On 1 April 2015 a number of significant changes made to the law by the Care Act 2014 (“the Act) came into force.
The heralded cap on care costs arising from recommendations made by the Dilnot Commission will not come into force until 2016 (s15 of the Act). There are however, significant changes which have come into force, including changes to enforcement powers, in particular, the repeal of s22 and s24 of the Health and Social Services and Social Security Act 1983, and s45 of the National Assistance Act 1948 and changes to the deferred payment agreement scheme.
As a result of which you may well need to consider whether or not a Local Authority can recover unpaid fees and how it seeks to recover those fees, or whether an individual should agree to the terms of a deferred payment agreement they have been offered by their Local Authority. I discuss below some of the important changes you need to have in mind when offering advice to your clients.
The previous system
Until 1 April 2015 a Local Authority was entitled to protect a debt arising from unpaid care home fees by securing a legal charge against a resident’s property. The Local Authority could secure the debt by simply making the relevant application to the Land Registry. There was no need to secure a judgment for the debt in advance.
The application could only be challenged by the debtor filling an objection to the registration of the charge, which would be referred to the First Tier Tribunal Property Chamber for determination. The Tribunal only has jurisdiction to determine if any liability exists, not the extent of the debtor’s liability. Consequently the objection was usually dismissed. If the debtor disputed the extent of their liability the only remedy was, either the Social Services Complaint system or a complaint to the Local Government Ombudsman. Such a challenge was rarely successful, and would not lead to a removal of the charge without the payment of the purported debt.
(ii) Deferred Payment Agreement (“DPA”)
The Deferred Payment Scheme was introduced by s55 of the Health and Social Care Act 2001.
The Deferred Payment Scheme provided a Local Authority with the power to enter into an agreement with an individual to defer recovery of care home fees until the individual’s main or only home was sold or until 56 days after the resident’s death (whichever was the latest). This was often viewed as similar to a bridging loan. The intention was that the property would be sold.
A DPA was not usually offered to a resident of a care home who had sufficient income or capital assets but did not wish to use or sell them to pay the fees or where the resident disputed their obligation to meet their care home fees i.e. disputed the financial assessment.
The DPA itself was a simple contract between the individual and the Local Authority for the repayment of any unpaid fees. It did not involve any other beneficial owner of the property or the potential beneficiaries of the individual’s estate. If the sum was not repaid prior to or within 56 days of the individual’s death the Local Authority would have to seek recovery of the sum from the individual’s estate. Recovery of the debt and any application for an order for sale, was often hotly disputed by the other owners of the property or those entitled to inherit the property.
The changes and their impact
After 1 April 2015 a Local Authority will only be able to recover unpaid care home fees by securing a judgment debt either in the County Court or the High Court (s69(1) of the Act). The Local Authority will be able to enforce any unsatisfied judgment debt in the usual way, including, but not limited to, an application for a charging order or order for sale.
A Local Authority is not entitled to a judgment debt for unpaid care home fees, however, if the Local Authority could have entered into a deferred payment agreement with the resident in accordance with the Care and Support (Deferred Payment) Regulations 2014 but did not do so, unless a DPA was offered and the individual refused to enter into the deferred payment agreement (s69(2)).
It is not clear from the statute whether or not this is intended to refer to a situation where the Local Authority must offer a deferred payment and does not do so or a where the Local Authority has a discretion to offer a deferred payment agreement and does not do so.
The principle benefit of this change is that if an individual wishes to challenge the Local Authority’s decision that they are liable for unpaid care home fee or wishes to dispute the amount they have been charged, they will now be able to do so by putting in a defence to the claim.
A difficulty I can foresee is that this new right to defend a claim will necessarily require a County Court or High Court judge to determine if the individual is liable for the unpaid fees. It is unlikely the County Court judiciary (where these issues are most likely to arise) is properly equipped to deal with the nature of such challenges.
Other significant changes to be aware of include:
(a) If the claim is successful, the Local Authority can recover the legal costs incurred in recovering or seeking to recover the debt (s69(5)) – this was not relevant previously as the Local Authority simply registered the charge.
(b) The Act increases the time limit for the recovery of a debt comprising of unpaid care home fees from three years to six years from the date the sum becomes due. Note: This only applies to sums that fall due after the commencement date. If the fees arose before the commencement date, the three year time limit will still apply (s69(3)(a) and (b)).
(ii) Deferred Payment Agreements
The detailed rules governing DPA’s are contained in the Care and Support (Deferred Payment) Regulations 2014. The Regulations provide for circumstances where a Local Authority must offer a DPA (regulation 2), circumstances where it may offer a DPA (regulations 3) and circumstances where it must refuse to offer a DPA (regulation 4 and 11).
A Local Authority must offer a DPA where:
- The individual has been assessed as having eligible needs that should be met in a care home;
- The individual has a beneficial interest in a property which is their only or main home;
- The property is not to be disregarded in the financial assessment i.e. it is not occupied by their spouse/partner or a dependent relative;
- The individual does not have capital or savings (other than the property) which exceed the financial limit (currently £23,250);
- The Local Authority can secure a first legal charge on the property.
