Lease-based provider breaches regulator’s standards after ‘conflicts of interest’ found

“Highstone entered into long leases with HH, which subsequently sold the majority of the properties in November 2021 to a real estate investment trust, along with renegotiated terms of the long-term lease with Highstone”, according to the judgement.

Highstone has received £12.7m in grants under Homes England’s Affordable Homes Programme, according to the organisation’s accounts up to 2021, the regulator said. 

The RSH said there is a “lack of clarity on roles and responsibilities between Highstone, HH and HBS, and obvious conflicts of interest with the majority of Highstone’s board holding a financial interest in HH and HBS”. 

It added: “Highstone failed to manage conflicts when acquiring and developing properties when its executive directors stood to personally benefit through HH and HBS. As a result, Highstone has failed to ensure that the arrangements it has entered into do not inappropriately advance the interests of third parties.” 

The regulator also said Highstone had been unable to provide evidence that its board gave “appropriate consideration” to risks arising from a long lease-based model.

“The long leases run up to 60 years, with no break clause until 25 and 50 years, resulting in significant risks to meet liabilities where there are voids or delays in agreeing rent and housing benefit levels with local authorities,” the judgement said.

The landlord provides supported living accommodation for vulnerable adults in partnership with local authorities from across Yorkshire, according to its website. It was initially placed on the regulator’s gradings under review list in July. 

On rents, the RSH said Highstone had been “unable to provide evidence of any assurance given to the board that rent levels are compliant with the Rent Standard”. 

It also said the organisation had made “inconsistent statements to the regulator about the classification of its stock”. 

The judgement added: “The governance failings and lack of assurance on compliance with the Rent Standard have created a significant risk that public funds may have been misused, thereby failing to safeguard taxpayers’ interests and the reputation of the sector.” 

It concluded: “The regulator considers that Highstone’s directors have failed to demonstrate meeting their fiduciary responsibilities and have not acted in the best interests of the registered provider.” 

In response to the investigation, Highstone has recruited new independent board members, and commissioned a review of its governance arrangements and its compliance with the Rent Standard, according to the regulator. 

Harold Brown, senior assistant director for investigations and enforcement at the RSH, said: “We are engaging intensively with Highstone’s new board as it works to return to compliance with our standards.” 

In a statement, Highstone said: “Highstone Housing Association is committed to working with the Regulator of Social Housing to address the issues identified. 

"Work has started to rigorously review areas of non-compliance.  

“In response to the regulatory engagement, a review of board membership has taken place, which included three new board appointments.

“Highstone is committed to the highest standards and places the interests of the vulnerable individuals it houses at the forefront at all times.” 

The landlord is the latest in a string of housing associations operating a lease-based model in the supported housing sector which have been found non-compliant by the regulator.

In 2019, an RSH report on the sub-sector said it was “currently hard to see how a provider of SSH [specialised supported housing) which is substantially financed by long-term leases and subsequent tight margins can meet the requirements of the Governance and Financial Viability Standard”. 

A damning MPs’ report last week raised concerns about the lease-based model and called for government action.