Ageing the New Zealand Righthold way: is Leasehold Plus right for the UK?
There are no two ways about it: we are all ageing. The UK population was made up of 1.7 million people over 85 in 2020. By 2045, this is projected to double to around 3.1 million. This is a huge change to the structure of society in a relatively short period and it is imperative that we are ready for it. A key part of that is considering how our housing supply can meet the needs of our ageing population.
At present, our housing market is reliant on those in larger properties downsizing to free up family homes and for this to funnel down the property market to the first-time buyer stock. The problem is that if we do not have the supply of age-appropriate housing for those in the older portion of society, then we are left with an ageing population with nowhere to move on to, stalling the housing market. A large amount of people of all ages will be living in housing that does not meet their needs and it’s likely that our older population will require more in-home support as a result, which will be difficult to achieve when the care system is already stretched.
The UK retirement market is trying to combat this by promoting integrated retirement communities (IRCs). These communities offer people the chance to maintain their independence whilst enjoying the benefits of being part of a community of like-minded people with access to on-site social and healthcare facilities. Housing within such communities is typically sold on a long leasehold basis, sold on a shared ownership basis or rented to their residents. Leaseholders pay a management charge during their occupation and potentially a deferred management charge and/or exit fee on resale depending on the lease terms.
The lease is granted by the operator to a buyer and then sold on as with any other property on the UK housing market. This model isn’t necessarily the best for the IRC model:
- It lacks any flexibility and we know that people are less likely to consider IRC’s where they are buying on terms that benefitted the original purchaser and which may not benefit them. In addition, operators do not have the ability to keep up with market preferences.
- These properties might have good resale prospects but the burden in these properties often falls to family members to help with arranging this and liaising with professionals.
The fees and charges applicable can seem confusing and overwhelming to residents.
- Residents are likely to have changes to their needs and to therefore require accommodation with more support (for example assisted living/nursing facilities). This can seem daunting and costly as their needs become more urgent. Often the procedure of marketing and selling a property will not move as quickly as required resulting in the resident paying costs on two properties.
New Zealand has reconsidered how the property system works and come up with an interesting, and successful, solution. You might be familiar with freehold and leasehold as the two ways of holding property here, but New Zealand has introduced a system of housing called “righthold”. This system utilises licences to give individuals the right to occupy an IRC property. They do not own the property in the sense that you own a house or flat in England and Wales, but they have a right to occupy and this lasts until they sell it back to the operator for a fixed cost.
The righthold licences in New Zealand are working so well that 15% of the over 65 population has this type of property ownership right. Whilst it’s by no means the majority, the New Zealand model has got to be doing something right. The government in New Zealand is supporting these schemes by providing legislation which is the backbone of the licences. It gives certainty to those living in these communities that their occupation is guaranteed, their rights are clear and the cost is somewhat regulated.
Whilst the UK was described at the recent ARCO (the main body representing the IRC sector in the UK) conference as being 20 years behind New Zealand in this respect, ARCO is now proposing a set of reforms which it calls “Leasehold Plus”. The hope is that it will better protect consumers and allow the sector to grow. This model would be a halfway house: an adapted leasehold title supported by a code of conduct which would be opted into by the housing providers. The lease would be granted to a resident, and then when they want to sell the property, the operator (as opposed to a new occupier of the property) will buy back the lease. This prevents the delays and risks currently faced by the UK housing market.
The predominant reason this does not happen now is that there is stamp duty land tax (SDLT) payable when the lease is resold to the operator which the operator would have to pay (as well as stamp duty land tax payable by the new purchaser when the operator grants a new interest). This SDLT cost for the operator would no doubt be passed on to a future purchaser, making the housing more expensive. There are also potential VAT implications for developer/operators, as they would usually be making additional exempt supplies on each new grant.
A leasehold plus system would be different to the usual leasehold model we currently have. The benefits to operators and tenants are clear:
- Each new tenant can have bespoke lease terms because each lease is between the operator and the tenant, meaning tenants can arrange the deferred fees and service charge in a way that suits them, their finances and their family. Under the current model, the terms of the lease cannot be varied on resale.
- There would be greater legal certainty and regulation of event fees and service charges which currently are not subject to specific regulation under UK law. This may help address concerns that such charges are unpredictable.
- The new lease to each tenant has the additional benefit of consumer protection laws applying where they would not after the first sale of a standard leasehold property.
- Dispute resolution would be built into the leases or a code of conduct which would give tenants easier, faster and cheaper methods of dealing with issues than going via the often too slow and complicated property ombudsman.
- The burden of resale is not on the customer.
The operators also benefit from this model:
- The operator would retain control over the marketing of the property on resale, retain control over the tenants and retain greater control over their brand value (for example through having the opportunity to explain their fee structure to the new tenant so that the tenant is fully aware of, and understands, the terms).
- The buyback model where all property is sold back to the operator is appealing to shareholders who benefit from the uplift.
- It is also being discussed whether enfranchisement should be removed. We understand that some care and IRC operators do have concerns about other operators taking control of their sites by way of enfranchisement. Whilst we are not aware of it happening, it is possible.
- Again, the new lease for each tenant is beneficial to each operator as it means they can allow for and work with changing fee models and keep up with the market.
From a lender perspective, consideration would need to be given to (amongst other things):
- The circumstances in which the operator would be permitted under the finance documents to buy-back a lease and vary the agreed pro-forma lease terms on the grant of a new lease after buy-back.
- The level of control over, and the application of, the disposal proceeds on resale.
- Whether the Leasehold Plus model is to comprise a similar security structure to that adopted by the New Zealand model. Under that model, a statutory supervisor (who oversees each village) holds a first ranking mortgage over the village assets to protect amounts owing to residents, which is a constraint on lending to operators because the lender can only take a second ranking mortgage. Development lending is therefore more common in New Zealand due to the impact on the amount that can be lent when the village is operating.
Subject to the above, we think that lenders would be receptive to Leasehold Plus given that it seeks to promote growth in the sector by removing some of the current problems with traditional tenure models.
So why is it not here yet? Well, in order for operators to pick up this new model there would need to be essential and significant statutory changes to make it work. For instance, if the model is based on buyback of the lease by the operator, then the SDLT rules should allow for a specific relief. It would not be unreasonable to expect HMRC to accommodate this type of scheme given that HMRC have been flexible in other areas such as Islamic finance. Similarly, the VAT rules will need to accommodate this, or taxpayers will need to structure to maximise VAT recovery. The Building Safety Act might also add backdoor additional charges at present and who incurs these needs to be considered.
The other issue is the long-term investment benefit. In the New Zealand model and the Leasehold Plus model, the financial benefit is with the operator long term because they reap the benefit of any uplift in prices over time. Great for investors, but for those whose home is their retirement fund it might not work.
To address the shortage of age-appropriate accommodation in the UK, we need more investment in, and development of, retirement housing designed with the needs of the population in mind. The concept fits nicely into schemes like Otterpool Park in Folkestone where 10,000 houses are being built within the next eight years and as we need housing for upwards of 1.4 million people in the over 85 category by 2045, the demand for retirement housing has never been more important.
ARCO has been discussing this new model for some time and it was stressed at their most recent conference that developers need to work with legislators to get the fundamental background to a Leasehold Plus system in place so that the UK has a plan for those 1.4 million people.
Charles Russell Speechlys has considerable experience advising developers and lenders in this area and is well-placed to advise on all elements of a transaction (including real estate, construction, planning, corporate structuring, joint ventures, banking and finance and tax).
This article was first published in ReactNews and can be accessed by clicking here.