June 28, 2017

‘Curtains for exit and sublet fees’ by Law Commission … but not until March 2017

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ExitfeeCarlexLeasehold exit and sublet fees have been referred to the Law Commission, which will almost certainly be the end of them.

This means anyone selling or renting out a retirement or non-retirement flat should keep all documentation with a view to making a claim in two and half years time.

The decision is a volte face, as in July the Law Commission stated that it was not going to examine the issue.

Exit fees are paid on sale of most retirement leasehold properties, and were a widespread revenue earner introduced by McCarthy and Stone and its imitators, where it was set at one per cent.

In the fancier retirement sites, it can be up to 12 per cent. Retirement builders stopped the fees from 2008, and they do not apply to most leases after that date.

But the Law Commission is also examining sublet fees.

There is no reason at all why this examination should not spread beyond the retirement sector to the wider leasehold sector.

LKP is deluged with inquiries about subletting fees, often where freeholders and their managing agents are plucking figures from the air for a sublet consent.

The tribunals have dealt with countless cases, but there is no binding decision on what would be a fair sublet consent (most freeholders have to give consent to a sublet, usually followed by the word “such consent not to be unreasonably withheld”.

The retirement sector is further complicated because some sublet fees are contributions to the contingency fund and some are set at one per cent of market price.

One family at Gibson Court, in Hinchley Wood, Surrey had to pay a sublet fee of £2,500 into the contingency fund last January.

McCarthy and Stone this month dropped the one per cent contingency charge at all sites where it is the freeholder in favour of an £80 plus VAT fee. More here

Today’s full statement from the Law Commission is in full below, or on its website here

Transfer of Title and Change of Occupancy Fees in Leaseholds

Status: Work will commence on this project in October 2014. We expect to publish a consultation paper in summer 2015 and make interim recommendations for reform in March 2016

The project was referred to the Law Commission by the Department for Communities and Local Government (DCLG) and will look at leasehold terms that oblige the lessee to pay a fee when title is transferred or where there is a change in occupancy. Concerns were raised with the Office of Fair Trading (OFT) about retirement home developments where these terms are chiefly to be found. The amount payable is usually calculated as a percentage of the sale price or the original purchase price. Terms may be triggered where the transfer of title is voluntary, for example on sale, or involuntary such as under a property transfer order. Change of occupancy terms may be widely drawn and can be triggered on more than one occasion over the lifetime of a lease, for example, where the lessee goes into hospital during spells of illness.

The OFT concluded that the terms were potentially unfair and that there was a lack of transparency, particularly in the sales material. The nature of the terms can be unclear and some appear to fall outside the existing regulatory regimes. As a result there may be no means by which a lessee can effectively challenge a term or the reasonableness of the sum involved. In response to the OFT’s report some landlords voluntarily entered into undertakings on the use of the terms. However, OFT also recommended that the Government should consider further measures, including legislative reform.

The project will consider the problems caused by terms in residential leases generally which require the lessee to pay a fee on a transfer of the title or change of occupancy, and in the retirement home sector and similar markets in particular.

We will look at how the current law addresses the problems that are identified and consider whether greater protection is needed for lessees. This may involve unfair terms legislation, landlord and tenant law and conveyancing procedure. We will also consider what the impact of any greater protection may be.

The project will be reviewed in March 2016 at which point we will make interim recommendations for reform. If the project continues we will make final recommendations in March 2017.

Comments

  1. Michael Hollands says:

    Does this mean the end of the part of the Exit that goes into the Contingency Fund. Or will that charge now be called by another name.
    I can see the point of sellers paying a reasonable amount into the contingency fund especially if they have benefited in pay outs for improvements from this fund whilst they have been residents.
    For example there is a complex of Retirement Bungalows nearby to me where there are no Exit charges at all.
    There is a bungalow for sale which I have enquired about. By chance I found out that there are some expensive maintenance works needed to the communal areas and their contingency fund is well underfunded.
    This would mean I would be required to make a major contribution if I purchased, I assume as soon as Contracts were signed.
    So to help avoid this type of situation I think a reasonable fixed sum should be paid into the Contingency Fund by the seller.

    • There are many leasehold sites, not all retirement, where a contribution to the contingency fund is made on sale.

