual fees of the home" per § 2.5.7), so that supported residents are not forced to resort to top-ups. He submitted that the judge wrongly construed § 2.5.4 as if it meant that, when the local authority has "due regard to the actual costs of providing care" it must disregard the effect on care homes' profitability and return on capital of all income streams other than fees paid by local authorities.
50. As I have stated, the Council's approach to determining "usual cost" involves two stages. The first is to assess the "actual costs" of providing care. The second is to offset the income that care homes receive from other sources against those costs. I first consider whether the language of LAC (2004) 20 precludes a local authority using additional income sources to set a "usual cost" that is necessarily insufficient to meet the assessed care needs. I then consider the role of "other local factors" and the difference between the consideration of return on capital in the earlier cases and what is involved at the second stage of the Council's approach in this case. Finally, I consider whether it is in any event permissible to use a model which expressly includes third-party top-ups, when those top-ups are excluded by § 3.3 of the circular. If it is not permissible to use such a model, then the decision taken by the Council is legally flawed whether or not it is permissible at the second stage to take account of fees paid by privately funded residents or by the NHS.
51. (i) The language of LAC (2004) 20: This plainly shows that the primary purpose of setting the "usual cost" is to cover the assessed care needs of supported residents. As I have stated, the term "usual cost" is (see § 2.5.4) used in the circular (as it was in §§ 3 and 4 of the Directions) as shorthand for the amount that the "council would usually expect to pay, having regard to assessed needs". The circular requires the Council to set a usual cost that is "sufficient to meet the assessed care needs of supported residents in residential accommodation" (emphasis added). The actual cost of providing care is thus clearly at the heart of determining what the Council would usually expect to pay, as that paragraph also states that the usual cost should be set "in response to significant changes in the cost of providing care".
52. The Council's model sets a usual cost that, in many cases, will necessarily be insufficient to cover the assessed care needs. The model's calculations rely on "the selected rate in combination with estimates of income from other sources (private and individually negotiated other public sector [sources])" to "cover the estimated costs of operation including profit" (see [29] above). On a profit analysis, taking the fees of privately paying clients into account, which are generally much higher than the local authority fees, results in a calculation which ignores whether the usual cost is "sufficient to meet the assessed care needs". By way of example, where all the residents of a care home are supported by a local authority, it would necessarily make a loss if the calculation relies on an assumed average figure based on the fees of privately paying residents or third-party top-ups. Where the proportion of supported residents is lower, whether a care home would necessarily make a loss will depend on the proportion of such residents and the assumed receipts per supported resident. It is to be noted that § 2.5.7 provides that local authorities "have a statutory duty to provide residents with the level of service they could expect if the possibility of resident and third-party contributions did not exist".
53. The Council argued that § 2.5.4 should be interpreted to require the usual cost to be "sufficient to enable the local authority to buy a bed for a resident in the market as it currently stands". In my judgment, this misconstrues the guidance and is inconsistent with its clear focus on actual cost. As I stated at [51] above, LAC (2004) 20 clearly contemplates a change of usual cost if the actual cost changes. Its focus is clearly on what care actually costs, not simply whether the local authority can find a place for a particular person. In the light of its dominant position in the market, the local authority clearly has leverage and can legitimately use that leverage to pare back undue profit and so as not to pay for inefficiently run care homes. But subject to that, in my judgment the structure of the circular and the meaning of §§ 2.5.4 and 3.3 means that it should expect to pay a sufficient amount to cover the costs of care, rather than relying on additional income streams to reduce its fees below those costs.
54. (ii) The role of "other local factors" in determining "actual" and "usual" cost: It is plain from the wording of § 2.5.4 that the "actual cost" may be different from the "usual cost" because due regard must also be had to "other local factors". Mr Bourne maintained that all sources of income should be factored into the capital return analysis, but this does not address the question whether that is to be done when having "due regard to the actual costs", the first of the two stages in the Council's approach, or at the second stage. If it is to be at the second stage, Mr Bourne's submission appears inconsistent with Ms Mason's evidence (see [31] above) that the top-up and other fees are "for additional items such as a better view/room or additional services, and they are not to pay for assessed care needs". I also reject his submission that the Care Forum's interpretation equated the "actual cost" with the "usual cost". In my opinion, it does not. Mr Purchase accepted that in some circumstances the usual cost may well be lower than the actual cost, such as where local care homes are operating inefficiently. Moreover (see the next paragraph), it is possible to identify circumstances in which what the local authority will expect to pay to meet assessed needs (i.e. the usual cost) will be lower or indeed higher than the actual cost of care.
55. The following factors are referred to in the officers' report and the Appendices, summarised at [25] and [27] – [29] above as local factors: the level of vacancies locally; whether there is an oversupply of residential care accommodation; the proportion of beds in the area purchased by the Council (45%) as compared with privately funded beds; land values; and the local labour market. In R (Sefton Care Association) v Sefton Council [2011] EWHC 2676 (Admin) at [82], HHJ Raynor QC considered that "local factors" could include: local pay levels, property costs and the Council's dominant position in the market. The first two of these matters appear principally relevant to determining the actual cost of care in a given locality. But other "factors" are also capable of distinguishing the actual cost of care from the usual cost. In the context of the present case, as well as inefficiency in local care homes, "other local factors" could include, for example, the wide range of proportions of local authority funded beds in different care homes. When asked by Burnett LJ what fell within "other local factors", Mr Bourne did not include third-party fees in his answer.
56. Mr Bourne submitted that if the Secretary of State wanted to say that incomes could not constitute "other local factors", she would have done so. I am not persuaded by this submission. On the contrary, it would be surprising if alternative income sources could be used to offset actual costs without the guidance explicitly saying so. This is even more unlikely in respect of third-party top-ups, which § 3.3 expressly states should not be relied on to reduce a local authority's "usual cost(s)".
