What next for the retirement living sector?

March 2019 could prove to have been a key month for retirement living, as the Ministry of Housing, Communities and Local Government (MHCLG) published responses to several consultations that have major implications for the sector. While the proposed changes will not affect everyone in the sector equally, retirement living operators will want to give serious thought to how the proposed changes could affect their business models. Event fees Event fees are charges payable by owners of retirement living properties that arise on certain events occurring. There is no standard name and they go by a variety of descriptions in leases, including “exit fees”, “transfer fees” and “deferred management fees”. They are mainly payable on sale, but some are payable on other events too, such as subletting or change of occupation. On 27 March, MHCLG announced that the government will implement all the recommendations made by the Law Commission’s 2017 report on event fees bar two. Some of the recommendations to be implemented include: a new code of practice standardising the information provided to purchasers a cap on the event fee that can be charged on subletting/change of occupancy. One of the principal drivers behind the Law Commission recommendations is to increase investment in the sector. Event fees might be unfair (and legally unenforceable) contract terms – the Office of Fair Trading, in its 2013 investigation into transfer fees, suggested as much. The proposed reforms attempt to resolve this by clarifying when an event fee will be enforceable. The recommendations should provide greater certainty, but operators relying on event fees to fund communal areas will need to make sure they are compliant with any future law. While it is currently unclear when event fees are enforceable, it will soon be much clearer when they are not and the appetite for challenging their validity in the courts will arguably increase. Lenders will want to know that operators will be compliant and have systems in place to ensure that this income is not at risk. Systems will need to be in place, for example, to deal with the new disclosure requirements. Where a retirement property is sold directly, there will be an obligation to provide prospective buyers with a standardised disclosure document within certain time periods. Similar provisions will apply when selling via an agent and non-compliance will affect enforceability of the event fee. Whether an operator is compliant with these reforms will depend largely on their staff. Clear procedures and effective training will be crucial to protect future event fee income. Ground rents and leasehold houses Like event fees, ground rents and leasehold houses have had their fair share of bad press. Consequently, the government has been consulting on whether they should be banned or restricted. Some stakeholders in the retirement living sector have campaigned for a specific exemption from any such ban or restriction on leasehold houses and/or ground rents in retirement community properties, and MHCLG’s October 2018 consultation document gave the impression that (in terms of ground rents, at least) the campaigning had paid off. At the time, MHCLG suggested that the sector could be provided with the option of being able to either charge purchasers a higher price with a nominal ground rent, or a lower price and an economic ground rent. In its response to the consultation, MHCLG now seems convinced that an exemption from a ban on leasehold houses can be justified in the sector. While MHCLG still appears to agree that higher than nominal ground rents can also be justified in the sector, the previous proposal of allowing the purchaser to choose between an economic or nominal ground rent was noticeably absent. Instead, MHCLG stated: “any exempted ground rent should not exceed 0.1% of the present value of a property, up to a maximum of £250 per year”. For operators with ground rents significantly in excess of this figure, a cap of £250 would be a significant reduction in income and would adversely affect capital values. When future legislation is debated in parliament, MHCLG’s previous proposal (to allow consumers to choose between a higher purchase price and an economic ground rent) may well reappear. Operators relying on ground rent should, however, consider how a cap of £250 (or otherwise) might affect them and how they would make up any shortfall in income. It may be the case that event fees – having now been given the government’s seal of approval – are a viable alternative. The sector’s response It might be thought operators would oppose limitations on ground rent and event fees. However, more forward-looking operators have welcomed the proposals, not least because it should result in easier comparison for consumers between competing schemes on the basis of clear and standardised up-front information – which some operators have previously hidden in the small print. As the market grows, operators believe that transparency will assist sales. Quality products, marketed fairly, will help shine an image tarnished by past unfair behaviour. To conclude, although the MHCLG has indicated its intentions for proposed reforms in the sector, we will need to wait until legislation is finalised before we can be certain what the final reforms will be. Whatever form the final legislation takes, the fact that the government has devoted time and resources to the sector (especially when it clearly has other more pressing issues to consider) is a positive sign. Hopefully this will be the first step towards a statutory framework for the retirement living sector that provides the clarity and certainty to consumers, investors and funders that is required to enable the sector to achieve its ambitious growth targets. Martyn Holland is a partner and David Hutber a solicitor in Irwin Mitchell’s real estate team