A high court judge has described as ‘troubling’ the basic accounting errors which Lambeth council allegedly made before opting to demolish – rather than refurbish – Cressingham Gardens Estate.
Lawyers for residents claim the officers’ failure meant that cabinet members behind the decision, were wrongly led to believe the £110m redevelopment would be profitable (have a positive £0.8m Net Present Value (NPV)) – a strict requirement of its own ‘must achieve criteria’.
The residents’ analysis of the redevelopment suggests it would not be financially viable and would in fact require tens of millions of pounds of public subsidy.
Meanwhile, the court heard how the community’s own alternative ‘People’s Plan’, which residents claim would both make a profit and offer dozens of extra homes at council rent levels, at the same time as averting the bulldozer, was wrongly discredited in the cabinet report.
The judicial review claim, brought on four grounds by resident Andy Plant, is the community’s second challenge to Lambeth council’s decision-making in little over a year.
If the decision is found to be unfair and unlawful, it could be quashed.
In November last year, another Cressingham Gardens resident, Eva Bokrosova, won her case, resulting in the first decision to demolish being quashed.
The judge in that case found Lambeth had unlawfully removed refurbishment options from the consultation after failing to produce evidence that they were ‘unaffordable’.
The most recent decision to demolish was made at a cabinet meeting on March 21.
Residents have been questioning the justification for and viability of the council’s preferred scheme throughout the consultation, which was first launched in September 2012.
Viability calculations in the current case, show £7.5m ‘income’ from the council being paid to ‘Homes for Lambeth’, the private company (special purpose vehicle (SPV)) Lambeth is setting up to build the new development, but not being accounted for as an expense in the financial model.
The March 2016 cabinet report stated that the money was to be spent on masterplanning and buying out leaseholders, and would be ‘recouped through the projects through Homes for Lambeth in due course’.
In a witness statement made in July, Lambeth’s regeneration programme manager Julian Hart, claimed that in the ‘detailed cash flow model, this expense is paid back to the council over the course of the construction period,’ when closer analysis revealed it was not, the court heard.
In the absence of evidence to back up Mr Hart’s claim, in October lawyers for the claimant wrote to Lambeth, ‘seeking documents that would show the recoupment’.
Later that month, a letter from the council’s legal services department confirmed the local authority had been ‘unable to locate any [such] documents’.
Just weeks before the hearing, Lambeth finally admitted it had not included the multi-million pound expense in the financial model, which was calculated by development consultants Airey Miller. The revelation was buried in paragraph 21 of a witness statement from finance director Christina Thompson.
The judge, Mr Justice David Holgate, described the paragraph, which was supposed to clarify the situation, as ‘incomprehensible’, and part of a ‘delphic [deliberately obscure or ambiguous] witness statement’.
In the statement, dated September 29 this year, the finance boss accepted that criticism of the council’s approach to account for the money in the NPV ‘may have been justified’, but only if the sum were a loan or a grant.
She argued that the income was neither, adding, ‘the money is best described as a sum to be recouped’, partly because ‘Lambeth will be the sole shareholder in Homes for Lambeth’.
She claimed that it was therefore ‘appropriate to include the sum in the NPV calculation without showing its recoupment’.
Another reason she cited was that the ‘scheme is expected to generate a surplus’.
David Wolfe QC, for the claimant, told the court, ‘I’m not sure her paragraph makes sense, and I’m not going to try and make it make sense.’
In a legal ‘skeleton argument’ contained in court papers, Mr Wolfe stated, ‘The option which the cabinet ultimately adopted, was said in the [cabinet] report to have a positive NPV – thus meeting a must-achieve criterion.
‘But the NPV figure included a £7.5 million cash income figure, which tipped it from negative to positive.’
Mr Wolfe argued that it was not appropriate to include finance as income in such a calculation, but even if it were allowed, it should have been properly accounted for.
He said that the point should be considered in the ‘context of the consultation process’ and a ‘dialogue with members of the public’ in which they were supposed to have a ‘chance to assess the viability’.
‘We then get to an element which emerges as a tipping point, and we get them changing and varying the consistency,’ added the barrister. ‘Variations not only about what it is, but also about how it will be treated and has been treated.’
