What has been proposed in order to deal with these issues?
The Government has said that it will consider re-launching commonhold as an alternative form of tenure. It has also committed to working with the Law Commission to identify opportunities to incorporate additional leasehold reforms as part of their 13th Programme of Law Reform. They have also agreed to take account of the report from the APPGLCR. Some developers of existing homes let on leases with problematic escalating ground rents are said to be already taking action to modify the terms of these leases.
What are the problems?
There has been a huge increase in the amount of housing built to cater for the elderly, in a wide range of accommodation types, ranging from acute need care homes through to luxurious bespoke apartments. The issues currently under discussion relate only to the terms contained in the long leases of retirement properties, as opposed to the arrangements under which residents live in care homes for the elderly. The problems relate to various financial terms which are sometimes included in these leases:
- the fees that tenants are sometimes charged when certain events happen, such as when they sell their lease, sublet or mortgage their property, if the property is inherited or if an additional person such as a carer or relative moves in; and
- the terms on which a leaseholder can exit from the lease. Sometimes a very large fee is charged and sometimes the leaseholder is obliged to sell the lease back to the freeholder at the original sale price, which means they lose any increased market value.
In 2013 the Office of Fair Trading investigated the use of transfer fees in leasehold retirement houses, and concluded that these were potentially unfair contracts terms contrary to the legislation which is now the Consumer Rights Act 2015. The OFT did not take legal action, but secured undertakings from several landlords operating in this sector about the extent to which these terms would be enforced. In 2014, the DCLG asked the Law Commission to consider these financial terms.
What has been proposed to deal with these issues?
The Law Commission's March 2017 report recommends that:
- a new code of practice on event fees in retirement properties should be put in place and approved under section 87 of the Leasehold Reform, Housing and Urban Development Act 1993. This would limit the circumstances in which an event fee could be charged in future, and would oblige the freeholder to ensure that clear information (including worked calculations) is given to purchasers at an early stage;
- the Consumer Rights Act 2015 should be amended to categorise as "unfair" any event fee which breaches this code; and
- estate agents who market these properties should be given guidance on ensuring that retirement flats are marketed in accordance with the code. A central database should be set up to contain all the information an estate agent would need to provide to customers.
The Law Commission also recognised that the way in which these fees are structured can be advantageous to leaseholders who live in properties where property maintenance, cleaning, caretaker or warden staff and other services are provided and who would not be able to afford to pay for those services if they were charged upfront.
The key message: ensure transparency at the point of sale
It is not yet clear what action (if any) the Government will take in response to the recommendations of the Law Commission and the APPGLCR respectively in relation to event fees in retirement housing and the financial terms in leases of new-build houses.
In the meantime, residential developers should take steps to ensure that customers fully understand the financial terms contained in new leases for sale. In the context of retirement homes, proactively implementing some of the Law Commission's recommendations would be sensible in order to protect against reputational damage.
Investors buying assets in this sector should ensure that their due diligence process highlights any leases which raise concerns in this area. Investors who already own freeholds in these sectors which may be vulnerable to challenge on the grounds of a lack of transparency should consider following Taylor Wimpey's example by making a provision for the cost of varying these leases.
Developers also sometimes structure new developments in such a way that they create income streams from infrastructure such as combined heating systems. In light of the Government's apparent stance on ground rent, developers and investors should take careful advice before committing to such schemes.