On 27 March 2019, the Ministry of Housing, Communities and Local Government confirmed that it will implement the majority of the recommendations contained in the Law Commission’s 2017 report on ‘Event Fees in Retirement Properties’.
The Government has not confirmed its timetable for implementation of the Law Commission’s recommendations. However, in the meantime, its support of the those recommendations removes much of the former legal uncertainty regarding the status of event fees and confirms that the sector can expect not only a new code of practice to ensure clarity for stakeholders and protection for consumers going-forward but also, importantly, the corresponding creation of consistent, standardised and transparent minimum standards and better regulation.
The fog which has enveloped the issue of event fees and encumbered the retirement living sector in recent years, should therefore continue to lift. It is a positive step that will benefit consumers, improve the reputation of the sector and encourage much needed further investment by developers and investors.
What are event fees?
Event fees or, as they are sometimes otherwise known, ‘exit fees’, ‘transfer fees’, ‘contingency fees’, ‘deferred-management fees’, ‘assignment fees’ or ‘selling service fees’, are additional fees charged to the tenant of a retirement property on top of service charges. They have at certain times been characterised as a return for the significant investment in communal facilities such as cafes and bowling greens, but equally are justified as being an extra revenue stream needed to make these developments economic.
As their name suggests, event fees are charged on the occurrence of a specific event such as when the property is sold, sublet, mortgaged or inherited and sometimes also upon a change of occupancy where, for example, an additional person such as a relative or carer moves into the retirement property.
The amount of event fees can vary significantly - from as low as 1% or 2% but more typically between 10% and 20% and sometimes as high as 30% of the re-sale price or market value of the property. They may, depending on the context, be payable to the freeholder, developer, the operator or the managing agent.
Law Commission’s findings
In 2013, an investigation by the then Office of Fair Trading (OFT) into retirement home transfer fee terms, a specific type of event fee, found that the terms in leases imposing such fees were potentially unfair contract terms and a breach of the Unfair Terms in Consumer Contracts Regulations. The OFT noted that there was a “lack of clarity in the legal framework” but did not bring proceedings against landlords, preferring instead to secure undertakings from a number of them not to enforce such terms to the disadvantage of their tenants. As a result, since that investigation, uncertainty regarding all types of event fees has reigned and the retirement living industry has repeatedly called for urgent clarification of their legal status. In 2014, the Department for Communities and Local Government called upon the Law Commission to investigate event fees and in February 2017 the Law Commission delivered its final report.
The Law Commission’s report uncovered a number of issues with event fees but declined to call for a blanket ban, preferring to instead recommend the regulation of all event fees and that substantive controls be created and maintained on when event fees may be charged. Provided that there is adequate protection for consumers, particularly those that may be older or more vulnerable, the decision to regulate as opposed to simply ban event fees was a welcome decision for the following reasons:
- Where event fees are used correctly, they are a mechanism that can benefit consumers by making retirement living more affordable – for example, many consumers who may be ‘asset rich, but cash poor’ could not, without the ability to defer such payments, otherwise afford to pay such fees upfront.
- For developers, event fees are an asset that they can borrow against thereby securing the funds that they need to build more (and much needed) specialist retirement housing, whilst the profit or surplus element comprised in event fees incentivises them to build and operate sites in the long-term.
- For operators, event fees establish a long-term operational business model which they have long argued is central to the long-term financial sustainability of their businesses.
- For investors, it will give them the certainty to lend on the security of an event fee in the knowledge that, if the code of practice (see below) is followed, the risk of such terms being held to be unfair and therefore unenforceable should be low.
As a result of its investigation, the Law Commission recommended that the Government develop a code of practice to be approved by the Secretary of State for Communities and Local Government. It also recommended that the code be supported by an amendment of the Consumer Rights Act 2015 to ensure that, where there is a breach of the code, its terms can be enforced by consumers directly and the event fee is potentially not payable.
On 27 March 2019, the Ministry of Housing, Communities and Local Government confirmed that it will implement the majority of the recommendations contained in the Law Commission’s report on Event Fees in Retirement Properties.
Two issues have been taken away by the Government for further consideration. First, the recommendation for the establishment of an on-line database for estate agents and consumers to ensure that event fee information is included in all advertisements and into which the Government is commissioning further research to understand the best means to achieve this. Second, the recommendation that protections be established so that, where a resident’s partner or carer moves into the property as their principal home, the event fee could not be charged on a change of occupancy and in respect of which the Government wishes to better understand the implications for both consumers and new supply.
The Government has not confirmed its timetable for implementation of the Law Commission’s recommendations but, since it has taken away two of its recommendations for further research and consideration and, given the current demands on the Government’s attention, it may be some time before the recommendations are fully implemented.
Whilst there already exist voluntary codes of practice giving protection for people in retirement housing such as the Association of Retirement Housing Managers (ARHM): Private Retirement Housing Code of Practice, the National House Building Council (NHBC): Sheltered Housing Code and the Associated Retirement Community Operators (ARCO): Consumer Code, as a result of the Government’s response, the sector can expect not only a new code of practice but also, importantly, the corresponding creation of consistent, standardised and transparent minimum standards for the sector and better regulation. This should complement the existing standards voluntarily adhered to by many stakeholders, whilst better regulating those stakeholders who either have not adopted such standards or the minority of those that, historically, may have applied event fees in a manner inconsistent with the principles of transparency and fairness.
Implementation by the Government of the Law Commission’s proposals should:
- limit when an event fee is charged to when the property is sold or, in limited circumstances, where it is sub-let or where the resident has died or the property is no longer their primary home;
- ensure that standardised transparent information is provided to consumers at an early stage in the purchase process, including how much the fee is likely to be, who gets it, and what the consumer will receive in exchange; and
- cap fees charged for subletting or change of occupancy at 10% of the total event fee.
Given that the Government has confirmed that it agrees with the aims of the two recommendations it is considering further, we can also expect with some confidence the creation of an online database and additional protections to prohibit or restrict event fees being charged upon certain changes in occupancy.
The Law Commission has suggested that implementation of all of its recommendations would result in an additional £3.2 billion of private investment over the course of the next decade and significant expansion of the supply of specialist retirement housing. Whether this will now be the case is yet to be seen. In countries such as the US, Australia and New Zealand, where large retirement villages have developed, comprehensive sector specific legislation has brought certainty and stability to the market and acceptance of their equivalent business models, something which has been lacking in the UK.
The Government’s response is a positive step in the right direction but only time will tell whether the Law Commission’s recommendations are faithfully implemented and allow us to judge whether doing so has the practical effect anticipated. There are other challenging areas for the UK retirement living sector that would arguably benefit from further regulation and, as the sector expands, the outlook may therefore become overcast once more. Where this is the case, comprehensive sector-specific legislative measures for UK retirement communities, similar to those that appear to have benefitted the respective sectors in the US, New Zealand and Australia, may be a desirable next step.