      We have no issue with that at all. Every site should have a healthy contingency fund.

      The percentages on subletting retirement leasehold made the contribution to the contingency fund exorbitant. The present McCarthy and Stone has done something about these by fixing the sum at a reasonable £80. (You will have to pay one per cent of market value after two years, but that, too, is reasonable as commercial investors would otherwise not contribute to the contingency fund.

      • “We have no issue with that at all.” I disagree.

        “Every site should have a healthy contingency fund.” Yes.

        When I lived in a block of flats in London where we managed and owned the freehold the CoM made sure sufficient money was saved from the service charges to put into a contingency fund for all repairs/maintenance costs. That is what the service charge is for.

        Any type of exit fee is a rip-off. If management companies didn’t exploit the leaseholders in other areas such as building insurance, emergency call service etc, sufficient money could be collected from the service charges.

        I have said time and time again on this website and AboutPeverel that Peverel Retirement published a booklet in which it clearly says that all minor/major repair costs are paid for through the service charges; THERE IS NO MENTION OF EXIT FEES ANYWHERE.

    • Michael,

      The Contingency Fund has a life of its own and is an acceptable way of planning for the future maintenance for the development.

      The individual leaseholder pays what they are expected to pay for the future of the development. The amount is decided by the Area Manger who sets a Budget Requirement for future maintenance.

      We were informed that a five year maintenance plan was the cornerstone of the Contingency Fund, yet when asked for this five year plan, we were ignored by Area manager and were classed as a trouble maker.

      The Area/Regional Manager would visit the development knowing the residents that had no understanding of what was going on. The Area Manager could undermine and build up resentment against those who questioned what Peverel Retirement were undertaking.

      • “The Area/Regional Manager would visit the development knowing the residents that had no understanding of what was going on. The Area Manager could undermine and build up resentment against those who questioned what Peverel Retirement were undertaking.”

        Yes, this is exactly what happened here. I’ve had 12 years of this; more recently the Area/Regional Manager recruited a relatively new resident to undermine, bully and harass me at meetings. I was told I should move…

        • fleeced,

          I am aware of this happening, we now have 18 new residents since I moved in, 2008/09.

          The good work you have done, has this not been appreciated?

          Admin can provide my email.

  2. I disagree: contingency funds should be created and maintained openly and transparently in the service and reserve fund charges and therefore subject to reasonableness. These like the other exit fees are a relic of the more common short leases in retirement schemes where voids, due to intestacy or no funds in the estate, affected the service provision.

    • Ditto. AM is right.

      Carlex has got this one wrong.

    • Michael Hollands says:

      If the contingency fund was funded solely by contribution from service charges it would in some cases increase them considerably. In Complexes where there is a big turnover that part of the Exit Fee must be a big contributor to the Contingency Fund
      I can see your point that it is fairer but a much higher service charge would be a disincentive to purchase and a burden on those who are finding it difficult to sell after moving out or on their descendants if they had died. In that case they may prefer to pay the percentage on sale if the property had depreciated in value.

      • I am aware of sites, entirely controlled by residents, which have chosen to introduce contingency fund exit fees on sale. It is not an unreasonable way of maintaining the fund.

        Anyway, a leaseholder controlled site can do what it likes so far as we are concerned.

        In retirement sites, building up the contingency fund with a fee on sales is not a bad way of doing this. Michael Hollands rightly points out the drawbacks of the alternative.

        Contingency fees can be an onerous additional charge – particularly if the seller is moving out, after a short period, because the retirement site has not been a success.

        McCarthy and Stone has very reasonably and helpfully reduced its contingency fund fees on subletting, which at the former one per cent of market value meant that renting out a retirement flat incurred the sort of subletting fees usually seen in Chelsea and Knightsbridge. McCarthy and Stone now charges £80. This was a small, concrete concession obtained by Carlex (which was then criticised by retirement leasehold fundamentalists).

        The worse aspect of contingency fees at present is that they are yet another charge imposed on retirement residents by a compromised managing agent on behalf of a monetising freeholder. We saw the results of this in the Cirrus scandal, where sites with large contingency funds were preyed upon for unnecessary Cirrus upgrades.