A Local Authority may offer a DPA where:
- The individual has been assessed as having eligible needs that should be met by provision of care in a care home or supported living accommodation (if the supported living accommodation is to be occupied pursuant to a licence or tenancy);
- The Local Authority can secure a legal charge on a property in which the individual has a beneficial interest (but not a first legal charge) or the individual can offer other security which the Local Authority considers sufficient to secure payment of the deferred amount.
Whilst this is not provided for in the regulations is also suggested that a Local Authority has discretion to offer a DPA where the individual faces the prospect of having to sell their home to pay for care. For example, if:
- The individual has savings or capital in excess of the upper financial limit but few accessible assets;
- The individual’s property is disregarded in the financial assessment as it is being occupied by a spouse/partner or dependent relative.
The Act also provides at s.34(2)(b) for an additional to two situations where a Local Authority may now agree to offer a DPA. In both instances the DPA will be a loan to the individual, the repayment of which is deferred in the usual way. As these agreements will be loans they may be regulated credit agreements subject to the Consumer Credit Act 1974 and the Financial Services and Markets Act 2000:
- A self funder– where the individual is not assessed by the Local Authority as having eligible needs but the individual wishes to secure care and support in a care home setting, supported living or extra care scheme but would not be able to afford to do so without selling their home;
- To meet top up fees (s.30(2)) – where the individual is assessed as eligible for a placement in a care home setting but expresses a preference for a care home which is more expensive than the care home the Local Authority intends to provide, the Local Authority can offer a DPA for the additional cost.
If the individual is a self funder, the individual may enter into a contract with the care home, but the Local Authority agree to pay the fees on their behalf and the repayment of those fees is deferred in the usual way. Alternatively, the individual may ask the Local Authority to arrange the placement on their behalf. The benefit of this option is that the individual may be able to benefit from any block contract rate which the Local Authority can secure. The disadvantage is that this will slow down the rate at which the individual’s care home costs will meet the magic £72,000 mark to be introduced next year.
In all circumstances, the individual must:
- Consent to the DPA (personally or through their proper representative);
- Consent to the terms and conditions of the DPA (see regulation 11); and
- Be willing and able to insure the property or asset against which the charge is secured.
Other significant Changes:
(a) A Local Authority must obtain adequate security for the DPA:
Under the new scheme the Local Authority may not enter into a DPA unless adequate security can be obtained. It is intended that security is principally provided by way of a first legal charge on the property. The Local Authority may however agree to a charge which does not have priority or to security provided by another asset if there is sufficient equity to secure repayment of the deferred amount, i.e. a charge on the land rather than the property, a valuable piece of art work.
The charge must be by way of legal mortgage and must apply to the whole title. Consequently, the Local Authority must, were applicable, secure the consent of any other person with a beneficial interest in the property or who may be able to prevent an order for sale being secured i.e. anyone with matrimonial home rights, to the charge being registered against the whole title (regulation 4(1), (4) and (5)). This means that all joint tenants must agree to be bound by the DPA and that it will take priority over their right of survivorship, and tenants in common must agree that any agreement previously made as to their respective shares in the property is deferred until after repayment of the deferred amount. The advantage of this is that the equity limit (see below) will be 90% of the whole asset. The disadvantage is that if any of the other owners of the property do not agree to defer their interest in the property (or other asset), the Local Authority is entitled to refuse to offer a DPA.
(b) A Local Authority can charge interest and administrative charges (s35):
The regulations specify the maximum interest rate the Local Authority is entitled to charge (regulation 9)i. The rate is fixed for 6 months on 1 January and 30 June. The current rate is 2.65%. The Local Authority is not required to charge the maximum rate but cannot apply a higher rate and must apply the same rate to all DPA’s it enters into. Interest will be charged on a compound bases and will continue to accrue until the whole sum has been repaid even after the equity limit has been reached (see below) or no more charges are being deferred.
If the Local Authority is required to recover the amount due as a debt in the County Court, the Local Authority will be entitled to use the higher County Court interest rate after the claim is issued.
- Administrative costs relating to the creation of the DPA:
The Local Authority is entitled to recover the costs it has expended in administering the scheme. The regulations (regulation 10) specify which costs can be charged for.
Each Local Authority must publish a list of administrative charges that it applies and must, before the agreement is entered into, notify the individual of the likely charges which will be levied in respect of creating the agreement and registering the charge and notify the individual of its current charges and, before seeking payment of any administrative charge, must provide the individual with a statement setting out the charges and what they are for (regulation 10(5)). The Local Authority can charge interest on any unpaid administrative charges.
(c) The introduction of an equity limit:
The equity limit or the amount a Local Authority can loan an individual is set at the value of the asset (the market or surrender value) which provides the security for the DPA, less 10% to represent cost of sale, £14,250 and any encumbrance which ranks in priority to the Local Authority’s charge (regulation 5(5)).
