ARCO publishes new Code of Practice for ‘retirement village’ operators

On the 1st November 2015 trade body Associated Retirement Community Operators (ARCO) published a code of practice called The ARCO Consumer Code. This code of practice is relevant to operators of ‘retirement villages’, which are communities for older people where additional services, such as home care, are available on demand for a fee. The properties are typically purchased leasehold and include a service charge.

Whilst in our view a step in the right direction (practices in this sector are often ‘shoddy’ to say the least and the recommendations in the code are helpful in addressing these issues) the code still falls short both in content and in status.

The first thing to understand about this code of practice is that it is not an approved code of management practice under Section 87 of the Leasehold Reform, Housing and Urban Development Act 1993. If it were, then Courts and Tribunals would be formally obliged to take account of what the code says in relation to any disputes being considered.

The code is entirely voluntary and relates to only members of ARCO, which to be fair represents the operators of over 50% of retirement village homes in the UK. ARCO operates no complaints resolution service for residents who feel the code has been broken, and it will only check a representative sample of the properties of each operator to make sure they are complying once every two years.

The code therefore appears to be well intentioned, but toothless.

Now onto the content. The three big issues in relation to properties in retirement villages are exit (or ‘event’) fees, service charges and sinking funds. These three issues are also very interconnected.

The way it works with the leases granted for retirement villages is that when they are sold on, or the owner dies, a fee must be paid – the exit or ‘event’ fee. The amount ranges from 10% to a staggering 30% (charged by companies such as LifeCare Residences) of the initial purchase price.

The argument justifying this charge is that the money goes into a ‘sinking’ fund to pay for major repairs to the property in the future, or towards keeping the level of the ongoing service charge at a minimum. In theory we can see the benefits to an older person, with limited income, of a guarantee of lower charges for the later part of their lives.

The problem is that the amount of the exit or ‘event’ fee does not always correspond closely to the amount deposited in the sinking fund, or the reduction in the service charge, and the levying of an exit fee appears to simply be a profit making venture: you sell 100% of a long lease, then in effect you sell 10% to 30% of it again every 10 or so years. Textbook example of how to legally sell a lease for the same time period over and over again.

The ARCO approach to tackling these big issues is to include provisions in their code of practice obliging retirement home operators to explain to prospective purchasers exactly how much the exit fees will be, what the service charge covers and how it is calculated, and the balance of the sinking fund.

All well and good. But hang on a second, are these not all things that should be clear in the contracts anyway and that any solicitor worthy of the name should be picking up on before purchase and highlighting to their clients? If they are not then the solicitor is at fault. For these reasons we are at this point confused about what the code hopes to achieve which a good quality conveyancer would not.

Some kind of guidance on what represents a fair percentage as an exit or event fee, clear guidance on service charge accounting and what charges should and should not be included, transparency on what happens to the proceeds of exit or event fees, all appear to be things that are required from a code of practice which is robust enough to add something useful to the current regulatory system.

Maybe if ARCO had considered these points then the Government might have been a bit keener about making their code an approved management code under Section 87 of the Leasehold Reform, Housing and Urban Development Act 1993. At present the code, like the trade body itself, appears simply to be ‘window dressing’ for a sector of the property industry with notoriously bad practices.