        • A clear example of why this contingency fee must be abolished:

          When I first bought into a Pegasus brand new development in 2002/3 it wasn’t long before there was a problem with the height of the electronic gates to the underground car park. Yobs could climb over causing damage to cars even setting fire to one. As a consequence the height of the gates needed to be raised (I have a photo of the gates showing temporary boarding up). In spite of the NHBC warranty cover and the new leaseholders protests we were forced to pay for it out of the contingency fund. This was a brand new building so who would paid for it? MUGINS/FLEECED.

          I had bought one flat in the building and hated it so much I sold it within the first six months and bought the present one. I couldn’t sell it on the open market and was forced to enter into a part-exchange deal and was ripped of thousands of pounds. My solicitor managed to get the 1% fee paid to the landlord waived but I was forced to pay the1% to Peverel for the contingency fund. So I ended up paying for a design fault that should have been paid for by Pegasus/builders.

          For all those of you who think this is “fair” please think again. How do you explain why it is fair to charge exit fees in the retirement sector but not in the non-retirement sector? It doesn’t make sense.

      • “If the contingency fund was funded solely by contribution from service charges it would in some cases increase them considerably.”

        No it wouldn’t. If managing agents stopped ripping-off leaseholders in other areas such as building insurance, entry phone systems and contract maintenance work, there would be ample monies left collected from the service charge to go into a contingency/sinking fund.

        I have sent Sebastian a copy of a Peverel Retirement booklet that clearly states: “Repairs will be financed through the service charge” – no mention of ‘exit fees’ – anywhere..?!

        • fleeced,

          We replaced a Warden Call System (WCS) in 2007/08 which was claimed as being OBSOLETE?

          The Report claimed our WCS was OBSOLETE which was a verbal communication between a Managing Agent and their Subsidiary Company Cirrus which was in 2005/09 a Peverel Company.

          This company Cirrus Communication benefitted from the report that claimed our WCS was OBSOLETE as they with Peverel Management Services Ltd benefited from the £1.4 million that Peverel Group made from giving incorrect information to many of the 65 Developments.

          We paid over £20,000 for an Up-date which was not required as the information has never being produced which shows that our development was OBSOLETE.

          Peverel Management Services Ltd trade as Peverel Retirement and have since 2005/06 to 2009/10 have been responsible for £1.4 Million Pounds worth of contracts, which were instigated by the Peverel Technical Managers as they were instructed to do.

          The fact that the system worked OK was not taken into account as the OBSOLETE SYSTEM made money the OK System would not.

  3. Erm the upper tribunal decision IS binding-the problem is that with the exception of leases commonly issued by ” big housebuilder” few have standard or similar wording and therefore the work and requirements can vary considerably. Similarly the enthusiasm for pursuing these vary as does the thoroughness- the dark empire has rightly been roundly criticized for preparing a stand spiel on ” what we do” and manifestly not doing that, as well as scoring an own goal with failing to read the lease that didn’t even require consent!

    Older leases still make detailed requirements such as production of references guarantors and bank guarantees or accounts for self employed or company owners.

    Any examination must therefore look at what is reasonably required and take into consideration that with the propensity for “buy let and hide” landlords consent is one of the few ways to find out what is going on. When service charges aren’t paid it is the good people who do pay that subsidise them and inevitably ending up having to any higher management fees and in many cases especially RMCs RTMS and RTE picking up legal costs of enforcement. Not to mention the quality of life when your block turns into a short let, holiday let, and housing benefit placements hell.

    And no, yawn, this is not scaremongering, its the reason why a balance has to be struck for stopping “pips being squeaked” on renting landlords, protecting the broader interests of the block and as there is going to be some cost even if it is £50, that it falls on those renting not everyone

    • The Upper Tribunal has attempted to stop the unending try-ons over subletting fees. Here it ruled on four leases and said £40 plus VAT would be a reasonable charge.

      But you are right. The freeholders and their managing agents keep coming back with their made-up fees as you can read on LKP here

      Not sure what we can do except publicise the most abusive try-ons. Many of the scamps in this sector are not very courageous when their try-ons are subjected to public glare.

