Legal briefing | Real Estate | 28 Jun 2019

Beware of the LifeCare decision

Overview

The decision in the LifeCare appeal (APP/X5210/W/18/3198746 10 June 2019), in which the Planning Inspectorate held that future income should be included in a viability analysis, adds further fuel to the fire about how various kinds of retirement living and elderly accommodation, with or without care services, are classified under planning law, and the impact that this will have on the viability of such developments.

The issues

In our recent flier on conflicting decisions relating to the use class classifications under the Town and Country Planning (Use Classes) Order 1987 for health care properties, we set out the issues arising from classifying retirement living as Class C3 (residential) or Class C2 (residential institutions). One of the implications of classifying elderly living accommodation in which a lesser degree of care is provided as Class C3 means that it attracts a requirement to provide affordable housing. For most local councils, the delivery of social housing has become a priority, and this LifeCare decision suggests that the Government is taking a very wide view of the scope of costs that should be included in the viability analysis, on which the council will base its calculation of the amount of affordable housing required from a particular development.

The LifeCare case

The LifeCare case was an appeal against the refusal by the London Borough of Camden of a £97m scheme in West Hampstead comprising 82 "extra-care" flats and 15 care home beds. Although LifeCare argued that the scheme should be classed as C2 and therefore incur no affordable housing requirement, they proposed a £2m sum for such housing in the event that the scheme was considered to be Class C3. The appropriate classification of the scheme was considered and the Inspector, Brendan Lyons, decided that the flats were C3 and the £2m payment was also rejected in favour of a late stage viability capped at £12.7m.

It is now standard for councils to include a viability analysis and review mechanism in s.106 agreements attached to residential schemes, which enables the council to have a "second bite" at the developer if the scheme proves more profitable than forecast at the application stage. Complex formulae are applied to assess the uplift in profits, which may generate a further additional affordable housing contribution. The greater cost of delivering accommodation suitable for the elderly or other people groups with special needs is naturally included in the build-cost of delivering such accommodation. However, the LifeCare appeal decision shows that the scope of the viability analysis of a retirement living development now may extend to future income streams, not just value on completion vs. build costs and profit (see para 183 of the decision). 

As part of the funding securing delivery of goods and services, LifeCare proposed that a "deferred management fee" ("DMF") would be charged where residents leave a retirement living unit, usually on death. This was considered by the Inspector to constitute a guaranteed income stream which should deemed to be part of the profits of the scheme. As such, he decided that it should be taken into account in the calculation of viability and, therefore, in the assessment of future additional affordable housing contributions.

The Inspector referred to expert evidence showing that charging DMFs was a practice common to many retirement living or similar accommodation schemes and which has been subject to a Law Commission report (para 180 of the appeal decision) recommending changes to the practice, though not the principle of such charges, which can range from 2.3% to 30% of the purchase price of a unit. At the higher end of this range, such fees can amount to a considerable secure revenue stream. The Inspector therefore disagreed with the argument by LifeCare that such unique elements should be ignored (para 184).

Impact of the case

Although consent was refused on 16 grounds (including noise and vibration impacts, provision of cycle parking, highways works, travel plan and other more common planning matters, some of which were agreed prior to the Inquiry) it is likely to be the consideration of DMFs which is the red flag in this decision, and one which healthcare developers will need to note in considering future viability analyses and business models.

Deferred management fees

Deferred management fees, sometimes known as "event fees", are costs that are charged by scheme operators in certain circumstances, such as on a change of occupancy or death.

The Law Commission was asked in 2014 to investigate this payment structure, and published its final report and recommendations on 31 March 2017. It recognised that these fees can make specialist housing affordable by deferring part of the payment for services until the occupiers come to sell. However, it recommended the introduction of a code of practice which would:

  • limit when a DMF can be charged;
  • limit the amount of DMFs; and
  • require operators to provide transparent information about the DMFs early in the purchase process.

In March this year the Government announced its intention to adopt the majority of these suggestions. There are two outstanding items (establishing an online database of information for prospective buyers and setting out new rights for spouses and live-in carers to stay at a property, without payment of an event fee, after the death of an occupier) which are still being considered.

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