57. (iii) Other sources of income and return on capital: I have stated (see [45] – [46] above) that it will usually be necessary to assess the overall profitability of a care home including its income from sources other than the local authority in order to determine whether the income in respect of local authority funded residents will provide a reasonable and sustainable return on capital for a care provider. This is not expressly addressed in either the general guidance on "cost" in § 2.5.4 of LAC (2004) 20 or in § 3.3 which explicitly addresses "more expensive accommodation", but without a return on capital, businesses are simply not viable; and if a business is not viable it cannot provide care.
58. In the framework of § 2.5.4, profitability and additional income sources might be considered either in the assessment of the "actual costs" of care, or separately as "other local factors", or as part of the "best value" requirements. For the reasons given above, there is nothing to suggest that "other local factors" can properly be interpreted as including additional income streams, and the Council did not seek to argue that they could. As to the "best value" requirements which require the best mix of quality and effectiveness for the least outlay over the period of use of the services bought", the Building Capacity agreement (see [12] above) points to providers' costs and efficiencies.
59. As Stanley Burnton J stated in the Birmingham case (see [45] above), assumptions have to be made for a determination such as those about "usual cost(s)", and as a number of the cases have stated, it is not for a judicial review court to micro-manage the manner in which the primary decision-maker approaches its task. I am fully alive to this. I do not, however, consider that it precludes a judicial review court concluding that the manner in which the primary decision-maker has approached its task is inconsistent with the underlying purpose of the task, or that a relevant consideration has not been taken into account, or an irrelevant one taken into account.
60. In my judgment, taking the methodology adopted by the Council, there is a difference between considering capital return and market viability in determining the "actual cost" of care for the purposes of stage one, and relying on other income sources in the way that the Council has at stage two to determine the "usual cost(s)". It is one thing to say that the fact that there is a functioning market may be a relevant consideration on which a local authority can rely to determine that its fees are meeting the actual costs of providing care. It is quite different for a local authority to determine what those actual costs are and then to determine that the usual fee(s) should be set at a level below that, on the basis that others will supplement the cost. The Council's approach in effect "double counts" the additional income sources by considering return on capital at the first stage, and then offsetting the assumed additional income streams at the second stage. To that extent, it is either taking a relevant consideration into account twice, or failing to take into account that capital return has already been taken into account.
61. I add that the construction advanced by the Council disregards the Building Capacity agreement made three years before LAC (2004) 20. That agreement was intended to address the problem of local authorities using their dominant market position to keep costs low. It would therefore be surprising if § 2.5.4. is to be construed as enabling councils to drive prices down by making a deduction of this sort from the assessed actual cost of providing the care.
62. To the extent that (see [31] and [54] above) the top-up and other fees are, as Ms Mason stated, "for additional items such as a better view/room or additional services, and they are not to pay for assessed care needs", it is also difficult to see how taking account of the assumed fees per resident (as opposed to the profit element in them) is a relevant factor in determining the fee a local authority is prepared to pay for providing care to supported residents. For all these reasons, in my judgment the analysis of market viability is most appropriately factored into the first stage of the Council's approach, i.e. the determination of actual costs.
63. I also note that the consequence of the Council's approach is that, in care homes with higher proportions of local authority residents, it is not viable to provide care at rates which will result in some care homes operating at a loss irrespective of whether they are run efficiently. This is likely to be so for Torbay where the usual cost(s) have been assessed on the assumption that 50% of residents receiving standard care are privately funded whereas the figures from the Torbay Care Trust's 2011 survey (see [20] above) gives a percentage of 63%. I recognise that the Care Trust's figure is also an assumption, that only 54% of care homes responded to the survey, and that the Council is entitled to rely on its own knowledge of the care homes in its area, and for those reasons do not regard this as a free-standing public law flaw in this decision.
64. (iv) The position of top-ups: § 1.4 of LAC (2004) 20 states that the "only circumstances where either a third-party or the resident may be asked to top up" is where an individual asks for, and is willing and able to pay for, accommodation that is more expensive. As I have stated, § 2.5.7 states that councils have a statutory duty to provide residents with the level of service they could expect if the possibility of resident and third-party contributions did not exist, and § 3.3 requires them to be able "to demonstrate" that the usual cost "is sufficient to allow it to meet assessed care needs and to provide residents with a level of care services that they can reasonably expect to receive if the possibility of resident and third-party contributions did not exist". In my judgment, those provisions, in particular § 3.3, in effect require the usual cost to be set without regard to the possibility of resident and third-party contributions. The Council accepted that it cannot adopt an approach that relies routinely on the payment of top-ups by individuals, but the assumed figure per resident per week does just that. See for example the table referring to "Implied LA Market Rate + TP" mentioned at [24] above which, in effect, amounts to routine reliance on third-party top-ups. The Council's approach undoubtedly embeds top-ups in its usual cost calculations and I have concluded that it is unlawful for that reason. Moreover, the Council's evidence (see [31] above) is that top-up payments are for "additional items" … and they are "not to pay for assessed care needs". As stated above, in my judgment that also makes it impermissible to rely on third-party top-ups to determine the usual costs necessary to meet assessed care needs.
65. (f) Ground 2: The role of fees other than "top-ups", i.e. fees paid by privately funded residents or by the NHS: Mr Bourne submitted that, even if the judge was correct to find that LAC (2004) 20 § 3.3 requires top-ups to be disregarded, he wrongly construed the circular as if it referred to all income other than local authority fees. It in fact refers only to "resident and third party contributions" i.e. top-ups, but not to fees paid by privately funded residents or by the NHS. Although the judge stated (at §61) that LAC (2004) 20 "is utterly explicit as to what can and cannot properly be taken into account", he did not state what he had in mind, and the declaration went beyond top-ups. In his skeleton argument (§39), Mr Bourne stated that the judge "appears to have construed the references in the Circular to top-ups as if they were references to any source of income other than the usual cost" (emphasis added). This, however, essentially acknowledges that the true "usual cost" would and should not include additional sources of income.
66. For the reasons I have given in when considering ground 1, I have concluded that, although there is no express reference to fees paid by privately funded residents or by the NHS, the effect of LAC (2004) 20, in particular §§ 2.5.4 – 2.5.7, is to preclude the Council from deducting assumed sums reflecting those sources of income.

