Deferred payment agreements: how can care homes protect fee income whilst a property is sold?
The answer is "yes" - but comes with some caveats.
If you are willing to offer deferral of fees until a property is sold, then technically you are offering credit to your resident. You potentially require authorisation from the Financial Conduct Authority and should comply with the Consumer Credit Act. Obtaining this can be complex, expensive and disproportionate.
Fortunately, there is an exemption which operators can utilise called the "low interest exemption". In order to use it, the following conditions must be met:
- the agreement must be secured on land and restricted to a particular class of people i.e. the residents of your care home; and
- the total charge for credit cannot increase during the term of the "loan". It should be no higher than 1% over the base rate of certain listed banks (these are mainly the high street banks); or
- the only charge under the agreement is the above interest rate.
The exemption will not apply to an agreement under which the total repayment amount varies. Our interpretation of this rule is that the total amount should reflect your weekly fees (or shortfall if the local authority are offering a 12 week disregard) for a fixed period.
So how does this work in practice?
Operators can offer deferred payment agreements to residents for a fixed period until they sell their home and can repay the fees. If the fixed period expires and the home has still not sold then either a further period can be offered or the "loan" becomes repayable in full. If the home sells during the fixed period, then the fees will be repaid in full out of the sale proceeds and the balance waived.
To secure the loan, residents should be asked to place a legal charge on their home which will ensure the fees are paid on sale. The costs of this are relatively inexpensive and involve checking the title, entering into a legal charge and placing a restriction on the title at the Land Registry. Operators can ask residents to pay their costs so they are not out of pocket.