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BRIEFING PAPER

Number 05994, 30 May 2019

Leasehold retirement homes: exit/event fees

By Wendy Wilson

Inside: 1. A requirement to pay

exit/event fees 2. The Office of Fair Trading

investigation (2009 to 2013) 3. Law Commission review

(2014 to 2017) 4. Amendments to the

Consumer Code for Home Builders 2017

5. Constituents’ enquiries on event fees

Number 05994, 30 May 2019 2

Contents Summary 3

1. A requirement to pay exit/event fees 4

2. The Office of Fair Trading investigation (2009 to 2013) 5 Contingency Fund fees 9

3. Law Commission review (2014 to 2017) 10 The decision not to abolish event fees 12 Responses to the Commission’s findings 12 The Government response March 2019 13

4. Amendments to the Consumer Code for Home Builders 2017 13

5. Constituents’ enquiries on event fees 14

Cover page image copyright: Wendy Wilson

3 Leasehold retirement homes: exit/event fees

Summary What are event fees?

Companies that own or manage specialist retirement properties, usually flats owned on a long leasehold basis, often include a clause in their lease agreements requiring owners to pay an "exit” or “transfer” fee when they wish to sell or rent out their homes. The Law Commission notes that payment of these fees is usually triggered by an event (such as resale or sub-letting) and for this reason now refers to them collectively as “event fees.” An event fee, according to the Law Commission “can be up to 30% of the property’s resale price.” Owners of retirement properties subject to event fees have questioned whether the practice is lawful. There has been a tendency for owners to be ‘surprised’ by event fees – they are unaware of the requirement to pay these fees until an event triggering payment occurs. The issue has attracted a good deal of media attention.

The OFT investigation

Between 2009 and 2013 the Office of Fair Trading (OFT), carried out an investigation into event fees. The OFT closed on 1 April 2014 and its responsibilities passed to a number of different organisations, including the Competition and Markets Authority (CMA) and the Financial Conduct Authority.

Overall, the OFT concluded that “transfer fee terms, as typically currently drafted, are likely to constitute unfair terms under the UTCCRs [Unfair Terms in Consumer Contracts Regulations].” However, the OFT decided not to test this proposition in the courts as a number of companies voluntarily agreed to drop event fees and make changes to enforcement practices. The OFT did recommend some further policy and legislative changes.

The Law Commission’s project – regulation rather than abolition

The Law Commission announced that it had started work in October 2014 on the Transfer of Title and Change of Occupancy Fees in Leaseholds project, as referred by the Department of Communities and Local Government. The project was subsequently renamed “Event Fees in Retirement Properties”. The Law Commission conducted a consultation exercise between 29 October 2015 and 29 January 2016. A progress report was published in June 2016 which recommended a detailed code of practice for event fees to be backed up by legislation. It was envisaged that event fees which did not comply with the code of practice would be unenforceable. A draft Code was published and consulted on in September 2016. The Law Commission published its final report on 31 March 2017. The Commission found some “major problems” with event fees but stopped short of recommending their abolition. Instead, the Commission recommended that event fees should be subject to regulation backed up by a binding code of practice.

Government to implement the majority of the Law Commission’s recommendations

On 28 March 2019, the Government announced that it will implement the majority of the recommendations contained in the Law Commission’s 2017 report Event Fees in Retirement Housing.

Information on wider issues with leasehold housing and Government plans for reform can be found in Library briefing paper: Leasehold and commonhold reform.

Number 05994, 30 May 2019 4

1. A requirement to pay exit/event fees

Companies that own or manage leasehold retirement properties, usually flats, often include a clause in their lease agreements requiring the leaseholder to pay an "exit” or “transfer” fee when they or their beneficiaries wish to sell or rent out the property. The Law Commission has observed that these fees can be described in a number of different ways:

The fees are called by a bewildering variety of names, from “transfer fees” and “contingency fees” to “deferred membership fees” and “selling service fees”. […] And all of them are triggered by an event (such as resale or sub-letting). For this reason we refer to them collectively as “event fees”.1

It is not uncommon for this fee to take the form of a percentage of the property’s market value at the time of selling. On signing the lease agreement the leaseholder agrees to this provision and it becomes a binding clause in their contract (lease agreement).