VII. Summary of conclusions:

67. For the reasons given in Part VI, I consider that there are two bases for upholding the judge's order that the Council's decision is unlawful. The first, a broader basis, is that the language of the circular as a whole, and in particular that of § 2.5.4, precludes using additional income sources to set a "usual cost" that is necessarily insufficient to meet the assessed care needs. The second, a narrower basis, is that it is wrong to use a model which expressly includes third-party top-ups, when those top-ups are excluded by § 3.3 of the circular. However, since the Lord Chief Justice and King LJ disagree with my interpretation, the appeal will be allowed.

Lady Justice King:

68. For the reasons given by the Lord Chief Justice set out below, I would allow the appeal.
69. Beatson LJ would for his part uphold the judge's order on two separate bases. [5] The broader base is that that the language of para.2.5.4 of the circular precludes a local authority from using additional income sources to set a "usual cost" that is necessarily insufficient to meet the assessed needs is a person requiring care. The second, narrower base, being that the local authority is wrong to use a model which expressly includes third party top-ups, which are, he says excluded by para. 3.3 of the circular.
70. The guidance found at LAC (2004)20 is written in support of the National Assistance Act 1948 (Choice of Accommodation) Directions 1992 and National Assistance (Residential Accommodation)(Additional Payments and Assessment of Resources)(Amendment)(England) Regulations 200. These Directions and Regulations are designed to enable individuals to exercise genuine choice as to where they live (the Directions) and the right of individuals to live into more expensive accommodation than would otherwise be made available, (the Regulations), something which could only previously be done by a third party on that individual's behalf.
71. In considering the two issues identified by Beatson LJ it is important to interpret the relevant sections of the guidance under that umbrella and with that purpose firmly in mind.
72. To this end para. 1.3 requires the council in question to facilitate an individual's preference for particular accommodation provided that :

i) It is suitable to the individual's assessed needs

ii) It would cost the council no more than what it would usually expect to pay for accommodation for someone with the individual's assessed needs….This is referred to throughout the guidance as the 'usual cost'

iii) The accommodation is available

iv) The provider is willing to provide the accommodation subject to the council's usual terms and conditions.

