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Retirement housing lawyer Patrick Gloyens demystifies exit fees – the controversial ‘use-now-pay-later’ charge some developers levy when a retirement property is sold

What are exit fees?

It is usual, in specialist owner-occupied retirement housing, for there to be a fee payable to the landlord if the owner ceases to occupy the property. These fees go under a variety of names: ‘Exit Fees’, ‘Departure Fees’, ‘Deferred Management Fee’, ‘Contingency Fund Fee’ and ‘Transfer Fee’, among others. They can be payable in a wide variety of circumstances; not just on sale but also on inheritance, surrender, equity release and sub-letting.

The range of fees is very wide – currently anywhere between 1 and 30 per cent of the value of the property.

Why are exit fees charged?

Different businesses give different reasons for charging these fees and this is reflected in the different terminology used to describe them. In many cases the fee is not linked to any service, but is simply a substitute for payment of a ground rent.

In other cases the fee is used to recover part of the cost of providing the extensive on site communal services and extra care and support services found in retirement villages.

Elsewhere the money from part of a reserve fund is used to help fund what can be very high service charges. In some cases part is categorised as an agency fee for handling the sale or pre-emption; part may also cover some of the administrative costs involved.

[pullquote1 quotes=”true” align=”right” variation=”purple”]Both the OFT and the Law Commission are rightly concerned to protect the consumer from hidden, unexpected, variable and uncertain fees.[/pullquote1]

In many cases the exit fee is a combination of some or all of these things and, especially where extensive communal services are provided, it is an essential part of the developers’ economic model.

The Office of Fair Trading view

In 2013 the OFT investigated certain types of these fees. As might be expected, they were approaching these payments as consumer champions and their conclusion was clear. The terms relating to transfer fees could be unfair and a breach of the Unfair Terms in Consumer Contracts Regulations of 1999.

The OFT considered the various arguments put forward by developers in support of these fees but concluded that the model was not optimal for consumers. They secured undertakings from many of the landlords then in the sector to cease enforcing a transfer fee or to replace it with a flat fee or to make other changes to mitigate ‘the most egregious unfairness of their respective fee terms’.

They wanted the business model to cease entirely in newly built developments (unless the fees reflected the cost of an actual service). The OFT did not consider in any detail either retirement homes or contingency fund fees – which it considered analogous to sinking or reserve funds – although it took a side-swipe at both in passing. It recommended a number of principles which it felt should be applied to existing developments as follows:

• The fee should be payable on final sale only – not on other events;

• It should be certain;

• It should not be a percentage of an assessed open market value;

• It should be transparent from the outset with details provided in a Purchaser’s Information Pack.

Finally they recommended legislative reform.

The Law Commision consultation paper

As a result the Law Commission was asked to review. The Commission has now produced a consultation paper inviting comments. To say that its remit is wider than that of the OFT is something of an understatement: it takes a wide angle lens to look at the policy issues involved not just in housing an ageing population but in housing generally.

It looks at the more developed retirement housing markets elsewhere in the world and its interim conclusions and the way it reaches them offer an interesting example of how informed policy making can be made.

Written in the clear and lucid manner we have come to expect of such reports, the argument goes like this:

The UK population is ageing. Every time an older person leaves a large family house and downsizes that frees a house for a growing family, which in turn can free a house for a first time buyer. So increased specialist retirement housing benefits all those seeking a home. Many older people would like to move but there are many deterrents – the most common being the lack of suitable properties. They quote approvingly a recent report to the effect that there is a ‘chronic undersupply of age specific housing’.

They explain that the economics of developing retirement housing depends not only on the initial sale price but also other potential income streams; – for care provision, ground rent and ‘event fees’ (a term they use to cover all the different types of fees referred to above). And they conclude that it is important not to interfere with those income streams in a way which discourages further supply.

They refer to the All Party Parliamentary Group finding that another deterrent factor in moving is the potential service charge costs, which can be very high. They agree that more sophisticated arrangements – as in some other countries – for deferring some service charges until the property is sold should be more widely available. In particular those who are capital rich and income poor may welcome the opportunity to defer some parts of the purchase price or the service charge or both.

Conclusion

They conclude that their aim is to encourage this nervous, fledging market to develop – and that involves an adequate income stream for developers.

Their proposed solution is much greater transparency – not just in the interests of fairness – but because lack of transparency could put back the whole market. That is not inconsistent in fact with the fundamental findings of the OFT but the conclusions of each report are different.

Both the OFT and the Law Commission are rightly concerned to protect the consumer from hidden, unexpected, variable and uncertain fees.

The Commission’s ‘mystery shopping’ exercise reveals an alarming lack of information about these costs in many cases. The Law Commission report reinforces the need for transparency and recommends changes to the law of unfair terms and stronger codes of practices to cover unfair fees.

However it also looks beyond that, to the need to encourage this market which brings benefits to both residents and society.

This is an impressive, well researched and carefully considered report. It is designed both to protect the consumer, to encourage growth of a potentially very large market and to answer a social need. It is good news for developers, funders and occupiers.

To view the Law Commission’s latest report click here 

Patrick Gloyens is Head of Retirement Housing at Michelmores, 6 New Street Square EC4A 3BF. email: patrick.gloyens@michelmores.com/0207 659 7676 or visit www.michelmores.com

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