Keeping Care Homes Profitable
20th January 2009 by: Tessa Naylor
There are many threats to the profitability of care homes and funding is the most obvious. For those homes where self funders make up the majority of residents, a new threat is coming, from the Office of Fair Trading.
The OFT’s particular target is the exit premium which is payable back to the care home owner when there is a change of resident and the unit lease is sold on by the outgoing tenant or their estate. This can be equivalent to 5% to 10% of the sale price. It is justified by its investment back into the infrastructure of the care home which keeps service charges low and this is especially attractive to fixed income pensioners.
However, the OFT has been considering for some time now whether the practice is one which the courts should be asked to rule unlawful and unenforceable under the Unfair Contract Terms Regulations 1999. These consumer focused regulations first came into force here in 1995 to enhance the protection which English law traditionally offered consumers in their dealings with tradesmen and suppliers and to create a stronger legal framework to address the imbalance forced on consumers by standard clauses in service or product contracts. In 1999, the Regulations were updated to apply these protections to contracts involving real property and leases. The introduction of the 1999 Regulations marked a revolution in English Land Law, where for the first time, clear, transparent and otherwise legally binding contractual obligations might still be rendered unenforceable where held to be unfair to the consumer tenant.
Ominously, the OFT has just announced its agreement with McCarthy & Stone that they will remove exit fee provisions from future leases and not enforce them in current leases. It needs to be clarified, however, that this does not count as a determination of the legal position which is as yet untested, but it does suggest that OFT’s resolve may be strengthening.
Much can be done to modify leases to fall in line with these Regulations and lease structures can be reassessed to make them more compliant with this new European dimension.
Coping with the recession biting into the housing market, foreign staffing issues and evermore demanding regulations are quite enough for care home owners to contend with. Keeping the OFT at bay looks like being the next challenge.
The OFT’s particular target is the exit premium which is payable back to the care home owner when there is a change of resident and the unit lease is sold on by the outgoing tenant or their estate. This can be equivalent to 5% to 10% of the sale price. It is justified by its investment back into the infrastructure of the care home which keeps service charges low and this is especially attractive to fixed income pensioners.
However, the OFT has been considering for some time now whether the practice is one which the courts should be asked to rule unlawful and unenforceable under the Unfair Contract Terms Regulations 1999. These consumer focused regulations first came into force here in 1995 to enhance the protection which English law traditionally offered consumers in their dealings with tradesmen and suppliers and to create a stronger legal framework to address the imbalance forced on consumers by standard clauses in service or product contracts. In 1999, the Regulations were updated to apply these protections to contracts involving real property and leases. The introduction of the 1999 Regulations marked a revolution in English Land Law, where for the first time, clear, transparent and otherwise legally binding contractual obligations might still be rendered unenforceable where held to be unfair to the consumer tenant.
Ominously, the OFT has just announced its agreement with McCarthy & Stone that they will remove exit fee provisions from future leases and not enforce them in current leases. It needs to be clarified, however, that this does not count as a determination of the legal position which is as yet untested, but it does suggest that OFT’s resolve may be strengthening.
Much can be done to modify leases to fall in line with these Regulations and lease structures can be reassessed to make them more compliant with this new European dimension.
Coping with the recession biting into the housing market, foreign staffing issues and evermore demanding regulations are quite enough for care home owners to contend with. Keeping the OFT at bay looks like being the next challenge.
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