73. It can be seen therefore that the 'usual cost' is not defined by reference to the actual cost of keeping any individual with his or her unique assessed needs in any particular accommodation, but rather it is such sum as the council would usually expect to pay for someone with those needs. That this is a distinction with a difference is clear from the wording of para. 2.5.4.
74. The purpose of para. 2.5.4 is to make it clear that the provision of preferred accommodation for an individual does not result in the council being required to pay more than their usual cost (as defined in para. 1.3) in order to secure the preferred accommodation in question. That the usual cost is not necessarily the same in terms of quantum as the actual cost of keeping an individual with his or her assessed needs, is made clear by the fact that the council is directed that "In setting out and reviewing their usual costs, councils should have due regard to the actual costs of providing care and other local factors".
75. With respect to Beatson LJ, the fact that under para. 2.5.4 the council can review the figure which is to be the usual cost, does no more than give the council appropriate flexibility to alter the usual cost between planning periods 'in response to significant changes in the cost of providing care to be sufficient to meet the assessed care needs of supported residents in residential accommodation'.
76. It occurs to me that one topical example which may lead to a council revising their usual cost, notwithstanding that a planning period has not come to an end, might be a substantial, unexpected, increase in the national minimum wage with the consequence that the 'usual cost' becomes untenable and no longer realistically a sum which the council could properly expect to pay for accommodation and further would be contrary to the agreement referred to by Beatson LJ at [12] and the Best Value policy.
77. It follows that I would agree with the analysis of the Lord Chief Justice that, critical to an understanding of the Directions and Guidance, is the need to have in mind that the 'cost' is the cost to the council and not to the care home of providing the care. I therefore agree that, for the reasons the Lord Chief Justice gives in more detail in his judgment, that when determining 'what a council would expect to pay for accommodation for someone with the individual's assessed needs' the council in question is entitled to take into account all sources of revenue, including revenue from privately paying residents.
78. The council is entitled to look to purchasing from the provider, accommodation which meets the assessed needs of an individual, at such a figure as can be fixed without jeopardising the viability of the providers and subject also to the requirement in para 2.5.4 to have regard to the actual cost as well as the Best Value policy. In my view, the figure fixed upon by the council (that is to say, the usual cost) does not necessarily have to be, and almost certainly will not be, synchronised with the actual cost to the provider of providing the accommodation in question.
79. The second question is whether the local authority is wrong to use a model which expressly includes third party top-ups, which are, Beatson LJ concludes excluded by para. 3.3 of the circular. With respect to Beatson LJ, again I disagree.
80. Para. 3 deals specifically with those cases where an individual chooses to move into accommodation which is more expensive than that which the council would usually expect to pay. Para. 3.2 allows such a placement and refers to the new provisions whereby the individual may themselves 'top-up' the fees paid as opposed to a third party doing so on their own behalf.
81. I do not apologise for setting out para. 3.3 again. It says:

"When setting its usual cost(s) a council should be able to demonstrate that this cost is sufficient to allow it to meet assessed care needs and to provide residents with the level of care services that they could reasonably expect to receive if the possibility of resident and third party contributions did not exist."

In the context of the section "3.More Expensive Accommodation" as a whole, I do not read para. 3.3 as saying that, when determining usual cost, the council is not permitted to include, when putting together its model, sums received by providers by way of top-up fees; rather, I read para.3.3 as providing protection to the individuals who are to take up residence in the accommodation in question.

82. To my mind what para. 3.3 aims to prevent is a situation where a council in setting its usual cost, does so on the basis that the figure will be so low that it will it will be necessary for individuals to pay a top-up simply in order to obtain an appropriate level of care. To do so would wholly undermine the intention of the paragraph as a whole, which is to allow an individual to buy enhanced care, usually in the form of a more spacious bedroom or some other form of enhanced facilities. As the Lord Chief Justice observes at [111], para 3.3 is concerned to guard against top-up payments being used… as 'a disguised payment for basic assessed needs'
83. I accept the arguments of the appellant that the judge was in error in concluding that the 2004 Guidance required the council to disregard income streams obtained by care homes other than the fees paid by the local authorities and accordingly I would allow the appeal.

Sir Ian Burnett LCJ:

84. The issue in this appeal is whether, when calculating the sum a local authority expects to pay to a care home for an elderly resident for whom it is responsible, the local authority may take account of the fact that (a) other residents are paying privately for their accommodation and associated care; or (b) other residents are selecting enhanced services for which they or a third-party pay a top-up; or (c) other residents have additional financial support from the NHS. The reality is that local authorities usually pay much less than private residents for accommodation and care; and there is the possibility that the cost to the care home of providing their service to local authority clients is greater than the fee paid by the local authority.
85. The resolution of the issue depends upon the meaning of Directions and Guidance issued by the Secretary of State for Health to local authorities regarding the approach to calculating what they will pay. The judge concluded that the additional sources of revenue could not be taken into account. In respectful disagreement with the judge and Beatson LJ I have concluded that the appellant local authority ("Torbay") was entitled to take into account those additional sources of revenue available to care homes when setting the rate they would pay. I would allow the appeal.
86. I am grateful to Beatson LJ for the comprehensive exposition of the legal framework which governs the question and will summarise my reasons relatively shortly.
87. By virtue of section 21 of the National Assistance Act 1948, subject to means testing, local authorities are placed under a statutory duty to provide residential accommodation "for persons who by reason of age, illness, disability or any other circumstances are in need of care and attention which is not otherwise available to them". This appeal is concerned with residential care for the elderly in Torbay. Under the statutory scheme in place in 2013 to 2014 (which as Beatson LJ had explained, has since been superseded) local authorities identify the cost that "they would usually expect to pay having regard to the person's assessed need". That provides the rate which they offer and pay to care homes in their area for standard care and accommodation. The judicial review proceedings, and this appeal, are not academic because, to the extent that the approach of Torbay was unlawful, balancing payments would be required to care providers.
88. Section 7A of the Local Authority Social Services Act (inserted by section 50 of the National Health Service and Community Care Act 1990) provides:

"7A Directions by the Secretary of State as to exercise of social services functions

(1) Without prejudice to section 7 of this Act, every local authority shall exercise their social services functions in accordance with such directions as may be given to them under this section by the Secretary of State.