The practice of charging these fees has received a good deal of negative media attention. Owners subject to these fees have questioned whether they are legal, as it can result in firms obtaining substantial sums of money when properties change hands. Some firms argue that the fee covers administration expenses incurred when the lease is assigned.

It is recognised that event fees can allow people to use some of their housing wealth to pay for a higher standard of living in their later years, but there is ongoing concern over the lack of transparency associated with these fees as part of the sales process. A number of owners claim to be unaware of the existence of the fees until the point at which a payment is requested.

Unlike normal service charges, these fees cannot be challenged by long leaseholders at a First Tier Tribunal (Property).

1 The Law Commission, Transfer of Title and Change of Occupancy Fees in Leaseholds

– current project status [accessed on 23 March 2016]

5 Leasehold retirement homes: exit/event fees

2. The Office of Fair Trading investigation (2009 to 2013)2

In January 2009, the Office of Fair Trading (OFT) secured an agreement from one company, McCarthy and Stone, to remove this type of clause from future contracts and not to enforce it in existing contracts. OFT considered the term likely to be in breach of the Unfair Terms in Consumer Contracts Regulations 1999 (the UTCCRs). McCarthy and Stone said that they did not agree with the OFT's view but co-operated and agreed to the changes, see: Retirement housing company agrees to change its lease agreements.3

The UTCCRs apply to standard contract terms with consumers:

The UTCCRs protect consumers against unfair standard terms in contracts they make with traders. The OFT, and certain other qualifying bodies (such as local authority trading standards, national regulatory bodies, and Which?) can take legal action to prevent the use of potentially unfair terms. A term is likely to be considered unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations under the contract, to the detriment of consumers. The UTCCRs say that a consumer is not bound by a standard term in a contract with a trader if that term is unfair. Ultimately, only a court can decide whether a term is unfair.4

The OFT produced specific guidance on unfair terms in tenancy agreements.5 This guidance has now been withdrawn and replaced with guidance published by the Competition and Markets Authority (CMA) on 31 July 2015.6

On 3 September 2009, the OFT announced an investigation into exit fees charged by retirement home companies:

The OFT has today announced an investigation into the contracts signed by occupants of purpose built owner occupied retirement homes. The OFT considers that a number of terms on exit fees in these contracts may be unfair and so may breach the Unfair Terms in Consumer Contracts Regulations (UTCCRs).

The OFT is issuing formal written notices to 26 retirement home firms setting out its concerns over terms on exit fees charged when residents sell or rent their properties.

No assumption should be made that any individual company has been found to have breached consumer protection legislation at this time.7

2 The OFT closed on 1 April 2014. Its responsibilities passed to a number of different

organisations including the Competition and Markets Authority (CMA) and the Financial Conduct Authority.

3 McCarthy & Stone PLC, 14 January 2009 4 OFT Press Release 1 January 2009 (now archived) 5 OFT, Guidance on unfair terms in tenancy agreements, 2005 6 Unfair Contract Terms: CMA37, 2015 7 OFT investigates retirement home exit fees, 3 September 2009

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The OFT did not investigate the fairness of exit fee terms by comparing the amount of fee payable against the service(s) a firm was offering in return, it considered:

... a wider set of circumstances including the information provided to the consumer during the sales process, whether the firms made the charges known to the consumers and whether consumers clearly understood the liability and took that into account in purchasing the lease.

The OFT’s report on the findings was published in February 2013: OFT investigation into retirement home transfer fee terms. On publication the OFT said:

The report sets out a number of general principles the OFT would expect all landlords to abide by when enforcing transfer fee terms in existing leases and recommends that legislative reform be considered to address the difficulties leaseholders face in challenging the reasonableness of such fees.8

The investigation was formally closed in April 2013:

The OFT has now written to the remaining businesses whose cases it placed 'on hold' earlier in its investigation, drawing their attention to the OFT's published findings report and in particular the general principles it expects all landlords to comply with if they make use of transfer fee terms. The OFT reserves the right to consider whether to take action against a landlord under the Unfair Terms in Consumer Contracts Regulations 1999 should they not abide by these general principles, in light of all the facts before it, current overall priorities (see also the OFT's published Prioritisation Principles) and appropriate legal considerations.

