The need for new ideas in social care leasing arrangements has become evident in recent years. The pandemic has focused attention on housing with care, where older people can enjoy self-contained accommodation with communal facilities but also access the support and care that they need. Meanwhile, ongoing leasehold reform is impacting on the way property is held in England and Wales. At ARCO, we are proposing a set of reforms to better protect consumers and to allow the sector to grow, which we call Leasehold Plus. We’re also aware of developments in rental and new ideas for care homes which could give better security to residents.
Current arrangements
The current arrangements in England and Wales (Scotland has a different system of property law) are broadly as follows. Housing with care properties, or Integrated Retirement Communities (IRCs), are either for sale as leasehold property, for rent, or for shared ownership.
The for-sale market is dominated by mid-market and luxury providers. Property is sold on a long lease (125 – 999 years) for the payment of a premium (purchase price) in the same way as an ordinary flat in the general property market. In a traditional leasehold set-up, the customer pays the purchase price, and then pays a variable service charge which is subject to landlord and tenant legislation and covers the landlord’s costs of services, repairs, maintenance, improvements, insurance and management. When the resident moves out, they sell on the lease as it stands to a new purchaser, who pays them the purchase price and then takes over the obligations of the lease, including the payment of service charges and any ground rent to the landlord.
The case for reform
IRCs combine age-appropriate housing with communal facilities (restaurant, leisure facilities, grounds, etc), an active social programme, and care and support for those who need it. Care, if needed, is paid for under a separate contract. IRC operators are long-term service providers to their residents. Their business model is very different from that of an ordinary residential property developer whose priority is to build and sell new properties and then move on to the next scheme.
The current leasehold model – what we might call ‘legacy leasehold’ – is not ideally suited to Integrated Retirement Communities. Leasehold is an ancient form of holding property which featured strongly in the feudal system and where some legislation dates back to 1709!
We recently surveyed 4,000 older consumers across the UK and asked them about downsizing/moving to specialist housing and what factors would influence their choice. The responses confirmed our view that older customers are worried about high or unpredictable service charges or other regular costs. 90% said that they would be concerned that ongoing monthly charges would keep getting more expensive, and 63% were worried about expensive unexpected bills.
Many IRCs have adapted their leaseholds, where possible, to offer customers the choices that they want. They insulate their customers from the risks of rises in costs or the need for major works by capping, indexing or fixing service and management charges. This ‘fixed service charge’ model is popular with consumers and allows them to plan effectively for their retirement. The IRC model is also not dependent on ground rent, with many operators instead using event fees which are charged on the sale or assignment of the lease. ARCO supported the Leasehold Reform (Ground Rent) Act 2022 which prohibits the charging of ground rent in new residential long leases.
Jamie Bunce, Chief Executive at Inspired Villages, said, ‘We recognise that our customers want cost certainty to give them peace of mind in their retirement, so we’ve got a range of measures in place to support that. The service charge at all our new schemes will be linked to the Consumer Price Index and the Earnings Index, which removes the likelihood of shock increases due to things such as an increase in village centre utility costs, and we are in the process of introducing this to our first six villages. Our event fee similarly protects residents from unexpected long-term maintenance costs for the village and means we can improve the resale value of their property. As a business, we had also already taken the decision to remove ground rent from leases for all our new villages before the Leasehold Reform (Ground Rent) Act 2022 came in.’
However, there are some changes which are not possible within the current leasehold framework. Placing the burden of resale on the consumer (or their family if they have passed away) causes stress to families at a difficult time and also means that new incoming residents are not fully protected by UK consumer law, because the transaction is not trader to consumer. The risks of mis-selling increase. While operators could buy back the property from the consumer, this is rare outside of the charity sector because of the impact of Stamp Duty (SDLT). In addition, the model that many IRCs use (fixed service charges plus event fees) does not have any specific regulation in UK law. ARCO fills the gap through its Standards programme for operators who are our members, but more legal certainty would increase consumer confidence and help the sector to grow to fulfil its potential.
A new model for IRCs
With this in mind, we are proposing a modified form of leasehold – Leasehold Plus – specific to the IRC sector. This would allow operators to buy back the property and re-sell it to a new buyer – with Stamp Duty payable by the new buyer but not by the operator. The operator could choose to buy back before a new buyer is found – perhaps to refurbish the property – but would only be required to do so once a new buyer had been found and a three-way transaction could take place. In each case, a new lease would be granted, so the problems of selling on inflexible long leases would fall away, since terms could be modified each time to suit the incoming purchaser.
The new buyer would be fully protected by UK consumer law and the operator would retain control over the marketing of the property and could ensure that the new customer had all relevant information before purchasing. The new system of Leasehold Plus would be accompanied by regulation of event fees and fixed service charges, with sector-specific regulation in a statutory Code of Practice to protect consumers and provide the legal certainty which would allow the sector to grow.
ARCO Strategic Partner, Trowers & Hamlins, has researched the proposition and the legal changes required. Partner Kyle Holling said, ‘We at Trowers have said for some time now that the key to better regulation of the IRC sector is striking the right balance between protecting the customer and encouraging investment in and the growth of quality operators. The Leasehold Plus model has the potential to achieve this, acting as an initial step towards sector-specific regulation in a way that can be progressed quickly for the benefit of all.’
Wider sector
This system – based on property ownership – would work well for IRCs. However, what of care homes or assisted living apartments (typically rented apartments where older people with higher care needs can receive care)? Some IRC operators offer the more ‘independent living’ IRC apartments, assisted living rental apartments, and a care home or care home with nursing on a single site. The assisted living option is very popular with older people with a higher level of care needs who may want an alternative to a care home. These apartments are well suited to rental, but some IRC operators are currently considering options for customers who want to invest the proceeds of a property sale as a capital deposit rather than paying a monthly or annual rent; so further legal changes may be required.
Some care home operators are also looking to diversify either into the IRC model or assisted living. One issue here is that to provide security of tenure, the resident must be free to choose their own care provider if, for example, they are unhappy with the service provided by the in-house care company, or it cannot meet their needs.
Looking to the future
Both the pandemic and scandals elsewhere in the leasehold property sector have rightly focused attention on the rights of residents in specialist housing and care provision. We hope that through legal reform – including through the Older People’s Housing Task Force – we can offer more choice and better protection to older people so that they can enjoy later life while accessing the care and support that they need.
ARCO’s vision is for 250,000 older people to be able to live in an IRC by 2030. Leasehold Plus would help to make this a reality.
Sally Ireland is the Director of Legal and Compliance at ARCO. Email: [email protected] Twitter: @ARCOtweets
What do you think of ARCO’s proposals for Leasehold Plus? How could this impact on the wider sector? Share your thoughts and feedback on the article.