(2) Directions under this section–

(a) shall be given in writing; and

(b) may be given to a particular authority, or to authorities of a particular class, or to authorities generally.'"

89. The National Assistance Act 1948 (Choice of Accommodation) Directions 1992 ("the Directions") were given under the powers found in section 7A. Guidance in connection with the Directions was issued at the same time. It was that guidance which was replaced by Local Authority Circular LAC (2004) 20 ("the 2004 Guidance"). It is at the heart of the appeal. Beatson LJ has set out the material parts of the Directions in paragraphs [7] to [9] of his judgment. It is paragraph 3(b) of the Directions which introduces the concept that a local authority is required to make arrangements for a person to be cared for at his preferred accommodation only if it costs no more than the local authority "would expect to pay having regard to his assessed needs". Paragraph 4 of the Directions enables the person concerned to select accommodation that costs more than the amount the local authority would expect to pay and for a third party to make up the difference.
90. The focus of the Directions, shorn of any guidance, is on what the local authority would expect to pay for accommodation and associated care given the needs of the person concerned.
91. In determining what a person would expect to pay for any service the starting point would be what he can buy the service for in the open market relying on the laws of supply and demand. A one-off or infrequent purchaser of goods or services might be able to drive so hard a bargain that the supplier would make a large loss but, perhaps to maintain cash-flow, is content to do so. Equally, the marginal cost of providing the service, given the overall position of the business, may be low. A qualifying factor for local authorities in purchasing care would always be the need to maintain an adequate supply of spaces in care homes. Driving the hardest bargain might deliver a short-term financial advantage but long-term financial pain if the result was to put care homes out of business or discourage new entrants to the market because they feared they could not make a profit. But a detailed calculation of the normal costs of running a care home would not, without more, be necessary to determine what a local authority would expect to pay.
92. The original guidance which accompanied the Directions explained that it was intended that "authorities are able to fulfil their obligations for the quality of service provided and for value for money." (paragraph 7) In a section dealing with "cost" in connection with preferred accommodation the guidance indicated that the test was whether the preferred accommodation was more than the local authority would usually expect to pay for someone with that person's assessed needs. It made the point that a local authority might expect to pay different amounts for respite care and permanent care. The focus of the guidance was squarely on what the local authority would expect to pay, with no reference to trying to evaluate an average or usual cost to a care home of providing the service. The concept of top up fees being paid to enable a resident to occupy more expensive accommodation (whether within the same care home as offered or a different one) was embedded in the scheme from the start, although originally those top up fees could be paid only by a third party rather than the person being cared for. That was later changed. In 2001 the guidance was twice amended to reflect this change and also to deal with deferred recovery of costs from capital.
93. The next relevant document to which our attention was drawn was Building Capacity and Partnership in Care issued in October 2001. This was a non-binding agreement between the statutory and independent social care, health care and housing sectors brokered by the Department of Health with representative bodies. Its status was as non-statutory guidance. Its aim was to encourage all those involved in the commissioning or provision of care to look at long-term needs. It had much to say on care for those with disabilities but its reach was broader to include the elderly who were unable to manage at home. Amongst its aims was:

" … to encourage a more strategic, inclusive and consistent approach to capacity planning at a local level. This should be based on a "whole system approach" that actively includes the current and potential contributions made by nursing and residential care, home care, ordinary and sheltered housing and other community-based options. This document aims to reflect and support existing examples of best practice in this field." (para 1.2)

94. In paragraph 4.4 it made the point that the government's "best value policy" required local authorities to balance cost with quality – the cheapest option does not necessarily deliver best value. Part 6 of the agreement, from which Beatson LJ has quoted in paragraph [12] above, made a series of points:

•    Commissioning should deliver a stable system;

•    Using a dominant market position to drive down cost may not be in the best interests of those being cared for because quality suffers and causes unplanned closures. Fee setting "must take into account the legitimate current and future costs faced by providers" as well as scope for improvement and improving cost effectiveness;

•    An overreliance on spot contracts may undermine the viability of businesses, with the result that staff may be difficult to recruit and retain.

95. The balance of part 6 was concerned with more specialist and individually tailored services rather than residential care for the elderly.