Although the OFT has now closed its formal industry-wide investigation, it will keep the sector under review in order to monitor compliance with the undertakings given by some landlords, and will have specific regard to any new evidence or changes in the law that may arise.9

Overall, the OFT concluded that “transfer fee terms, as typically currently drafted, are likely to constitute unfair terms under the UTCCRs.” The OFT decided not to test this proposition in the courts:

We have, however, decided not to test this in the courts at this stage on the basis that the landlords we have reached agreement with have either voluntarily dropped the transfer fee, replaced it with a flat fee, or agreed to make various changes to the way they enforce such terms with a view to mitigating what we consider to be their inherent unfairness. We have reserved our position on certain remaining concerns to see if the mitigating factors are sufficient.10

However, the report set out a number of general principles that OFT expected all landlords to comply with.

Existing Leases

Limiting the circumstances in which the transfer fee is charged to final sale

8 OFT Press Release, 1 February 2013 9 OFT Press Release, 9 April 2014 10 OFT investigation into retirement home transfer fee terms, February 2013, chapter 8

OFT concluded that event fees are likely to be unfair terms but decided not to test this in the courts.

7 Leasehold retirement homes: exit/event fees

If charged at all, a transfer fee should only be payable on final assignment by way of a sale, and not in any other circumstances such as sub-letting, upon inheritance, a change in occupation, surrender or an equity release.

Providing certainty as to the tenant's transfer fee liability

The tenant should be able to assess their maximum potential liability arising under the transfer fee term, for example by being offered one or more of the following options:

• through the charging of a flat fee

• through the calculation of the transfer fee as a percentage of the lower of the price the tenant originally paid for the property or the sale price achieved by the tenant

• by being given the option to switch to a ground rent

• by the transfer fee being expressly treated as credit.

Not using the 'open market value' of a property as a basis for calculating the transfer fee payable on sale

Tenants should not be required to pay a transfer fee on sale that is calculated on the basis of the open market value of the property. We consider it unfair that a landlord is able to determine the property value against which the transfer fee will be calculated, even in circumstances where the lease term allows for the tenant to dispute the landlord's valuation.

Ensuring the transfer fee term is transparent

A landlord's obligations under the UTCCRs may not be discharged solely by reliance upon the fact that a tenant will receive advice from a solicitor or conveyancer prior to purchase.

The transfer fee term must be sufficiently clear to enable the typical consumer to have a proper understanding of it, which requires not only that the actual wording of the term is comprehensible to consumers but that they can understand how the term affects their and the landlord's respective rights and obligations.

It should also be made clear to consumers whether the transfer fee is:

• simply payable as a consequence of an assignment of the lease taking place but not related to the provision of any services or consent, or

• payable in respect of any administrative services undertaken by the landlord (including fees for the landlord to give their consent under a lease) and is therefore subject to a test of reasonableness and challengeable at the Leasehold Valuation Tribunal in England and Wales. In this regard we expect statements made by landlords about the nature of the transfer fee, and what it is for, to be completely accurate and not misleading. We do not expect landlords to give the impression that a transfer fee is a condition for consent, or paid in respect of any services provided by the landlord, unless the landlord also makes clear the consumer’s rights to challenge the fee before the Leasehold Valuation Tribunal.

In practice, we would expect that in addition to pre-sale material - such as the Purchaser Information Pack – including a clear and prominent explanation of the transfer fee term, prospective

Number 05994, 30 May 2019 8

tenants will also be provided with a 'key facts' summary document explaining their financial liabilities under the transfer fee term (including the circumstances under which the tenant will become liable, how the transfer fee is calculated and a number of worked examples).

We expect landlords and their managing agents to use their best endeavours to bring the transfer fee term (in addition to other material information about the retirement home property) to the attention of prospective tenants. This would include, for example, not only providing pre-sale documentation to the prospective tenant or their solicitor but also, where it was not possible to obtain details of the prospective tenant's solicitor, providing such documentation to the seller’s solicitor with prominent instructions that it be passed to the buyer as quickly as reasonably practicable.

OFT enforcement policy

We expect landlords to abide by these overarching principles when enforcing transfer fee terms in existing leases. They represent the minimum steps we consider necessary to address the most egregious unfairness around transfer fee terms.

