STOP PRESS: The day before the meeting McCarthy and Stone, which pioneered retirement leasehold housing, announced that ALL retirement flats on new schemes would be sold on 999 year leases not the 125 years as at present. This has been in effect since August.

This is a huge victory for those seeking reform in this sector – and long overdue. Now developers can build all schemes, retirement and non-retirement with resident-controlled management companies, which would end freeholders monetising the management of sites.

LKP/Campaign against retirement leasehold exploitation Roundtable event
3 December 2015, 3.45-5.00 pm
Committee Room 9, Palace of WestminsterStephen Lewis, Law Commissioner for Commercial and Common LawLadies and gentlemen, today I received a complaint. It was from a certain Mrs Bull. Mrs Bull was trying to buy a retirement flat. After speaking to her estate agent, she emailed the company that runs the housing scheme with some questions. Mrs Bull’s email said:Dear Ms Jones
Thank you for your reply.
Just one more query, that the agent could not answer, is the question of the exit fee. Is this an ongoing feature in the contract? I should hate to go ahead and find that this feature is included, yet has been obscured in the agency’s details.The company wrote back, saying – and I quote:
All enquiries should come through the buyer’s solicitor once the lease title has been submitted and the transaction is proceeding.That’s right. Leave it to the solicitor. As Johnathan Smithers has indicated, by the time a home buyer has instructed a solicitor, they have already invested time and money in the purchase. Our research suggests that, by this stage, buyers have set their heart on the property and passed the point of no return. Even if the solicitor finds enormous fees hidden in the lease, it’s too late to pull out.Ladies and gentlemen, it’s time for landlords, managing agents and estate agents to stop burying their heads in the sand.

The solicitor stage is too late. Material information about the lease should be disclosed to leasehold buyers from the moment they see a property advertised. Disclosure should take place early, clearly and prominently.

Now, I know that this is a room full of experts on leasehold – and I should say, it’s a privilege to speak in front of such an erudite audience. I’m very grateful to Martin Boyd, Sebastian O’Kelly, Jim Fitzpatrick and Sir Peter Bottomley for giving me the chance to speak to you today. What I suggest probably seems obvious to you. But the message does not seem to have got through to many of the people who sell or manage retirement leasehold property.

But I haven’t introduced myself. I’m Stephen Lewis, Law Commissioner for Commercial and Common Law. I’m responsible for the Law Commission’s project on what some people call “exit fees” and what we call “event fees”. These are fees in residential leases, triggered by events such as the sale or sub-letting of the property. Event fees are especially widespread in retirement property. They can be very high. They can be up to 30% of the sale price.

And we think that the law on event fees is in need of reform. It needs to be clarified and modernised to ensure fairness for consumers and fair competition for businesses. And of course, what I’m going to say about transparency in relation to event fees has wider significance for residential leases in general.

I’m going to talk briefly about three themes of our provisional proposals for event fees: transparency, choice and protection. And I’ll try to draw out how the proposals are relevant to bigger questions about the entire leasehold sector.

I would like to say upfront that we are not proposing to ban event fees altogether. We understand and acknowledge that they are an essential element of the financial model for landlords and developers and they do serve a beneficial purpose for income-poor leaseholders because they often cap the amount of the service charges that are payable.
Let’s start with transparency. We provisionally propose that event fees should be disclosed early, clearly and prominently. This means that any advert displaying the price of a flat should also state the event fee. The principles of transparency underlying this proposal apply to all of residential leasehold. For the same reasons, service charges and ground rents should be disclosed up front. Too often, this does not happen.

Our proposals go even further, stating that developers should give realistic worked examples of how much money the resident will have to pay in event fees. However, event fees are not unique in needing worked examples to be better understood. Worked examples could be a good way to help consumers understand any complex pricing structure in residential leasehold.

Transparency is linked to consumer choice. For example, disclosing material information up front allows consumers to make an informed choice. But in leasehold, sometimes legal intervention needs to go further than transparency in order to redress the imbalance of power between landlord and tenant.

That’s why we propose to give consumers a further choice. We say that they should be allowed the choice to pay event fees up front. Right now, consumers sign up to pay a fee far in the future when the property is sold. They don’t know how much that fee will be, because it is a percentage of the property’s future sale price. We suggest that they should have the choice to pay a fixed fee up front instead. Then those who wish to live in a retirement flat are not forced to accept an indeterminate future liability.

So this proposal goes further than protecting consumer choice. It gives consumers an element of protection, which is going to be my final topic before I finish.
There is a difference between event fees that are for a service, and event fees that go into the landlord’s pocket. In many retirement leases, the event fees that are for a service are called “contingency fees”, while the fees for the landlord’s pocket are called “transfer fees”.

We are of the view that there should be more protection of money that is paid in event fees that are described as being for services. Often, the money is supposed to go into a sinking fund. For this reason, we think that the money should be held on trust. The money should be held on trust so that if the landlord goes insolvent, the sinking fund is protected for the leaseholders who live on the site. This would bring retirement leases into line with the position on sinking funds outside of the retirement sector. At the moment, there is no legal requirement to hold sinking funds that are raised by event fees on trust. It is down to the terms of the lease. We provisionally propose a new statutory trust to protect this money.

So I’ve talked about transparency, choice and protection for consumers. The sanction for companies that break the rules in any of these areas will be that the fee does not have to be paid.

However, there is one exception. Unlike with fees that go straight into the landlord’s pocket, we think that where the money goes into a sinking fund, the event fee should still have to be paid even if the leaseholder was not told about it properly when they were buying the property. This is because the sinking fund is for the benefit of all the leaseholders. To say that the fee does not have to be paid would be robbing Peter to pay Paul. There are, however, sanctions against landlords in this event. For example, there are criminal sanctions for the breach of Consumer Protection from Unfair Trading Regulations of 2008.
With this exception, if the rules are broken, the fee shouldn’t be payable.

We would propose the following mechanism for this sanction. The rules would be contained in a stand-alone set of provisions approved by the Department of Communities and Local Government. They would then be adopted in industry codes of practice, like the Association of Retirement Housing Managers code of practice. Because they are approved by DCLG, the rules would apply even to companies that are not members of the trade association.

And we recommend that the codes should have statutory backing, so that if a company breaks the rules about event fees, the event fee will not have to be paid. To do this, we would amend the list of indicatively unfair contract terms in the Consumer Rights Act 2015, the so-called “grey list”. An entry would be added for event fees that do not comply with the relevant code of practice. So where the code had not been complied with, the courts would, in our view, be very likely to find that the event fee term was unfair and unenforceable.

I gave an example at the beginning of my speech about how bad practice surrounding event fees is making life difficult for consumers like Mrs Bull. And I’ve talked about how we want to make her life easier, through transparency, choice and protection. And I’ve explained the sanction we provisionally propose for companies that break the rules.

Now it’s your chance to shape our proposals. The consultation is open until 29 January. We want to hear from as many of you as possible on whether you agree and what you think we should do. And of course, if you have any immediate questions, I’ll be happy to answer them today.