As Sullivan LJ observed in Members of the Committee of Care North East v Northumberland County Council [2013] EWCA Civ 1740 at paragraph 15, this document adds nothing of substance to the statutory guidance.

96. The 2004 Guidance was issued at the same time as The National Assistance (Residential Accommodation) (Additional Payments and Assessment of Resources) (Amendment) (England) Regulations 2001 (2001 No. 3441) were laid before Parliament. They made provision for additional payments to be made so that a person who had been assessed as needing residential accommodation could choose to live in accommodation more expensive than the local authority would usually pay to meet the assessed needs. The summary at the beginning of the 2004 Guidance includes the following explanation:

"1.3 If the individual concerned expresses a preference for particular accommodation ("preferred accommodation") within England and Wales, the council must arrange for care in that accommodation, provided:

The accommodation is suitable in relation to the individual's assessed needs (see paragraphs 2.5.1 to 2.5.3)

To do so would not cost the council more than it would usually expect to pay for accommodation for someone with the individual's assessed needs (see paragraphs 2.5.4 to 2.5.8). This is referred to throughout the guidance as the usual cost.

The accommodation is available (see paragraphs 2.5.9 and 2.5.15)

The provider of the accommodation is willing to provide accommodation subject to the council's usual terms and conditions for such accommodation (see paragraphs 2.5.16 to 2.5.17)

1.4 If an individual requests it, the council must also arrange accommodation more expensive that it would usually fund, provided a third party or, in certain circumstances, the resident is willing and able to pay the difference between the cost the council would usually expect to pay and the actual cost of the accommodation (to 'top up'). These are the only circumstances where either a third party or resident may be asked to top up (see paragraph 3)."

97. The Directions and the 2004 Guidance require the local authority to identify what it would usually expect to pay for accommodation for someone with the individual's assessed needs. The 2004 Guidance uses the shorthand synonym "usual cost" for that more expansive term. In my opinion, it is critical to understanding the Directions and the 2004 Guidance to have constantly in mind that the reference here to "cost" is to the cost to the council of purchasing a service and not cost to the home of providing that service. That is a different concept which is introduced in the 2004 Guidance as "the actual costs of providing care".
98. Section 2 of the 2004 Guidance is concerned with "Preferred Accommodation" with a dedicated part entitled "(b) Cost". It bears repeating:

"2.5.4 One of the conditions associated with the provision of preferred accommodation is that such accommodation should not require the council to pay more than they would usually expect to pay, having regard to assessed needs (the 'usual cost'). This cost should be set by councils at the start of the financial or other panning period, or in response to significant changes in the cost of providing care, to be sufficient to meet the assessed care needs of supported residents in residential accommodation. A council should set more than one usual cost where the cost of providing residential accommodation to specific groups is different. In setting and reviewing their usual costs, councils should have due regard to the actual costs of providing care and other local factors. Councils should also have due regard to Best Value requirements under the Local Government Act 1999.

2.5.5 Individuals should not be asked to pay more towards their accommodation because of market inadequacies or commissioning failures. Where an individual has not expressed a preference for more expensive accommodation, but there are not, for whatever reason, sufficient places available at a given time at the council's usual costs to meet the assessed care needs of supported residents, the council should make a placement in more expensive accommodation. In these circumstances, neither a resident nor a third party should be asked to contribute more than the resident would normally be expected to contribute and councils should make up the difference between the resident's assessed contribution and the accommodation's fees. Only when an individual has expressed a preference for more expensive accommodation than a council would usually expect to pay, can a third party or a resident be asked for a top up (see paragraph 3.1). Costs of accommodation should be compared on the basis of gross costs before income from charging. Given the different amounts that councils will recover from individuals by way of charges, it would not be appropriate for a council to determine a usual net cost it would expect to pay.

2.5.6 For the cost of placements in other councils' areas see paragraph 2.3.

2.5.7 Councils should not set arbitrary ceilings on the amount they expect to pay for an individual's residential care. Residents and third parties should not routinely be required to make up the difference between what the council will pay and the actual fees of a home. Councils have a statutory duty to provide residents with the level of service they could expect if the possibility of resident and third party contributions did not exist.

2.5.8 Costs can vary according to the type of care provided. For example, the cost a council might usually expect to pay for short-term care might be different from its usual cost for long-term care. There are also a number of situations where there may be higher costs incurred in providing residential care, be it long or short-term. Examples include specialist care for specific user groups with high levels of need or where necessary to prepare special diets and provide additional facilities for medical or cultural reasons. Councils should be prepared to meet these higher costs in order to ensure an individual's needs are appropriately met."

