Unlocking growth in retirement living: what legal reforms do we really need?

Generally, setting terms for 125+ years for occupancy by someone who will, on average, live there for seven or eight years creates a lack of flexibility for the sector and for consumers. Further, anyone inheriting an existing lease from a consumer may not benefit from the consumer protections afforded in business-to-consumer transactions.

The government’s stated intention to ban new leasehold flats and make commonhold the default reflects priorities for general needs housing, not specialist forms of housing targeted at particular age groups.

Commonhold runs contrary to the reality of why people live in retirement housing – residents generally move to these homes to make use of the provider’s facilities, receive daily care as a necessity and escape the repair and maintenance requirements and responsibilities which arise in mainstream housing. The commonhold model involves occupiers retaining responsibility for this management and so simply doesn’t fit how retirement living actually works.

Could contract-based occupancy be the answer?

What is the alternative? Legally speaking, the alternative to freehold, leasehold or commonhold is a licence. This allows flexibility but does not, under current law, provide the occupier with security.

Enter the New Zealand model, set out in a targeted piece of primary legislation (the Retirement Villages Act 2004), in which a contract-based licence product is commonplace. Residents do not seek to argue they are tenants because the lifetime protection on occupation and financial protections on their capital payments offered through the legislative framework are superior.

ARCO, the national membership body for charity, not-for-profit and private IRC operators in the UK, has developed proposals for a Retirement Occupancy Contract (ROC), as a UK version of New Zealand’s Occupation Right Agreement (ORA).

The key, relevant difference between the UK and New Zealand is the lack of an existing regulatory system in England. In New Zealand, the regulatory system provides sufficient security to residents that they will part with capital in return only for an ORA. For an ROC to work here, similar protections would be required.

Various mechanisms are possible. Residents could take a charge over individual units as security, or participate in a charge over the operator’s freehold ownership interest. Alternatively, a third-party surety body could underwrite the operator’s performance regarding return of capital on resales.

Each approach has merits, but ultimately, a comprehensive regulatory framework would be preferable. New Zealand demonstrates that comprehensive legislation can protect residents’ interests before, during and after occupation through disclosure regimes, monitoring and registration, external oversight and an environment of security for residents’ rights.

Primary legislation or quick fixes?

So, do we need full primary legislation for an ROC, or can smaller stepping stones get us there? The honest answer is: it depends on our ambitions.

In the longer term, if we want a thriving sector that genuinely parallels New Zealand or Australia, we probably need primary legislation creating a bespoke regulatory framework. A change in the law would be needed to make clear that an ROC does not amount to the grant of an equitable or legal interest in land and that no tenancy will arise.

Financial regulation under the Financial Services and Markets Act 2000 could apply to operators using an ROC model, but would potentially require FCA regulation, which would be very difficult both practically and legally – this too would require legislative change.

However, there may be smaller, bite-sized, alternatives, for example, an exemption for the sector to the ban on leasehold flats. With specific requirements as to the terms offered, creating a better deal for customers is a logical progression towards the ROC, allowing retirement occupancy lease (ROL) as a transition step in market evolution, a simpler solution for now in terms of changes to the law.

The path forward

Commonhold reform could be some years away and leasehold may never be abolished. But the sector can’t afford to wait indefinitely.

Ultimately, an ROC model with sector-specific regulation would be best. In the meantime, the ROL concept has real attraction and fits the model where commonhold does not.

The New Zealand precedent proves that purpose-built legislation can create a successful, sustainable retirement living sector. The question is whether we have the political will and cross-industry consensus for wholesale legislative framework, or whether taking ‘baby steps’ and retrofitting existing legislation will be sufficient to get all stakeholders on board.

For housing professionals looking at the demographic imperative of our ageing society, getting this right isn’t optional – it’s essential.

Kyle Holling and Lizzie Pillinger, partners at Trowers & Hamlins law firm