Leasehold Reform (Ground Rent) Bill [HL]

Written evidence submitted by Churchill Retirement PLC (LRGRB07)

Dear Members of the Leasehold Reform (Ground Rent) Bill Committee,

We would like to take this opportunity to c onfirm that we, in common with the wider retirement housing sector , support reform of the leasehold system to outlaw unfair and unjustified practices , but we do have a specific concern about one particular aspect of how these reforms are being implemented.

Our position

We are strongly opposed to the leasehold abuses that have prompted such justifiable anger, but these are not practices seen in retirement housing. We do not sell houses on a leasehold (cottage and bungalows on our developments are sold on freehold), and we do not have aggressively escalating ground rent terms.

We remain in place as the landlord on our developments, we manage and maintain the developments ourselves and therefore the relationship between us and our customers remains unbroken, meaning homeowners are not left having to deal with a third-party freeholder as has happened in some cases with other developers .

As the Bill is drafted it gives very little time for the retirement sector to adapt to a ban on ground rents from which it was originally exempted, and there is a real problem with the way it will impact on part-sold developments at the time it comes into force.

Background

Up until January 6th this year, the Government’s stated policy was that retirement housing would not be subject to the ban on ground rents on the basis that ground rents in retirement housing are used to provide a tangible benefit for occupiers by supporting the construction costs for extensive communal areas within developments. These communal areas can include residents’ lounges, treatment rooms, guest suites, catering facilities and accommodation for on-site support staff, areas which play an important role in retirement developments where the emphasis is on creating a cohesive and social community.

Between September 2019 and January 2021 the retirement sector was repeatedly assured that the exemption accorded to retirement housing remained the Government’s policy – in writing and in person. However, it now transpires that the policy change had been initiated in A utumn 2019 and whilst certain other stakeholders were privately advised of the change of policy, retirement housebuilders were not told and to the contrary were reassured the exemption remained unchanged. As a result, developments which got underway in that time and went on sale in that time did so with ground rent income factored into the funding model.

Retirement housebuilders which, by the Government’s own admission, have a specific reliance on ground rent for the provision of communal areas, therefore find themselves having to adjust to the removal of ground rent in less than half the time was accorded to mainstream housebuilders and have developments on sale which will not be sold out by the time the Bill takes effect.

Our Request

Due to the combined effects of retirement housing taking much longer to sell than mainstream housing and the sector having effectively lost a year of sales due to our customers self-isolating during the pandemic there will be developments on sale at the moment which will not have sold out by April 2023 when the ban is due to come into force.

The consequence of this will be retirement developments which are in operation with apartments already sold and occupied yet will be retrospectively caught by the new legislation meaning different types of leases will have to be created on identical apartments within the same building with some paying ground rents to fund the construction of the communal areas while others don’t. This presents legal complexities, funding challenges and fundamentally fractures what are by their very nature small, tightly knit communities where people contribute equally and fairly to shared costs.

Peter Aldous MP (Co-Chair of the APPG on Housing and Care for Older People) and Desmond Swayne MP propose a limited technical amendment which would permit part-sold developments to sell out fully on the same terms that they begun, with the ban applying to new developments going on-sale after the implementation date.

In terms of delivering the ban, it would mean that no new retirement housing developments w ould be launched with a ground rent after the transition period ends in April 2023 and only those that remain part-sold at that time can continue to sell out on the same terms they began. The amendment is as follows:

4: Clause 2, page 3, line 11 , at end insert-"Retirement developments where leasehold residential flats have already been sold prior to commencement but others remain unsold"

(12) A lease is an excepted lease if it is a lease of a retirement home in a development, where (a)   other residential flats within the development have sold and completed on a long leasehold before the relevant commencement day under section 26(4) but it is a flat within the development which remains unsold, and (b) the development commenced prior to 6 th July 2021

We believe this to be a reasonable request and one which was advocated in the House of Lords by a group of highly respected cross-bench Peers who recognised there to be a genuine problem with the way the Bill would work.

Here after is a short, general briefing note on how the Bill will affect retirement housing and responses to questions which are quite reasonably put in connection with ground rents in this sector. If you need anything further please do not hesitate to get in touch.

Yours sincerely,

Simon Cawte

Communications Director

Churchill Retirement Living

6 December 2021

LEASEHOLD REFORM (GROUND RENT) BILL

Bill Committee, Evidence Submission, 6 December 2021

● Specialist housing for older people is an essential means of enabling older people to live safely and sociably in a home of their own as their needs change, with support services on-hand as needed.