Seeking to understand Lambeth’s decision to compare the viability of its regeneration options using NPV calculations, judge Holgate referred to the ‘difficult’ decisions’ the council supposedly faces in weighing up which estates to refurbish and which to redevelop.
He said that in this context there was a ‘tendency’ for Lambeth to see NPVs as merely ‘theoretical’, partly because they do not take into account claimed problems with sourcing funding for certain options.
Turning to James Goudie QC, defending Lambeth, the judge probed, ‘If your clients produced a positive NPV [a profitable model] for refurbishment, that might be a factor that could influence the choice as to whether that scheme should go ahead for refurbishment?’
Mr Goudie replied, ‘One could argue that the project could be done without doing any NPV exercise at all.’
‘Why do an NPV exercise if they’re not going to use it?’ pressed the judge.
Mr Goudie said he would ‘come back to that’.
The barrister later returned to the topic of the claimed surplus, and how that might excuse the missing £7.5 million.
The judge agreed the surplus was ‘pertinent’, but repeated, ‘I need to know how to handle’ the failure to include expenditure.
He added, ‘I draw the inference unless you tell me otherwise, if it had been modelled, it would reduce the cashflow.
‘Whether it makes it [NPV] negative, it’s not for me to say.
‘What is the legal analysis – why shouldn’t it have been taken into account?’
He continued, ‘For months, Lambeth is saying that the repayment is in the model [and] it’s being taken into account.’
‘But almost at the eleventh hour, this witness says, “It’s not in the model,” and we have this paragraph attempting to explain that.
‘This is troubling me.
‘This is a mandatory criterion. This is the council’s own decision-making framework, not something imposed on them by the court. It’s something they chose as a test.’
Mr Goudie then pointed out a passage in the cabinet report which said an option with a negative NPV should only ‘probably’ be rejected.
Mr Wolfe had explained that ‘probably’ was a reference to schemes in general, and did not grant the council freedom to deviate from the official basis for decision-making about Cressingham.
Mr Goudie said, ‘If all [options] were [NPV] negative, a choice still has to be made.
‘It can’t seriously be suggested that if you manage to contrive that all are negative, that nothing is going to happen.’
He added, ‘Whether it had a positive NPV ultimately or not… one has to see the NPV in perspective.’
The judge went on to say that if the cashflows had modelled the £7.5m, ‘That, to use the vernacular, would be a slam-dunk.’
‘Even if the approach to NPV could be regarded as erroneous,’ said Mr Goudie, ‘this doesn’t mean that amounted to unlawfulness, still less that it would warrant any relief, because we were finally unable to fund any refurbishment of the estate.’
The barrister claimed that the refurbishment options (1-4) were dependent on funding from the Housing Revenue Account (HRA) (an assertion disputed by the claimant), which could not be afforded (also in dispute), while the demolition option (5), could be privately funded.
He added, ‘Whilst we would wish to be much more positive about Option 5, we submit it was the least of the worst of evils.’
After discussing the contention with regeneration officers behind him, Mr Goudie finally offered an explanation about the surplus, claiming that it was in fact ‘£25 million’.
He said this huge sum came from the difference between the ‘discount rate’ (6.09 per cent – the percentage used to perform the NPV calculation), and what the council believed would be the real, much lower cost, of borrowing (around 4 per cent).
This was possible because the council could control the ‘state aid margin’ – an interest rate payable because the SPV has to compete as a private company with market lending rates.
‘So, what you’re saying, is that in this explanation, the £7 million can be taken out of the £25 million, without disturbing the £824 thousand NPV?’ asked the judge.
‘Yes,’ said Mr Goudie. ‘Christina Thompson’s witness statement states there’s a sufficient surplus to be able to recoup the £7.5 million if and when that might be desired.’
‘She doesn’t give your explanation,’ said the judge. ‘Maybe there’ll be another late witness statement. I’d much prefer if it’s in the documentation we have already.’
When the court convened again on the third and final day, Lambeth produced a document which sought to explain the matter further.
However, the judge spotted a flaw in the author’s explanation of the NPV calculation.
‘Where does it come from?,’ asked the judge. Mr Goudie replied that it was ‘done by Mr Holbrook’, his junior barrister who defended Lambeth in the previous judicial review.
