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There has been some recent publicity in the press about troubles experienced by sellers of retirement flats. An example given is a substantial drop in value of a retirement flat in Folkestone and the high interim costs suffered by the seller. The seller, son of a deceased owner, failed to sell after more than four years despite the flat being in good condition and in an area that has apparently experienced a healthy rise in property values overall.

It is difficult to know how widespread this issue is. The article at hand refers to mixed conclusions drawn by the Elderly Accommodation Council who have researched this issue. Although the Folkestone example may be an extreme one, it presents good cause to look more generally at the issues that affect sales and purchases of retirement flats.

When looking to purchase a retirement flat in a managed block, and particularly when buying a flat in an ‘assisted living scheme’, it cannot go amiss for a purchaser to take the time to look into some key factors. Even if the risk of difficulties cannot be dispelled, at least one can try to take steps to go in with eyes open as to the risks involved when purchasing this type of property and the sort of things that may cause concern for future buyers when the time comes to sell.

Some of the key factors are:

1. Service charge levels. This was perceived to be the main cause of a lack of interest in the Folkestone property and can be particularly pronounced with ‘assisted living’ schemes. Assisted living arrangements by their very nature can require communal facilities and catering, 24 hour warden and other staffing needs which are expensive to maintain compared to unassisted living accommodation. The issue here may not be so much that these are expensive services per se, but more the risk of substantial increases in the service charges over time.
2. The management structure: Check in advance who owns the freehold and who manages the scheme. Even if a purchaser is reassured by the existing situation, they should bear in mind that the freehold, along with responsibility for managing the scheme and collecting service charges, may in the future be passed on to someone else. The new freeholder could, for example, manage the scheme via a management company controlled by a private equity fund which may be more likely to view its involvement as a temporary investment opportunity rather than seeing a need to prioritise the cost effectiveness for residents.
3. The hidden costs of what we shall call here the ‘resale gap’: It is easy to underestimate the overall costs connected with the flat whilst dealing with the administration of the deceased’s estate and then marketing the property. These will include council tax, ground rent and service charge payments to the freeholder or management company. The Folkestone seller fell foul of the council tax empty homes premium. This allows local authorities to increase the council tax charge after a property is empty and substantially unfurnished for 2 years (since 1 April 2019 this charge can be doubled). From April 2020 councils will be entitled to triple the charge after a home has been empty for 5 years. Avoiding this charge by letting a retirement flat out during the resale gap may not be an option for practical reasons and is likely to be subject to restrictions imposed by the seller’s long lease.
4. Costs payable by a prospective buyer: It is not uncommon for retirement flat leases to require the buyer to pay to the freeholder a percentage (i.e.1-2% and in some cases more) of the sale price or probate value as a contribution to a service charge reserve fund.
5. Costs of seller’s packs from the management company or freeholder: The freeholder will often charge the seller a fee for issuing management and service charge information and replies to freeholder enquiries. These fees can sometimes seem unjustifiably high.

What steps can a purchaser take to try to ascertain the risk?

1. A purchaser should be aware that the market for retirement flats will, even in absence of other factors, be narrower than the general property market. This is due to the minimum age restriction on buyers and the fact that mainstream lenders are less likely to agree to lend against retirement flats.
2. A purchaser would do well to take independent valuation advice before agreeing a purchase price with the developer or other seller. They should be wary of ‘early bird discounts’ offered by developer sellers when purchasing a flat in a new scheme. These may not necessarily result in a price below true market value.
3. Although a response cannot guarantee the longer term outcome, a purchaser may wish to try to find out as much as it can from the freeholder or managing agent as to the likelihood of even reasonable increases in the service charges over time. This could be especially relevant when purchasing a flat in a new scheme and where a long service charge history may not be established.
4. A purchaser may wish to check marketing and eventual sale prices for equivalent flats in the same block if possible. The Land Registry will note the sale price against the registered title. Therefore it may be possible to find out whether any other flats have sold within the last couple of years and to check the sale prices online. A trend towards lower resale prices over time across the flats could be a warning sign.
5. A purchaser should try to find out how transparent the service charge structure is. Will accounts, receipts and detailed statements be made available for inspection, whether in practice or as provided for by the relevant lease?

Hannah Collins is a Commercial Property associate in our Enfield office.