‘Event Fees’ is the term devised by the Law Commission to refer to charges in leases that are payable on the sale or sub-letting of retirement properties. These fees have caused considerable anger and resentment, especially on the part of family members who inherit what they believe to be an asset only to find it is subject to significant additional charges when it is sold or even more annoyingly if it is retained and sub-let. Many think these fees are unfair and unreasonable.
In a leasehold context, charges are only unreasonable if they fall within the statutory definition of an administration charge whereas charges in consumer contracts can be unfair if they are not properly disclosed before the contract is entered into. Unreasonable administration charges can easily be challenged at a tribunal but unfair charges must be challenged through the courts.
The Law Commission investigation follows an earlier inquiry by the OFT (The Office of Fair Trading, now The Competition and Markets Authority). The OFT examined specific fees occurring in leases of retirement flats, notably those produced by McCarthy & Stone and subsequently acquired by Fairhold Homes. These fees, named transfer fees and contingency fees, were commonly known as ‘exit’ fees. Public criticism at the time was mainly directed against the transfer fees payable to Fairhold. The OFT challenged McCarthy & Stone, Fairhold and other key retirement property developers on the grounds that exit fees were potentially unfair terms in consumer contracts or leases.
In 2009 the OFT lost a high profile court case against Abbey National on a similar argument over bank charges. In a landmark decision the Supreme Court overruled the lower courts and determined that charges that ‘go to the price’ of a contract are exempt from the test of fairness. This court decision prompted the OFT to negotiate face-saving settlement agreements with Fairhold and other developers, which included token undertakings with regard to the future collection of exit fees.
Oddly in its settlement agreement with Fairhold the OFT insisted that Fairhold give an undertaking it would not make any representations that a transfer fee is an administration charge. This could be a legal error by the OFT and may prejudice leaseholders right to challenge the reasonableness of transfer fees in tribunals. The Leaseholder Association has routinely maintained that transfer fees in many leases fit the statutory definition of an administration charge, which are already
regulated by Schedule 11 of the Commonhold & Leasehold Reform Act 2002 and can be challenged in the First-tier Tribunals. Paradoxically the OFT settlement agreement also required an undertaking from Fairhold that in future leases it would not charge a transfer fee unless it was for a service and the fee was reasonable. In other words, unless it was an administration charge!
These background events are explained in more detail in the Law Commission’s Consultation Paper published in October 2015. The Paper provides an adept analysis of the relevant legal issues and is a valuable source of reference for all practitioners dealing with residential leases.
THE LAW COMMISSION’S BRIEF
The Department of Communities and Local Government (DCLG) asked the Law Commission (LC) to further investigate exit fees in order to address uncertainty over the issue. The brief to the LC was to consider the problems caused by transfer fees, how the current law addresses these problems and whether greater protections are needed.
To assist in its investigations the LC invited various organizations to join an advisory panel and take part in the consultation process. Throughout 2016 these contributors responded to questionnaires, made suggestions and arranged for focus groups of retired leaseholders to provide valuable feedback and road test proposed solutions. The Leaseholders Association participated in this process.
The LC determined that leases of retirement properties are complex and varied with many differing types of charges, some deemed payable for a service and others that are effectively the deferment of a part of the purchase price. For the purposes of its investigation the LC chose the term ‘Event Fee’ in an attempt to encompass all charges payable on the sale or transfer of the property. In retrospect the term ‘event charges’ may have been less confusing as the word ‘fee’ naturally means a payment for a service, which limits rather than broadens the defined scope.
SHOULD EVENT FEES BE BANNED?
Some anti-leasehold activists have long campaigned for a complete ban of exit fees and have criticized the LC for not recommending the abolition of all fees that are for the sole profit of the landlord. In our opinion the LC is correct not to recommend a blanket ban. If fees payable on exit are effectively a deferment of part of the purchase price and provided that is clearly understood at the outset, then consumers should not be denied the freedom of alternative financing options because they are at retirement age and potentially more vulnerable.
Consumers routinely expect to have choices of financing for high value purchases. One of the most popular methods of car acquisition is by means of a lease agreement with low monthly payments and a substantial exit fee, generically known as a balloon payment at the end of the contract. These finance agreements suit many car buyers with fixed incomes and have helped revive new car sales, which in turn benefits the economy. Why shouldn’t the same principle apply to the purchase of retirement homes?
ARE FIXED COSTS UNFAIR?
Some critics have focused on types of retirement schemes such as lifestyle villages where the cost of all the services is paid for by means of a pre-agreed fixed charge, part of which may be paid on exit rather than upfront. It is said these schemes deny owners the right to challenge the reasonableness of costs, which only applies to variable service charges. This may be true but the counter argument is that these owners know exactly what they are expected to pay and may prefer to choose this option because it provides budgeting certainty and peace of mind, even in the knowledge it may be costing more overall. In reality it is a risk both ways, because the developer may under-estimate the cost of services and the property owner would then end up paying less than the real cost.
Further, as one contributor pointed out, not all buyers are in the same circumstances. Some may be cash rich and income poor and others vice versa. The market must surely be healthier if there is flexibility of buying options to suit varying personal situations.
Rather than ban these variable payment options, the LC has determined that the most practical form of protection it can give consumers is to ensure there is total transparency. It proposes to achieve this by introducing measures to make purchasers fully aware of the charges they will be expected to pay before they become emotionally and financially committed. In principal we agree with this general approach.
In summary the LC makes 23 recommendations, which include establishing a code of practice, imposing obligations on landlords and operators, a cap on event fees payable, full disclosure of event fees by developers and estate agents, the creation of a central database, a disclosure document and amendments to the Consumer Rights Act to include terms in residential leases relating to event fees.
WHY HAVE SOME ORGANISATIONS CRITICISED THE REPORT?
It was arguably over-ambitious of the LC to attempt to include all forms of leases and all types of charges and landlord benefits under the one umbrella term ‘event fees’, which has led to some unnecessary confusion and has also distracted attention from the precise complaint that caused the original outcry, which was over a specific transfer fee clause in Fairhold leases.
There are some tenuous assumptions made about the effect of event fees on the resale market and some legal uncertainty about the application of consumer rights to older leases.
The proposed disclosure document is a positive step forward but critics may say it does not go far enough, notable omissions being ground rents and service charges. The LC says these were outside its brief from DCLG but may be the subject of future inquiries.
Together with its Consultation Paper, the LC report represents a thorough and fair evaluation of the issues surrounding leasehold fees and charges. It is a wake up call to all parties involved in the advertising and selling of retirement flats that buyers are entitled to full disclosure of relevant information and that failure to provide it could be a criminal offence.
The report doesn’t offer bulletproof solutions but the measures proposed should create a more transparent environment to protect buyers against developers and estate agents who might otherwise seek to bury significant charges in the small print of sales particulars. Such measures must be welcomed and it would be churlish to let a few negative aspects overshadow the significant safeguards afforded to purchasers of retirement properties if the reports recommendations are implemented.
Finally and importantly the report does confirm that transfer fees that are charged for granting approvals can qualify as administration charges and are open to the challenge of unreasonableness in the first-tier tribunals. The Leaseholder Association is advising a substantial number of Fairhold lessees about transfer fees and other wrongful charges and this clarification from the LC is very helpful.
The Leaseholder Association©