● A typical 45 apartment development will:

o Enable over £230,000 of health and social care savings each year

o Generate 90 additional moves by releasing second-hand family-sized homes back onto the market,

o Lead directly to 30 first time buyers getting on to the property ladder further down the housing chain

o Be located on brownfield sites on or near to the High Street, generating over £200,000 of additional spend each year in local shops and businesses.

o Offer older people a safe, sociable and supported environment. Covid infection rates were less than a third of that seen in the general population because of the precautions we were able to put in place.

Our concerns with the current version of the Leasehold Reform (Ground Rent) Bill

Issue 1: Impact on people living in part-sold developments

● As the Bill is currently drafted, the proposed ground rent ban for retirement housing will retrospectively catch a number of developments open and which will not have sold out by the time the ban comes into force. This will split these single-building developments into different types of tenure with some owners contributing to the costs of the construction of the communal areas, which the ground rent covers in our schemes, and others not. This will fracture communities in these schemes, create complexity and confusion in terms of lease structures and throw the viability of some developments into question.

● The solution to this is to let those retirement developments already part-sold at the point the ban comes in for retirement housing (currently set as April 2023) complete their sales on the same leasehold basis as those already sold, i.e. with the same ground rent terms. This would mean that a limited number of apartments would be sold with ground rent obligations, aligning with leases for apartments already sold in the same building. However, no new retirement housing developments will be launched with a ground rent after the transition period ends in April 2023.

● This reasonable request has already been made in the House of Lords by a group of respected cross-bench Peers who sought a technical amendment enabling part-sold developments to continue to sell out fully with ground rents in place.

● The suggestion that remaining properties in the development should just be sold at a higher purchase price of £15-18,000 above that of others that have sold to recover the loss of ground rent is simply not realistic when an asking price for identical properties in the same development has already been established. This increase in purchase price would leave most occupiers significantly worse off over a typical ten year ownership of a retirement property.

● The current transition period of 12 months for the sector to adjust to the change in policy is helpful but ultimately it will only give retirement housing developers two years to absorb what is a massive upheaval, that is half the time accorded to mainstream house builders to adapt, housebuilders which have not been reliant on ground rent income in the same way our sector has.

● Owing to the age profile of our customers and the need for them to self-isolate during the Covid pandemic it is the case that sales in our sector have already been heavily impacted and delayed, meaning we have more developments which remain part-sold than would ordinarily be expected, thereby exacerbating the problem with the way the Bill is drafted.

● We, therefore, ask that you give consideration to a limited technical amendment so that any future ban applies only to new developments which go on sale after the 12 month transition period has concluded, rather than it applying to individual unsold apartments within a part-sold development at the time.

Issue 2: Impact on delivery of high quality, affordable Retirement Housing in the absence of ground rent income

● The extensive communal areas which characterise retirement housing can account for a third of the overall floorspace in a development and these are areas which cannot be "sold" unlike in mainstream apartment buildings as they are shared by the homeowners. The cost of constructing these areas needs to be recovered to make the development viable and this has been done to date through a modest ground rent of £400-£500 per year.

● The role of ground rent in retirement housing is widely recognised as being distinct from that in other types of housing as it helps the few developers and operators in this sector to bid at the market rate for land.

● Without this element in the viability appraisal, retirement developers will struggle to compete with mainstream housebuilders and commercial developers to secure sites for retirement housing. This is already proving the case where we were recently outbid for a brownfield site by a drive-through, self-storage business, on a site that would otherwise have been perfectly suited to providing specialist housing for older people.

● The particular role of ground rent in retirement housing has been recognised by Policy Exchange, Demos, the HCLG Select Committee and ultimately the Government itself.

● It is proposed that this shortfall should be made up by increasing the asking price for new properties. However, there is no evidence that all retirees would be prepared to pay an additional 5-10% for a retirement property, indeed it is already the case that the overall cost to move is a deterrent to many and we are being urged to find ways of making our properties more affordable not less affordable.

● This also is at odds with the levelling up agenda as it will mean the sector may have to retrench to parts of the country where house prices are higher and the prospect of achieving a higher sale price is more reliable. This would leave parts of the North and Midlands sparsely supplied with high quality housing options for older people compared to elsewhere in the UK.