The judge then corrected Mr Holbrook’s approach.
Mr Goudie continued to press the point about the money being ‘readily recoupable’.
‘I get your point,’ said the judge.
The court also heard how cabinet members were misled about the contents of the People’s Plan (TPP), which was discredited in the cabinet report.
Mr Wolfe argued that in leaving out explanatory appendices from the cabinet report, ‘the council officers had a duty, when summarising and appraising TPP, to do so accurately, fairly, on a proper basis and in sufficient detail in order for the cabinet to be able to conscientiously take into account the consultation response which TPP embodied’.
He added, ‘The problem, however, was that their summary and appraisal contained material errors on key points which officers said (in the report) were fatal to TPP.’
Firstly, the report stated that TPP had been over-optimistic in assuming that 80 per cent of rental and service charge income would be available to reinvest, when the figure allowed in the plan is closer to half of this.
This inaccuracy was exacerbated by the fact that the council also wrongly claimed that it spends around 30 per cent of income from Cressingham Gardens on repairs and maintenance, when a freedom of information request revealed it was only 7.64 per cent.
The report also claimed that the cost of repurposing the undercroft car parks into housing (23 flats), would cost about four times more than calculated in TPP, which put it at only £52k per home.
TPP’s detailed costings were supported by an architect and a quantity surveyor. By contrast, the council’s estimate was two short sentences and ‘very much finger in the air’, said Mr Wolfe. He said this was a distinction which was not made clear to cabinet members.
In addition, officers also ruled out the conversion after claimed the ceiling heights would not comply with the London Housing Design Guide, which was not true.
The guide, which the judge observed was a guide and not building regulations, suggests new housing would need to have higher ceilings, but exceptions could be made for conversions in sensitive historic contexts or conservation areas.
The court heard how English Heritage (now Historic England) strongly suggested the council consider extending the Brockwell Park Conservation Area to include the estate, as a reflection of its ‘local significance’.
‘It’s put as a very clear no-go,’ said Mr Wolfe. ‘It’s put as a show-stopper’, he added, arguing that this was ‘bound to impact’ how the cabinet members viewed the proposal.
The judge pointed out that the report contained a ‘litany of criticisms’ of the proposed conversion, including about restricted daylight and the fact that the extra flats would be ‘single aspect’.
A third error in the summary of TPP to members, was the report’s assertion that the proposal was reliant on funding from the Housing Revenue Account (HRA). The judge acknowledged that TPP in fact details a number of alternative funding streams.
Finally, the council’s analysis included £1.4 million of ‘weathertight repairs’ costs in its analysis of the plan, when the scope of the works has now decreased to £430k, meaning their decision was based on incomplete data.
Mr Goudie insisted the report ‘addressed TPP very fully’ and had been treated with an ‘abundance of fairness’.
Of the estate’s critics of the council, he said, ‘They always want yet more. They are simply insatiable.’
However he admitted, ‘I do appreciate that on some points I may not be able to submit more strongly than, “It [the analysis] passes muster”.’
He added, ‘In our submission it did, and certainly did not constitute unfairness.’
Regarding the repurposing of the car parking space, Mr Goudie conceded that TPP offered a similar number of extra homes for council rent levels as does Option 5 [in TPP a further 14 new build homes are proposed at the north end of the estate, totaling 37, while the council’s best effort is 27].
However, he suggested that putting the current points aside, they remained ‘unsatisfactory’, due to the ‘undesirability of homes in a car parking area’.
Lambeth denies four grounds that: The council erroneously included the £7.5m income which would have otherwise for each of the options resulted in its own preferred demolition option failing the ‘must achieve criteria’; Misled its own Cabinet members as to ‘The People’s Plan’ and/or the members failed conscientiously to take into account key aspects of this consultation response; Failed to provide up-to-date data relating to the HRA finances to either the consultees or the Cabinet members, such that they were (respectively) not properly able to comment on or take into account the data; and Breached Mr Plant’s right to property under Article 1, Protocol 1 of the European Convention on Human Rights, combined with his right to respect for a home, by removing his existing ‘Right to Buy’ contrary to current government policy.
The case was heard between November 15 and 17 and the judge has reserved judgement, which is expected to be handed down within weeks.