99. The next section of the 2004 Guidance explains that if the preferred accommodation is not immediately available appropriate arrangements should be made to provide for the person concerned at home or in temporary accommodation.
100. The sophisticated model used by Torbay to make its best estimate of the broad costs to care homes of providing accommodation has been described by Beatson LJ. In this appeal it is not the subject of criticism. It inevitably aims at a broad-brush calculation. Whilst some costs involved in running a care home can be calculated fairly closely (food, wages assuming typical staff/resident ratios, business rates for example) others are intrinsically variable. The availability of concrete figures is patchy given the natural reluctance of many businesses to divulge commercially sensitive information. Torbay's use of this model was to ensure compliance with the obligation in paragraph 2.5.4 of the 2004 Guidance to have due regard to the actual costs of providing the level of assessed care in question.
101. The model delivered a notional cost per resident to the provider which took account of estimated day to day costs and also included a return on capital. This last feature is an important part of the viability of a business which would ordinarily not be calculated on the basis of individual transactions but on overall revenues and costs of the enterprise.
102. Neither the Directions nor the Guidance require a local authority to set the figure they would usually expect to pay at the level of the actual cost, however calculated, or at a figure which exceeds it. Having due regard to a factor requires the decision maker to take it fully into account. It is an important factor in assessing what a council would expect to pay because, even though pure market economics might enable a council to drive a very hard bargain, the "best value requirements" recognise that price is not the only measure of value. Maintaining a healthy functioning market in care accommodation is necessary to enable a local authority to discharge its statutory duties in the longer term and for the benefit of its elderly population, whether they pay for care themselves or are funded wholly or in part by the local authority. Yet the weight to be given to the factor remains a matter for the decision maker.
103. Local authorities are cautioned against setting "arbitrary ceilings" and should ensure that the amount they would expect to pay is sufficient to provide accommodation necessary for the assessed needs. That, once again, is a reference to whether the services can be purchased for the usual cost that has been set: see paragraph 2.5.7. Moreover, as paragraph 2.5.6 makes clear, if a council sets too low a figure for what it would expect to pay, with the result that accommodation at that cost is not available, the council will be responsible for the difference rather than the individual concerned. Paragraph 2.5.7 also explicitly recognises that there may be a difference between what a council will pay (i.e. the sum it expects to pay) and the "actual fees of a home".
104. The Guidance enjoins councils to have "due regard" to three things:

1 The actual costs of providing the care;

2 Other local factors; and

3 The Best Value requirements of the 1999 Act.

Otherwise, there is no lexicon of relevant factors to which a local authority must have regard found in either the Directions or the 2004 Guidance.

"Other local factors" is a term not defined in the 2004 Guidance. The evidence of Torbay shows that it took account of the proportion of the care market purchased by the council, the ratio of residential to nursing homes and that there was (at least in its opinion) an oversupply of residential places. It took account of local vacancies. Torbay also had regard to the flexibility of the local labour market and land values.

105. In my view, Torbay was entitled to take into account the mix of local authority funded places and those privately funded when determining what it would expect to pay for care. The greater the proportion of available places being funded by a local authority the more directly responsible it is for the health of the sector within its locality, and vice versa. Moreover, its purchasing power will vary depending on how much of the available accommodation in the local market place it is paying for. It might also have regard, as Torbay did, to the variations in mix from establishment to establishment. A strong supply of privately paying residents charged fees well in excess of the actual cost of providing services to them might enable a council to pay much less, without jeopardising the quality of care or the supply of spaces. That feeds directly into the question whether fees from privately paying residents can be taken into account when setting the usual cost to the council. Whether that is properly characterised as a local factor or simply something to which a council is entitled to have regard may not matter, but in my view it falls comfortably within the rubric of "local factors".
106. The context of this question, as the respondents recognise, includes that:

(a) there is no express requirement in the Directions or 2004 Guidance to ignore revenues from privately paying residents;

(b) "actual costs" are but one of a number of factors to which due regard must be paid in arriving at the "usual cost"; and

(c) the 2004 Guidance acknowledges a difference between what a council pays and the actual fees of a care home.

107. In deciding what he would expect to pay for a long term service any purchaser would hope to establish, if he could, the lowest figure at which he could purchase it without jeopardising the viability of his supplier. Knowledge that the supplier already has a number of profitable contracts under its belt would provide a legitimate reason to expect to pay less, particularly if the supplier had little expectation of filling its spare capacity at a higher price. The marginal cost to a supplier of providing the service might be low. Indeed, it would be odd if a purchaser did not take this feature into account. In my opinion there is nothing in the cost section of the 2004 Guidance which tells against this approach subject, of course, to paying due regard to actual cost and Best Value.
108. I have approached the question of whether a local authority may take account of other income streams by first looking at fees from privately paying residents because that is likely to be the most valuable source of additional revenues in many localities. I have also done so by considering that part of the 2004 Guidance concerned directly with cost, and the factors which inform the question of what a local authority would expect to pay. The same reasoning applies to revenues which residential homes receive from the NHS, which similarly finds no mention in the 2004 Guidance. The same is not true of top up fees. The argument advanced by Mr Purchase on behalf of the respondents understandably relied upon paragraph 3.3 of the 2004 Guidance which states:

"When setting its usual cost(s) a council should be able to demonstrate that this cost is sufficient to allow it to meet assessed care needs and to provide residents with the level of care services they could reasonable expect to receive if the possibility of resident and third party contributions did not exist."