We will have regard to these general principles on a case-by-case basis when considering whether enforcement action under the UTCCRs might be appropriate against a landlord who enforces transfer fee terms in contracts with consumers. The principles are not, however, intended to be exhaustive or set in stone and will be kept under review in the light of new case law or legislation that may emerge in relation to the fairness of transfer fee terms or any evidence of significant continued consumer detriment. If we receive further complaints, we would be obliged to consider them, in the context of any new evidence and any changes in the law.

Newly created or acquired leases

We take the view that the nature of transfer fee terms, coupled with consumers' strong behavioural biases, are such that there remains a risk of consumers suffering detriment.

We consider that landlords should not include or enforce transfer fee terms in newly created or acquired leases, other than in circumstances where the fee is for a service and is no more than the actual costs reasonably and necessarily incurred in providing that service, or where it is presented as a credit facility.11

In chapter 9, the OFT recommended further policy and legislative changes:

We therefore recommend that legislative reform be considered by expanding the remit of the Leasehold Valuation Tribunal to allow the tribunal to rule on the reasonableness of all transfer fees (possibly through an amendment to Schedule 11 to the CLRA12 and/or any other necessary changes). Further, or alternatively, there could be consideration of whether the model currently in force in Scotland of restricting or prohibiting certain classes of fees would be appropriate.13

11 OFT investigation into retirement home transfer fee terms, February 2013, chapter 8 12 Commonhold and Leasehold Reform Act 2002 13 OFT investigation into retirement home transfer fee terms, February 2013, chapter 9

9 Leasehold retirement homes: exit/event fees

Contingency Fund fees Although not the focus of its report, the OFT also expressed concerns about contingency fund fees. These are typically paid into a reserve fund held by management, in order to pay for irregular and expensive repair and maintenance works.

The OFT considered the drafting and application of contingency fund fees as they tend to be drafted in a similar way to transfer fees, and apply in a similar range of circumstances. The report found:

Contingency Fund Fees may be covered by other legislation as service charges, and so may be challengeable in the LVT [Leasehold Valuation Tribunal]. However, where the fee is applicable on sub-letting, because it can be large, this could also have a significant impact on the ability of a tenant to sublet their property, or even have it occupied at all. Where it applies on final sale, it is also practically difficult to challenge, since generally the fee must be paid before the sale can complete.14

The OFT recommended that any reform of transfer fees should also include reform of contingency fund fees.

14 OFT investigation into retirement home transfer fee terms, February 2013, chapter 9

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3. Law Commission review (2014 to 2017)

On 1 September 2014, the then Secretary of State for Communities and Local Government, Eric Pickles, said his Department would look to address the issue of transfer fee covenants particularly found in the retirement leasehold sector by referring the matter to the Law Commission.15

The Law Commission announced that it had started work in October 2014 on the Transfer of Title and Change of Occupancy Fees in Leaseholds project, as referred by the Department of Communities and Local Government (DCLG, now the Ministry of Housing, Communities and Local Government):

The project will consider the problems caused by terms in residential leases generally which require the lessee to pay a fee on a transfer of the title or change of occupancy, and in the retirement home sector and similar markets in particular.

We will look at how the current law addresses the problems that are identified and consider whether greater protection is needed for lessees. This may involve unfair terms legislation, landlord and tenant law and conveyancing procedure. We will also consider what the impact of any greater protection may be.

The project will be reviewed in March 2016 at which point we will make interim recommendations for reform. If the project continues we will make final recommendations in March 2017.16

A consultation exercise, with an associated consultation paper, was conducted between 29 October 2015 and 29 January 2016.17 Alongside the consultation paper, the Law Commission published several background documents including a Law Society survey on the prevalence of event fees, a mystery shopping report, and an assessment of information on service charges, exit and other fees in retirement villages as presented on the websites of eight providers. An analysis of the 168 responses received was published in May 2016.18

A progress report was published in June 2016 which recommended a detailed code of practice for event fees to be backed up by legislation. It was envisaged that event fees which did not comply with the code of practice would be unenforceable. A draft Code was published and consulted on in September 2016.

The project was subsequently renamed “Event Fees in Retirement Properties”.

