The Law Commission is concerned that event fees charged by landlords of retirement housing are potentially unfair and need to be capped.
The Law Commission is a non-political independent body, set up by Parliament to keep the law of England and Wales under review, and to recommend reform where it is needed. After a two-year investigation into retirement housing, it has found that there is the potential for abuse in the charging of so called 'event fees' or 'transfer fees'. When the system works well, which it does most of the time, these fees - payable on a sale or sub-letting of the property, for example - help offset service charges payable in retirement housing.
However, a few rogue landlords may hide complicated formulae deep in the small print or charge fees in unexpected situations. Moreover, there is a question mark over the legality and enforceability of event fees in many cases, which is holding back the development of new retirement housing projects. Investors have been reluctant to lend on the security of an income stream based on event fees, given the perceived risk that such terms may be found to be unfair (and therefore unenforceable) under consumer protection legislation.
In its latest report, 'Event Fees in Retirement Properties', published on 31 March, the Law Commission is urging the government to regulate the sector and bring in a new code of practice - to make event fees more transparent, stop unexpected fees and allow a right to challenge unfair fees.
The Law Commission's concerns
The Law Commission has concluded that specialist retirement housing provides a good option with health and social benefits for older people who could otherwise become isolated. However, high-quality specialist housing is expensive and can include services such as communal facilities, security and on-site care requiring payment of a regular service charge. Nearly all of these properties are sold on a leasehold basis and many of these leases include a fee triggered by certain events - such as when the owner sells or sub-lets their property. These fees can be a practical way of making retirement flats affordable, particularly for older people with low incomes, because they can defer some of the running costs until the property is sold. The Law Commission discovered that the majority of developers of the 160,000 retirement properties in England and Wales levy such fees.
The Law Commission's principal concern is that owners and their families are sometimes not told about the fees until after they have agreed to buy the property. The fees can also be charged when the owner is not expecting it, such as when a spouse moves into the property or when the owner moves into a nursing home and sub-lets the property. With event fees being anywhere up to 30% of the total property price, they can run into the tens of thousands of pounds. Some are not clear about what services can be expected for the money. Concerns about this were raised by the Office of Fair Trading in 2013. As a result, the Department for Communities and Local Government asked the Law Commission to consider how to make event fees fairer.
Following public consultation, the Law Commission is not calling for the outright banning of event fees, because of the benefits they can offer consumers (in particular by making specialist housing affordable by deferring part of the payment for services until the owner sells the property). Instead it is recommending the regulation of the sector and changes to the law to bring in a new code of practice, which outlines minimum mandatory standards with which landlords must comply. The impact would be:
- fees could no longer be charged unexpectedly. They could only be charged when the property is sold, or, in limited circumstances, when the property is sub-let or where the resident has died or the property is no longer their primary home.
- fees charged for sub-letting or change of occupancy would be capped
- standardised, transparent information would be provided at an early stage in the purchase process. This would include how much the fee is likely to be, an explanation of how the fee is calculated, who receives the fee and what the home owner will receive in exchange.
- protections would be built in so that no event fee could be charged if a resident's partner or carer moved into the property as their principal home.
The Law Commission's report contains the interesting statistic that in 2015 there were over 11 million people aged 65 or over living in England and Wales, yet there are just 160,000 retirement properties available for them. By contrast, 17% of over 60s in the USA live in specialist housing, 13% in Australia and 13% in New Zealand. Developers who were interviewed as part of the project told the Law Commission that if the current legal uncertainty around event fees is removed or reduced, there could be an additional £3.2 billion investment by private companies over the next ten years to build more high-quality retirement leasehold properties. For operators such as registered providers, who are becoming increasingly active in this arena and using income streams to generate commercial cross-subsidy for affordable housing operations, anything which creates greater clarity and potential for increased funding opportunities has to be welcomed.
Increasingly, stakeholders interested in residential regeneration projects and community building are targeting retirement housing as a key area for development and investment. This includes a large number of registered providers, for whom retirement housing provides a valuable and necessary part of their place-making mandate as well as generating surplus funds that can be channelled into core affordable housing provision. The benefits are clear, and these proposals may well be embraced by the sector, whether or not they make it onto the statute book, as a means for providing greater transparency and as a differentiator between providers.
If your organisation operates retirement housing and charges event fees, we would be happy to work with you to identify what changes may be needed to your documents to ensure compliance with these proposals, should they be implemented.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.