109. It was submitted that this piece of the 2004 Guidance explicitly prohibits a local authority from taking account of fee income to care homes from top up fees. In my view, that misunderstands what this part of the 2004 Guidance is concerned with.
110. As paragraph 1.4 of the summary makes clear (quoted above), paragraph 3 of the 2004 Guidance is concerned to limit the circumstances in which a third party or resident may be asked to make a top up payment. Paragraph 3.1 states that paragraph 3 "applies only where a resident explicitly chooses to enter accommodation other than that which the council offers them, and where that preferred accommodation is more expensive than the council would usually expect to pay." On its face it does not seek to qualify what has gone before in paragraph 2. In my opinion, it does not prohibit a local authority from looking at the total revenue picture of the care home sector in its locality when fixing what it expects to pay. That said, in my judgment paragraph 3.3 is of a piece with what has gone before.
111. In must be read in the context of the distinction between what the council would expect to pay, having regard to the assessed needs of a person, and the actual cost of providing for those needs. The first is concerned with what the council pays to satisfy those needs, the second with what it costs the supplier to do so. Paragraph 3.3 expects a council to be able to demonstrate that the usual cost it has set (i.e. what it expects to pay) allows it to meet the relevant assessed care needs. In other words, that it can purchase accommodation with the appropriate services at this price. It is concerned to guard against top-up payments being used in individual cases as a disguised payment for the basic assessed needs because they are designed to cover enhanced accommodation or services, and nothing else.
112. This appeal was argued at a high level of abstraction. The issue is whether Torbay acted unlawfully in taking account of the three revenue streams (private fees, top up payments and NHS payments) when making the evaluative judgement of what it would expect to pay for residential care for the elderly. In my opinion, there is nothing in the Directions or 2004 Guidance which precludes them from doing so. That judgement was informed by a complex model which took account of a very large range of considerations and worked on the best, albeit incomplete, evidence available. We were shown aspects of the evidence and the model but this appeal is not concerned with any criticism of the model or Torbay's approach, save as regards the high level points.
113. I accept the arguments advanced on behalf of the appellant that the judge misconstrued the 2004 Guidance as requiring it to disregard the effect on care homes' profitability and return of capital of all income streams other than fees paid by local authorities and would allow the appeal. They are encompassed in grounds 1 and 2 identified by Beatson LJ in paragraph 40 of his judgment. Ground 4 adds nothing; and in agreement with Beatson LJ for the reasons he gives in paragraph 41, I do not consider that ground 3 (inadequate reasons) is made out.

Note 1    Continuing Healthcare is where the NHS meets the full cost of all care and accommodation if it decides that a resident has a primary need for nursing care owing to the nature of his or her needs.     [Back]

Note 2    It is known as “Funded Nursing Care”. Where the primary need is for health care, the provision of nursing care is the responsibility of the NHS: Health and Social Care Act 2001, section 49.    [Back]

Note 3    Laing and Buisson is a healthcare consultancy which developed an economic model for calculating a fair price for care: see [46] below.     [Back]

Note 4    The court was informed at the hearing that the reference to “South West Homes” was to homes in the South West region and not to the care company of that name.     [Back]

Note 5    The four bands of fees approved in 2013 were; £341 and £392 respectively for standard and standard plus residential care; and £529 and £555 respectively for standard and standard plus nursing care.    [Back]

Note 6    These included Laing & Buisson’s annual “Care of Elderly People UK Market Survey”, the Bishop Fleming Torbay survey in 2011, and work done by the Association of Directors of Adult Social Services.    [Back]

Note 7    A table in the section of the Torbay Usual Costs Model 2014-2015 Current Assumptions on Provider Impacts refers to “Implied LA Market Rate + TP”.    [Back]

Note 8    Commission on Funding of Care and Support, July 2011.    [Back]

Note 9    This is the percentage in the October 2012 Consultation in Appendix 1. In Appendix 5, there is a breakdown between the assumed figures for the different bands: that for standard residential care is that the Council purchased 40% of the beds and 6% were purchased by others at rates linked to the Council’s rate. Compare the figure obtained by the Torbay Care Trust’s 2011 questionnaire: see [20] above.     [Back]

Note 10    R (Sefton Care Association and others) v Sefton Council [2011] EWHC 2676 (Admin); R (EMCARE) v Leicestershire County Council [2011] EWHC 3096 (Admin); R (Care North East Newcastle) v Newcastle City Council [2012] EWHC 2566 (Admin); R (Redcar & Cleveland Independent Providers Association and others) v Redcar & Cleveland Borough Council [2013] EWHC 4 (Admin) and R (South Tyneside Care Home Owners Association and others) v South Tyneside Council [2013] EWHC 1827 (Admin).     [Back]

Note 11    This model was first published in a 2002 report, Calculating a Fair Price for Care: A Toolkit for Residential and Nursing Care Costs, for the Joseph Rowntree foundation, which was updated in 2004 and in 2008.     [Back]