15 HC Deb 1 September 2014 c3WS 16 The Law Commission, Transfer of Title and Change of Occupancy Fees in

Leaseholds, October 2014 17 Law Commission Consultation Paper, 226, Residential leases: fees on transfer of

title, change of occupancy and other events, October 2015 18 Law Commission, Residential Leases: Fees on Transfer of Title, Change of Occupancy

and Other Events, Summary of responses to consultation paper, 25 May 2016

11 Leasehold retirement homes: exit/event fees

The Law Commission published its final report on 31 March 2017.19 The Commission found some “major problems” with event fees, including:

• event fees can be hidden in complex leases

• leaseholders may be charged unexpectedly – even when their spouse or carer moves into the property

• event fees are often disclosed too late in the process for the consumer to take the fee into account

• that if consumers do spot event fees, they may fail to appreciate their financial consequences

The ageing population means that the number of people likely to be affected by event fees on retirement properties is likely to increase.20

The Law Commission identified an “urgent need to protect older consumers, who are often vulnerable, from event fees that are unfair or imposed in unfair circumstances.”21 However, the Commission stopped short of recommending the abolition of event fees. Instead, the Commission recommended that these fees should be regulated by:

1. Preventing event fees from being charged in unexpected circumstances.

2. Imposing obligations on landlord/operators to provide standardised, transparent information about event fees to consumers at an early stage, including an indication of how much a consumer may have to pay, enabling informed choices to be made.

3. Making it easier for consumers to challenge unfair event fees by providing increased legal certainty.22

A code of practice was recommended which would be approved by the Secretary of State and supported by an amendment to the Consumer Rights Act 2015. The code of practice would:

• Limit when an event fee can be charged, and, in some situations, the amount that can be charged; and

• Impose stringent obligations on landlords to provide transparent information about the event fees payable to a consumer early in the purchase process. This information will be in a standardised format, and will enable a consumer to see and take account of:

• Information about the event fee – how it is calculated, who receives the fee, and what a consumer receives in exchange for the fee; and

• How much the event fee is likely to be depending on changes in the property’s value.23

19 Law Commission No 373, March 2017 20 The Law Commission, Event Fees in Retirement Housing, March 2017 21 Ibid. 22 Law Com No 373 (Summary), 20 March 2017 23 Ibid.

The Law Commission did not recommend the abolition of event fees.

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The decision not to abolish event fees The Law Commission’s rationale is summarised below:

First, event fees can make specialist retirement housing affordable to consumers. Older people are often “asset rich, but cash poor”. Event fees can help by subsidising high operating costs which would otherwise result in high service charges. We refer in our report to responses from current leaseholders who explain that event fees which operate as deferred service charges have enabled them to enjoy a better standard of living than they would be otherwise able to afford.

Secondly, the use of event fees may facilitate the overall supply of specialist retirement housing. There is evidence that good quality specialist housing may benefit both individuals and the wider community. For individuals, such housing may provide health, social, financial and emotional benefits. For the wider community, increased supply of specialist retirement housing may reduce pressure on the NHS and health services. It may also make housing stock available, by allowing older people to move out of family homes and by encouraging the development of new retirement properties through developers borrowing against event fee income.

We have considered whether to abolish only event fees which are purely for the landlord/operator’s profit. However, that would ignore the benefits of specialist retirement housing, the desirability of offering older consumers a choice of type of housing to suit their circumstances and the role that event fees have to play in financing the development of specialist housing. Also, such a blanket ban would be difficult to implement in practice.

We have concluded that it would be better to regulate all event fees rather than attempting to abolish certain types of them. However, we acknowledge stakeholders’ concerns, and we recommend substantive controls on the charging of event fees.24

Responses to the Commission’s findings The All-Party Parliamentary Group (APPG) on Leasehold and Commonhold (established in 2016) questioned some of the Law Commission’s findings, in particular, the idea that event fees may make retirement housing more affordable for older residents who are ‘capital rich and cash poor’ by deferring payments. The APPG was critical of the Commission’s failure to consider counter evidence and the risk of a lack of transparency around event fees.25 The APPG report (April 2017) concluded: “the APPG is concerned that the proposed event fee system may have disadvantages and produce serious continuing consumer disadvantage.”26 The report went on to call for more work to be carried out on the need for wider regulation of this part of the housing market.27

From a landlord point of view, there is potential for the proposals to result in losses. An article in Real Estate Quarterly (Summer 2017) said:

24 Ibid. 25 APPG, A preliminary report on improving key areas of leasehold and commonhold

law, April 2017 26 Ibid. 27 Ibid.

