Later Living: The rise of retirement villages

ONS research shows that the number of those aged 65 years and over continues to increase faster than the rest of the UK population (increasing by 2.3 million between mid-2009 and mid-2019, accounting for 18.5% of the UK population in mid-2019). Improvements in healthcare mean people are living longer and more healthily, resulting in a longer period spent in retirement. The demand for age-appropriate housing has therefore increased, sparking rapid growth in the senior living sector in recent years.

Retirement villages are featuring more prevalently in the sector, offering 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. The call for such villages is being driven by not only a shortage of suitable retirement accommodation, but also by increases in wealth and a mounting focus on wellbeing.

Apartments within such villages are typically sold on a long leasehold basis, with leaseholders paying a fixed management charge during their occupation and a deferred management charge on resale. Recent trends show that occupiers prefer to opt for the choice of paying a reduced management charge during occupation in return for a higher deferred management charge on resale. Deferred management charges are typically being set between 10-30% of the sale price of an apartment. The charge compensates the operator for providing and maintaining the various services and facilities at the village.

Such charges create a long-term sustainable cash flow for investors and are a key component of the retirement living model. It is therefore fundamental that sufficient analysis is undertaken on how this income stream will be taxed, as this goes straight to the value of the freehold. The key question is whether these charges qualify as a “service charge” (as that term is defined in section 18 of the Landlord and Tenant Act 1985), which would result in the service charge regime within that Act applying to the charge.

Lenders taking security over the freehold site and the associated income streams will want to be confident that the management charge is not classed as a service charge, so that it falls outside the statutory protections of the regime and is not open to challenge on the grounds of reasonableness.

Lenders will also want to ensure that the description of ‘rental income’ within their facility agreements is extended to include the management charge to avoid any ambiguity around whether such charges fall within the market standard definition of ‘Tenant Contributions’. Close attention will also need to be paid to how the account provisions operate to ensure that the proceeds from such income streams are not able to leave the lender’s security net.

Charles Russell Speechlys has considerable experience advising lenders in this area and is well-placed to advise on all elements of a transaction (including banking and finance, real estate, construction, planning and tax).

This article was written by Cara Fulker, Jon Bond and Nicola Marriott and. For more information please contact them or your usual Charles Russell Speechlys contact.