Issue 3: Not clear what problem this is seeking to fix

● The retirement housing sector supports reform of the leasehold system to outlaw unfair and unjustified practices but these are not practices seen in this type of housing:

1. We do not sell houses on leasehold (cottage and bungalows on our developments are sold on freehold).

2. We do not have aggressively escalating ground rent terms.

3. We remain in place as the landlord on our developments, managing and maintain ing the developments and ensuring the relationship between us and our customers remains unbroken .

● Replacing ground rent with a higher purchase price works out more expensive for the customer. A typical customer will live in a retirement living development for 10 years, paying roughly £450 per year in ground rent. Over ten years this works out at £4,500. Where the increase in purchase price to be just £15,000, a typical customer will have paid over £10,000 more in total. A customer would need to live in the development 30 years before they saw a saving if the higher purchase price is applied in lieu of ground rent.

● Polling undertaken by Populus found 82 per cent of retirement home purchasers would prefer ground rent to a higher purchase price.

● The proposal from the then MHCLG Secretary of State , in 2019 , was that purchasers of retirement properties should be given the choice of paying ongoing ground rent or a higher purchase price. A total ban on ground rents for the retirement sector takes away consumer choice to decide for themselves, depending on their particular situation, how they would like to contribute to the funding of the communal areas, through ground rent or a higher purchase price.

FAQs

● Can’t the cost of constructing the communal areas simply be added to service charges?

This is not possible as, by law, service charges must accurately reflect the day-to-day running costs of each development and cannot be used to cover construction costs for communal areas.

● Can’t the cost of constructing the communal areas simply be added to the purchase price?

Some will be able to pay a higher purchase price, and some will be prepared to, but most will not. The overall cost of downsizing is already an impediment to many and we have been focusing on trying to make this type of housing more affordable and more financially attractive.

● Doesn’t the 12-month transition period provide enough time to sell out developments that are part-sold?

No. Retirement Housing has far slower sales rates than mainstream housing. Typically, they do not sell off-plan, customers wait until the development is operational before buying. These properties are not bought by buy-to-let investors. Instead, they are generally people who take time to decide on a move, then have a property of their own to sell before completing. For these reasons, sales rates are logically much slower than those seen in mainstream housing . As sales were challenging for a year during Covid there are a number of developments with more apartments remaining unsold than we would ordinarily have seen , t hese developments are very unlikely to have sold out by April 2023.

● How come other places like America don’t have ground rents?

Where ground rents are not used to fund the construction of the communal areas the developer will instead apply an "Event Fee" or "Exit Fee" which is a percentage of the resale price of the apartment which must be repaid to the developer when it is sold. This can be as high as 30% of the resale price which the owner must repay. This is also seen in some "retirement village" developments in the UK which also rely on the Event Fee model instead of using a yearly ground rent payment. We have not used the Event Fee model of funding because:

· Polling shows customers do not like it, hence the largest providers of private-sector retirement housing in the UK have tended to avoid it.

· It can work out significantly more expensive for customers and their relatives may not necessarily be aware that this liability rests on the property when it comes to be sold.

· We were previously guided by Government that it did not want to see a pro life ration of Event Fees, which had been the subject of a Law Com m ission inquiry, and instead that a modest yearly ground rent was seen as preferable.

Background

● In June 2019 the late Secretary of State for MHCLG (Rt Hon James Brokenshire) confirmed the Government’s policy for ground rents in retirement housing would be permitted the option of a modest ground being payable as long as buyers were given the choice between this and paying a higher purchase price in place of ground rent.

● This was originally proposed by his predecessor Rt Hon Sajid Javid because the Government recognised that in retirement housing ground rent was a necessary means of paying for the space allocated to extensive communal areas such as residents’ lounges, treatment rooms, guest suites, catering facilities and accommodation for on-site support staff. In the Government’s June 2019 consultation response these areas were referred to as being a "tangible benefit" received in return for the ground rent and therefore merited different treatment to mainstream housing.

● The fact that MHCLG did not announce a change of policy until January 2021 leaves us with developments which started construction on the basis that ground rents could continue as part of the funding model for our sector and will be part-sold at the time the ground rent ban comes in.

● We believe that if these developments have to operate with some residents paying their contribution to the construction of the communal areas via a ground rent and others facing a higher purchase price for apartments bought after April 2023 will cause confusion and a sense of unfairness for both current and future residents. We are keen to have the opportunity to discuss with the department how this issue might be resolved.

6 December 2021