      • The best solution is to look at statutory amendments to the clauses, including those on related deeds of covenant and notice fees, as the latter, post the UT decision, sky rocketed.

  4. Am I misunderstanding previous posts. Payments to reserve funds although should be fair and reasonable are not fees, as the money is still held for the benefit of all leaseholders. Exit fees and sublet fees that go straight into the profits of the freeholder are unreasonable.

    • Correct: exit and (excessive) sublet fees are wrong; contributions to the contingency fund are supposedly for residents’ benefit (provided it has not been plundered by Peverel / Cirrus).

      However, the contingency fees are specified in the lease and a freeholder would be liable (to complaint from the other residents) if it did not collect them.

      The retirement builders, of course, made the leases complex and opaque as possible to disguise the revenue earner fees – they appear in differing parts of the lease, for example.

      It will be interesting to know what the Law Commission makes of sublet fees paid the freeholder. These apply to most leasehold properties where it usually states in the lease that subletting consent is required from the freeholder and words such as “such consent should not unreasonably be withheld”)

      This has resulted in widely varying charges, many of which are absolute try-ons by freeholders. But here, for example, a poor woman faced a £910 subletting fee because a resident-managed block in Kensington had a panic attack after a flat was rented by working prostitutes.

      The OFT did examine subletting which will doubtless figure in the Law Commission’s deliberations:

      “In relation to sub-letting, we still take the view that terms in long leases preventing sub-letting have potential for unfairness under the Unfair Terms in Consumer Contract Regulations (UTCCRs). In our view a consumer should be able to seek permission to assign (by means of a sublet) and that permission should not be unreasonably withheld.

      “We would see this as being particularly important in relation to leases in retirement properties. In some instances tenants may need to move out due to health issues (often to a nursing home), so subletting the property is an important means to pay service charges, and otherwise maintain the tenant’s investment in the property. Further, where the original tenant has died, often their heirs or estate will remain liable to pay service charges, while being ineligible to reside in the property themselves because of minimum age restrictions. In such circumstances, subletting may be the only means by which the property can provide any economic benefit to the owner. Further in circumstances where the market value of the property has fallen since the tenant purchased it, being obliged to sell rather than sublet is likely to cause significant hardship to the tenant.”

  5. “Anyway, a leaseholder controlled site can do what it likes so far as we are concerned” and when they choose to abuse the fund? It is not ringfenced under section 42 either.

    Just this week I was looking at a case where residents want to use the fund for cosmetic work to enhance the saleability of the flats, which will empty said fund, rather than the more serious problems with the roof. The minority, with long term interests, are having to look at litigation to stop it.

  6. The exit contingency vs reserve fund is not a new argument as it applies equally to non retirement premises, and in principle, the person who is prepared to let his house run down and take a hit on the sale, and the other who looks after it.

    Residents can make a choice when they are in control and that is key, but both they and freeholders are equally criticised for large one off bills when there is no reserve, and having pots of money lying around when the reserve fund is well planned. “Pensioner shock with £63k bill” and “landlord sitting on pot of gold while pensioners freeze” are headlines which mean you are damned if you do…..

    Other blocks whether external freeholder or resident owned or controlled get by without contingencies and some blunder from crisis to crisis and some have high charges but solid long term plans and healthy reserves

    The debate then is what is contingency sum for, operating black holes arrears illness intestacy etc, or future major works?

    Perhaps SC schedules should allow the latter and guidance require that even if the reserve fund is only minimal that a 5 10 20 year plan be in place so that owners can plan their investments accordingly, or sell up, and purchasers know what they are in for. If residents want to fully fund that plan then they can, or invest accordingly, as the hard fact is, rip offs aside, is that buildings have to be looked after.

  7. Carlex says:

    HOW TO SELL YOUR PEVEREL FLAT
    HOW TO SELL UP AND AVOID THE FEES

    LEGAL MATTERS
    “Peverel’s property transfer department deals with their legal side of the sale process. They have helpfully collated a “solicitor’s pack”, which they charge a pretty price for. There is absolutely no requirement to pay for this. You will already have much of the information – especially if your record-keeping has been good.”