13 Leasehold retirement homes: exit/event fees

By not being able to charge fees when a carer moves in, for example, the landlord could be faced with double the occupancy, service and maintenance costs without being able to recover them. This may put pressure on the communal services and facilities which are there for the overall benefit of the tenants. Moreover, the prescribed cap may not reflect the landlord’s actual costs.28

The authors went on to say that regulation could go some way towards removing some of the media stigma attached to event fees and “may be an important step in encouraging growth within this market.”29

The Government response March 2019 On 28 March 2019, the Government announced that it will implement the majority of the recommendations contained in the Law Commission’s 2017 report Event Fees in Retirement Housing.30

The Law Commission reported:

The Minister for Housing and Homelessness, Heather Wheeler MP confirmed that the Government will “implement the report’s recommendations, with exception of two issues” which the department will be exploring in further detail.

Firstly, they agree with the aims of the recommendation to establish an online database to provide information to prospective buyers. But, they will be commissioning further research to understand the best means to achieve this.

The Government also wants to further consider the recommendation for spouses’ and live-in carers’ succession rights to stay at a property, without payment of an event fee. This is to gain a better understanding of the implications for both consumers and new supply.31

4. Amendments to the Consumer Code for Home Builders 2017

Since April 2010, all homebuilders registered with the UK’s main home warranty providers: NHBC; Premier Guarantee; and LABC Warranty, have had to adhere to the Consumer Code for Homebuilders. The Code sets out a number of principles that home-builders must meet in their marketing and selling of homes and their after-sales customer service.

The Code Scheme was reviewed during 2016 together with Home Builder good practice guidance. The fourth edition applies to reservations signed on or after 1 April 2017. This edition contains strengthened guidance on event fees:

Following complaints about 'event fees' such as deferred management charges and fees on resale or transfer of leases

28 Event fees on retirement homes: how might regulation help? Real Estate Quarterly,

Summer 2017, pp24-5 29 Ibid. 30 MHCLG Press Release, 28 March 2019 31 Law Commission, Event fees in Retirement Properties [accessed on 30 May 2019]

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(particularly in the retirement homes sector), which have been the subject of a current Law Commission investigation and report, there is now a Requirement that any such ‘event fees’ are declared at Reservation stage.32

5. Constituents’ enquiries on event fees

The OFT’s (now archived) website has a useful Q&A section.

If constituents are concerned that they may have been unfairly treated or want advice on their personal circumstances, the OFT advised them to contact Citizens Advice. Alternatively, they could contact their local trading standards service and obtain independent legal advice.

Chapter 10 of the OFT investigation into retirement home transfer fee terms report contains the following information on private rights of action:

...individual consumers have their own rights under the UTCCRs. Where a term is not drafted clearly, it must be construed in the way that most benefits the consumer. An unfair term is not binding on the consumer and a supplier cannot rely on it in any dispute. Consumers cannot be made to comply with obligations arising from unfair terms, and may make claims for compensation or other redress even if the term states that they may not. A consumer may argue in a dispute with a supplier that the terms of a contract are unfair and ask a court to make a decision on the matter. This right exists independently of the OFT’s powers under the UTCCRs and can be enforced regardless of any view we have given on the same or similar terms, or indeed, any action it has taken. Ultimately the question of whether or not a term is unfair is a question for the court to decide.

We are unable, however, to provide direct advice or assistance to individual consumers, and strongly advise that tenants seek legal advice before considering any such action.

10.4 Further, we cannot say with certainty that our findings will apply to a particular lease, as the unfairness of any lease term would need to be assessed by a court on a case-by-case basis by reference to all the circumstances surrounding the conclusion of the contract.

10.5 In addition to private rights of action, in some circumstances there may be scope for disputes to be taken to mediation; however we would recommend that tenants seek independent advice before doing so.33

32 Summary of Changes to the Code and Home Builder good practice Guidance with

effect from 1 April 2017 33 OFT investigation into retirement home transfer fee terms, February 2013, chapter

10

BRIEFING PAPER Number 05994, 30 May 2019

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