NAEA supports Law Commission proposals on ‘event’ fees

Monday 18 January 2016

The National Association of Estate Agents is supporting the Law Commission in its quest for the introduction of stringent codes of practice to require developers, operators and managing agents to bring ‘event’ fees to the attention of prospective buyers.

The issue

Event fees, also known as ‘transfer fees’, ‘contingency fees’ or deferred ‘management fees’ are the money some residential leases require the leaseholder to pay on the sale of the property or other event.

The fees are common in specialist housing for older people. For instance, when someone moves to retirement housing residents can make use of services provided for the accommodation. These can include use of the residents’ lounge, a gardener, or access to 24-hour care.

There are costs for these services, which many older people can afford to pay. However, for some older people who may be able to purchase specialist retirement housing they could be income-poor and unable to pay service charges. Consequently they might prefer to defer payment until after the property is sold, rather than paying the whole cost through annual service charges.

To defer payment developers and the companies who manage this type of retirement or specialist property allow people to buy a long lease. This lease will include a clause that says when the property is sold a certain percentage of the proceeds of the sale must be paid back, either to the developer or into a fund for the upkeep of the accommodation as a whole. Depending on the services available, the percentage can be as little as 1% or as much as 30%.        

Problems                                                                   

Problems arise because people aren’t always being told about the fees before they purchase the property and in many cases buyers hear about the fee when they hire a solicitor to read the lease. However, by this point the buyer has already invested time and money in the purchase and it’s often too late for people to absorb further complex information about a fee that they hope will only be payable after their death. Many people also feel that they have reached the point of no return and continue with the sale.     

Another problem is that the fees may be triggered by other events. These include sub-letting the property or taking out an equity release mortgage. In such circumstances the fees can come about unexpectedly and amount to thousands of pounds.   

Investigation

The Office of Fair Trading (OFT)investigated transfer fees in 2013 and commented on the lack of clarity in the existing legal framework. They recommend that consideration be given to reforming the law in this area.  

In September 2014, the Department for Communities and Local Government asked the Law Commission to look at the problem and to consider whether more protection was needed for buyers.

In October 2015 the Law Commission opened a consultation on residential leases looking at fees on transfer of title, change of occupancy and other events.

Proposals

Through its consultation the Law Commission is recommending stringent codes of practice to require developers, operators and managing agents to bring event fees to the attention of prospective purchasers. They want to see the code backed up by legal sanctions in the event of non-compliance.

The Law Commission also think that event fees, charged, for instance, when a property is mortgaged or when a carer moves in, should not be charged except on sale or sub-letting and that this should be part of the approved provisions on event fees.

Looking at this in greater detail the Law Commission say that it may be appropriate to charge some fees on sub-letting, but where sub-letting fees are expressed as a percentage of the open market value they can often add up. 

The Law Commission is also considering whether alternative payment options, such as a flat fee, might be helpful to consumers who do not know how much they will have to pay where an event fee is a percentage of the sale price. 

Where a landlord sells the property directly the Law Commission suggests that the event fee provisions should require the landlord to provide material price information in a clear and prominent way early in the process.

Estate agents

In situations where the property is sold by the leaseholder’s agent, the Law Commission concludes that problems arise when the lease is sold by one resident to another using an estate agent. Although estate agents are under a legal requirement to give upfront cost information, they may not be aware of the fee because the leaseholder may have forgotten, suffering ill health or passed away.

Currently developers and managing agents are under no obligation to inform estate agents about fees. The Law Commission think this needs to change so that estate agents can include information about event fees in their initial advertisements and property particulars. They have put forward two suggestions as to how such information might be provided:

  • Landlords could place all the information on an online database, which would allow all estate agents to go online and type in the address. The database would then provide details of the event fee and an outline of the disclosure document.
  • The estate agent could contact the managing agent who would then be required to supply the estate agent with a completed event fees disclosure document within two working days. This is because the estate agent would not be permitted to advertise the property until the information has been supplied.

The Law Commission believe that landlords who fail to comply with the appropriate code provisions should face a legal sanction. The Commission also believe that unfair terms legislation has the potential to provide an appropriate sanction against event fees which are used in an unfair way.

However, the Law Commission also recognises the complexities and uncertainties about how unfair terms law applies to long leases. As a result they provisionally propose statutory reform to treat event fees as if they were terms of a contract between the tenant and the landlord, made when the current tenant first becomes bound by the term.  

The proposals are extensive and can be read in full here        

NAEA

The issue is important for estate agents because they need to comply with Consumer Protection Regulations and consumers need to be told about event fees when they see the property advertised, visit an office or view the property. It’s also important that the issue is highlighted when the buyer puts in an offer and has it accepted. 

Downsizing is a part of the housing cycle and can allow many younger buyers with families to make use of larger properties which older people often still occupy after their own children have grown up and left or a partner may have died.

When purchasing retirement housing many developers of these specialised property go through the fees with prospective buyers and many agents do the same with the lease. What’s important is that purchasers and their families realise that the longer they live in these types of property the bigger the charge is likely to be.      

The Law Commission’s consultation is open until 29 January 2016 and the NAEA will be responding.