Fairhold leasehold retirement properties: transfer fee terms

Office of Fair Trading (OFT) closed consumer enforcement case.

Case information

Case reference number: CRE-E/24874

Complainant: OFT own-initiative investigation

Investigation into: Fairhold Homes Limited (company registration number 02556027; with a registered office of Molteno House, 302 Regents Park Road, Finchley, London, N3 2JX) and associated Fairhold group companies (collectively referred to as Fairhold)

Issue

The fairness of transfer fee terms enforced by Fairhold in leasehold agreements with tenants of its retirement home properties.

Relevant law

  • Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs)
  • Consumer Protection from Unfair Trading Regulations 2008
  • Enterprise Act 2002.

Case description

As part of an industry wide investigation, the OFT investigated the use of transfer fee terms by Fairhold in leasehold agreements with tenants of retirement homes held by Fairhold as freeholder. The transfer fee terms require tenants to pay one per cent of the higher of the sale price or open market value of their property in a number of circumstances, and represent an income stream to that landlord. The OFT considered that the transfer fee terms were likely to be in breach of the UTCCRs.

Although not the focus of the OFT investigation, the OFT also had concerns about the fairness of contingency fund fee terms that were generally drafted in a similar form to transfer fee terms. Contingency fund fees are paid into a fund to pay for the repair and maintenance of the development.

Undertakings given

Whilst Fairhold did not agree with the OFT's views and believed that its transfer fee and contingency fund fee terms did not breach the UTCCRs, it engaged constructively with the OFT during the investigation and agreed to sign undertakings to address the OFT's concerns, which the OFT accepted. Undertakings were voluntarily given, without any admission of any breach of the law, by Fairhold.

Fairhold has undertaken that it will not charge a transfer fee in any new leases it obtains through the acquisition or development of properties, unless the fee is for a service and represents its reasonable costs.

The company has also agreed, amongst other things, to make the following changes to how it enforces transfer fee terms in the leases of its 53,000 existing retirement home properties:

  • It has clarified that leaseholders will not pay any transfer fee when the lease is passed on through inheritance or surrendered, or when a relative or carer moves in with them.
  • A flat fee of £85 - to be adjusted in future years in line with inflation - will be charged for sub-letting (by assured shorthold tenancy agreement), replacing the current transfer fee of one per cent of the open market value.
  • A transfer fee of one per cent will continue to be charged on sale, but it will now be calculated against the lower of either the price the tenant sold the property at, or the price the tenant originally paid for the property. This will give tenants certainty over their maximum liability at the time they purchase the retirement home, and also prevent disputes about what the right level of fee should be. The fee was previously calculated as a percentage of the higher of the sale price or open market value, which could lead to disputes about what the property was really worth. 
  • The transparency of the transfer fee term will be improved in pre-sale documentation, where the landlord is made aware that a sale is taking place.

Fairhold has also agreed that where the terms of an existing lease give it discretion to waive the contingency fund fee of one per cent of the open market value payable upon each sub-letting, it will instead charge a fee equivalent to one month's rent (in accordance with the waiver) for each sub-let by way of an assured shorthold tenancy agreement.

Further, Fairhold has agreed that it will not tell tenants that payment of the transfer fee is for a service, or a requirement of the landlord giving consent to sell or otherwise deal with the leasehold property. Fees for services or consent are known as Administration Fees, and are regulated under the Commonhold and Leasehold Reform Act 2002. As such they must be reasonable and may be challenged in the Leasehold Valuation Tribunal.

Scope of the undertakings

The undertakings apply to Fairhold's 53,000 existing retirement home leases (that is, leasehold retirement properties containing transfer fee terms in which Fairhold owned the freehold as at 30 July 2012, the date of the undertakings).

Fairhold has undertaken that should it assign the freehold (or create a subordinate leasehold interest) in any of its existing leasehold retirement home properties that contain transfer fee terms, it will secure the agreement of the purchaser to abide by the terms of the settlement.

The OFT has closed its investigation into Fairhold on the basis of the undertakings given by the company.

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