When making an offer of a DPA the Local Authority must advise the individual of the valuation for the property or alternative security, and the equity limit so the individual can be aware of how much care the Local Authority will fund. The Local Authority is also encouraged to re-evaluate the equity limit on a regular basis if there are changes in the market. The individual is entitled to request an independent valuation of the asset if it disputes the Local Authority’s valuation.
(d) Notification of deferred amount:
The Local Authority must send the individual a statement every 6 months setting out the deferred amount which has accrued during the previous 6 months, the total amount that has been deferred to date, the percentage of the equity which the total deferred amount represents, and an estimate as to when the equity will be exhausted.
(e) A new automatic time for repayment:
The DPA must be repaid in full on:
(a) the sale or disposal of the property or asset against which the charge is secured. It will of course be a condition of the charge that it is discharged in full before it can be removed.
(b) 90 days after the death of the individual to whom the DPA relates, or such longer time as the Local Authority may permit.
As a property practitioner most of these changes make perfect sense. The new rules are, on any view, far more workable and potentially fairer than the previous scheme.
The Local Authority can no longer unilaterally secure a charge against an individual’s property in circumstances where there was at best an inadequate system for challenging any financial assessment or valuation of a property undertaken by the Local Authority. The new DPA scheme should also avoid many of the disputes that previously arose after death of the individual between the Local Authority and beneficial owners of the property or beneficiaries of the individual’s estate.
The benefit of the new enforcement system is that, if necessary, the resident will have a proper forum to dispute the debt claimed by the Local authority. I am concerned however that the County Court system is ill-equipped to deal with such disputes, as most Judges sitting in the County Courts will have limited knowledge or experience of the Local Authority financial assessment and charging schemes if any. There is also the difficulty of securing funding for such litigation, if the individual’s only asset is their home.
The advantages of the new DPA are likely to be uncontroversial where the individual is the sole legal owner and there is no one else in residence. It will also allow the individual to pay a top up for a more expensive care home (without a DPA this must be paid by a third person). It also means that where there are multiple owners, all interested parties will know from the outset of the DPA that the deferred amount has been secured by a charge against the property and that any sum advanced by the Local Authority will take priority over their interest and the repayment can be enforced in the same way as a legal mortgage. It also has significant advantages of other forms of finance especially equity release schemes.
But it is likely to lead to difficult questions where there are joint owners of the property or beneficiaries of the estate who wish to live in the property after the individual death. Unfortunately, clients faced with this situation are unlikely to appreciate the niceties and potential impact of the DPA on their own property rights unless they seek independent legal advice. They will also be asked for their consent at a time when there will be huge emotional pressure to consent to the DPA which is offered, if that is the only way for them to secure the care the individual needs. There will also be pressure to consent within the initial 12 week disregard period otherwise the individual will become liable for the care home fees.
Some difficult questions for joint owners asked to consent to the DPA:
- Should a joint owner(s) to agree to a DPA to pay for the cost of care provided in a care home, if they do not know how much that care will ultimately cost? The total deferred amount could easily exceed the value of the individual’s interest in the property and if it cannot be repaid by the joint owner(s) from any other assets on the death of the individual, the joint owner(s) may be required to sell the property to pay the amount due.
- What happens if the remaining owner(s) want to downsize? They will only be able to do so if they can also repay the DPA from the proceeds of sale. Who will own the downsized property? In what share? Will there be sufficient equity in the new property for a new DPA?
- If the DPA is repaid from the sale of the property how are the remaining proceeds of sale to be shared between the joint owners? If the individual agrees to the remaining proceeds not being shared equally there is a risk the Local Authority will argue that the individual was entitled to an equal share and that the individual has deprived themselves of capital.
- What if they themselves need to go into a care home in due course and cannot finance it without a DPA?
One option that may resolve some of these difficulties is to stipulate that the equity limit is limited to the value of the individual’s share of the property (allowing for any interest that will accrue). But what happens when that limit is reached? How will the cost of care be met after this limit has been reached?
Another option is to ensure that the DPA includes a stipulation that if the deferred amount is repaid from the proceeds of sale, the deferred amount is repaid from the individual’s interest in the proceeds of sale first and the joint owner is entitled to any remainder.
The intention of the government when making these amendments was that no one should be forced to sell their home in their lifetime to pay for their care. Having considered the impact of entering into a DPA on any other beneficial owner of the property or beneficiary of the estate who the individual wishes to live in the property after their death, a significant question mark remains as to whether the amendments brought in by the Act have achieved the Government’s aim. The individual entitled to the care may not have to sell the property in their lifetime, but it is highly likely the other beneficial owner or a beneficiary of the estate will.
Final Note: if you have any clients in care homes who wish to take advantage of the changes to be brought into force in April 2016 they will need to have an assessment by the Local Authority of their care and support needs under the Act prior to April 2016, so that a shadow care account can be created and the calculation of their accrued care costs can start from the earliest possible moment.