    Yes, but even when the seller provides all the necessary legal document/paperwork leaseholders are still bound to pay these fees: E&M charges £135 and Peverel/FirstPort charges £268.80 totaling £403.80. Like ‘exit fees’, E&M and Peverel/First Port will block the sale if the fees aren’t paid? So what is Carlex’s advice on this issue/problem? Is it worth challenging afterwards in the hope of getting the money refunded?

    EXIT/TRANSFER FEES:
    “If you don’t hand it over – Peverel won’t register the sale at the Land Registry. And it’s ‘in the lease’…
    …Certainly, the one per cent which is destined for crediting to the contingency fund, for the benefit of keeping the maintenance charges lower for future leaseholders, is believed to be fair.”

    I strongly disagree. ALL ‘exit fee’ payments are unfair. Money for minor/major building repairs are covered/paid for through the service charges collected as set out in the booklet Peverel Retirement Repairs Policy booklet.

    Therefore I wish to make a formal request to Carlex to change its stance on ‘exit’ fees paid into a contingency fund as fair and that Carlex asks the Law Commission to consider abolishing this fee as well.

  8. Michael Epstein says:

    Where exit fees are used to contribute to service charge funds, it does serve to disguise the true level of service charges. In addition, that the exit fee is based on a percentage of a selling price and not the service charge this means the exit fee contribution to service charges is not a fair reflection of the service charge precept. It also means that residents pay into a service charge fund, in which they no longer have any control over.
    In my opinion it is much more open and transparent to be levied the true service charge costs.

    • Agree. If the accounts were open and transparent without rip-off charges for building insurance, the entryphone, care/call systems and maintenance contracts, the need to collect money for a contingency fund by means of ‘exit’ fees on all sales would not be necessary. Accepting the present system as “fair” sends a clear message that it’s OK to rip-off leaseholders in the retirement sector (dribbling geriatrics), while all those living in the non-retirement sector with standard leases, are not stung with additional exit fees to pay for a contingency/sinking fund. It’s not on.

  9. fleeced,

    You are a woman after my own heart, and for that I thank you.

    Your fight against failures of management in who ever is in charge of a development has been excellent.

    Our Insurance costs are inclusive of 14% to Kingsborough Insurance as Commissions which Janet Entwistle claims wrongly that the LVT were happy with 14% was a false claim and was used to show that Peverel Listened.

    How wrong, Janet was given this 14% when a development which was paying over 40% was offered a reduction of 26% which was accepted.

    The 26% reduction was seen as a victory and accepted by the development, trust Janet as a Barrister to make a meal of this and claim it was accepted.

  10. Michael Hollands writes:

    Just a few more interesting points on Exit Fees , a subject which causes much consternation.

    Retirement Villages is a company that works at the top end of the market.

    Purchase prices for new properties can range from £200,000 to £400,000 even more.

    The Exit ( Assignment Fee) can be as much as 12.5%

    This is on the sale price of the property. The purchaser also has the choice of paying this fee when purchasing and it would then be based on the purchase price. There would then be a part refund if the the property was resold within two years.

    They say the purpose of the Exit (Assignment) fee is to help them recover the large initial capital expenditure on the luxurious complex and to provide them with some income on this outlay.

    I do not know what the average management fees are at these village but I suspect they are high considering the standard of services and facilities provided.

    So if the Exit (Assignment Fee) was discontinued and added to the management fee it would be considerably more.

    A rough calculation would be as follows.

    Assume the cost of a property is £300,000, the average occupation is 10 years and the Exit (assignment fee) is 12.5%

    £300,000 x 12.5% = £37,500 divided by 10 years = £3750year.

    So the management fee would have to increase by £3750 to cover the loss of the Exit (assignment) fee if it was discontinued.

    I imagine it could double the management fee and make residency seem less attractive.

    So I come to the conclusion the high cost of the Exit ( assignment fee) makes sales easier as purchasers do not give it so much initial consideration as they would a higher management fee.

    On the other hand doing it this way can help some enjoy this quality of life which they would not be able to afford if the management fee was doubled.

    The Exit (assignment) fee only gets paid after the have experienced this quality lifestyle. When they die or leave.

    Assuming that all charges and fees are above board then I don’t see anything wrong with either system.
    Maybe purchasers should be given the choice of the two alternatives.