In this edition
Developing a New Care Home
A Legal Guide
The trend towards new build
Property and development
The legal process
Introduction
At Elliot Mather, we have a strong involvement in the private healthcare sector, regularly acting for buyers, sellers and funders of nursing home properties and businesses.
Recently, we have seen a noticeable shift in the nature of care home business growth. There has been an increase in the number of care home operators who decide to develop new care homes or substantially extend their premises, rather than purchasing existing operations.
We are regularly told that there is an increasing need for care home accommodation due to the size and ageing profile of our population. Many care operators could increase their capacity through the development of new homes, but have little understanding of the process.
The purpose of this briefing is to explain the process and highlight the legal issues where you may need advice.
The trend towards new build
There have been a number of reasons for this change. Firstly, the number of good quality care homes coming onto the market appears to have reduced. Coupled with this, purchasers have experienced difficulty in gaining bank funding for a purchase, whilst expectations of potential sellers have remained unreasonably high.
Secondly, the purchase of an existing care home comes with a myriad of potential legal and commercial problems. Although a good lawyer, who is experienced in the care home sector, can minimise these risks, the protection often depends upon warranties and indemnities. These are akin to "after-the-event" insurance, in that the protections do not prevent the problems arising, but entitle the buyer to compensation if they do and this is never wholly satisfactory.
Thirdly, no care home (no matter how good) is ever perfect, and the potential buyer always wishes that something, such as the location, room size, facilities etc, was different. Many of the older care homes struggle to meet new regulatory requirements. They are often converted from other uses, such as former hospitals or blocks of flats, and are not structurally suited for the purpose or are only able to provide a particular type of care.
In contrast, developing a new facility offers a way to reduce these risks, allows the care home operator to build exactly according to their specification. Subject to registration and developing an attractive building, they have a ready made business without the cost of acquiring goodwill. The operator uses his or her business skills to properly market and staff the new premises without inheriting any employment problems.
With this in mind, it is easy to see the attraction of flexible, purpose built accommodation which is easier to manage and maintain and which provides a more pleasant living environment.
Location, location, location
Having located a suitable parcel of land, possibly adjacent to your existing care home, the starting point must be proper analysis.
Prior to agreeing to purchase the land it is important to investigate the land to ensure that it is fit for purpose. This includes checking the title to the land to identify anything that might restrict your use. We regularly encounter restrictive covenants limiting the use of land to a "single private dwelling" only. Developing a care home on land with such a restriction would be a breach of covenant, which might restrict or prevent you from raising development finance. Commencement of building works might result in a court injunction being sought against you, which would effectively stop all
development work either temporarily or permanently. However, if the restriction is identified early, you might be able to insure against this risk, particularly if the covenant is very old. The restriction may be unenforceable, although each case turns on its own facts and merits so you would need to assess the likely risk of a claim being brought against the cost of arranging indemnity insurance. It might be more appropriate to apply to the Lands Tribunal to have the restriction removed.
You will need to ensure that all appropriate property searches are carried out, whilst obtaining as much information as possible from your seller. Land can be affected by a very wide range of physical problems and conditions, such as rights of way, tree preservation orders, uncharted utilities and informal agreements with neighbours. The existence of services, such as water, sewerage, gas or electricity running across the land and serving adjoining properties will need to be taken into account. Likewise the existence of a public footpath across the land could hinder your plans, although it is possible to seek to divert such services or public rights of way at your expense.
Development land can also be affected by such problems as being located within a conservation area or comprising (in whole or in part) a listed building. These and many other factors may restrict development of the site, the potential value and the ease of funding the development.
Clearly, it is advisable to consult us at the outset to ensure that all of these issues are best dealt with prior to purchasing the development land, so that remedies can be found at an early stage of the development process.
Ground suitability
Local authorities have a duty to identify land which is contaminated. If the land you are considering is contaminated, the local authority can require the current or previous owner to clean it up at their expense. Problems arise in the case of old contamination, where the party who polluted the land cannot be found. In these cases, the current land owner or occupier can be required to remedy the contamination. Therefore, it is very important to assess the risk of land contamination before agreeing the purchase.
In addition, you should consider the suitability of the ground for the proposed development, as specialised foundations can be very expensive and materially impact upon the viability of a development scheme.
A desktop environmental survey will only reveal limited data as to past land uses. You should consider a detailed ground test of the land by an appropriately qualified surveyor. Indeed this is often a requirement of the planning permission and certainly would be expected by any funder. Unfortunately, these tests are not infallible, as they do not examine the whole land.
Planning permission
It is important to secure an early outline planning permission. You would usually appoint an architect to negotiate with the local planning authority to agree a basic design and the size of the new development. This can then be fleshed out with more detail once outline planning permission has been obtained.
The design and specification of the care home is critical as it will form the basis of the building or development agreement.
Development options
There are two main ways to undertake a new development, either turn-key or custom development. Turn-key solutions, broadly speaking, allow the development company to provide a full service, from the initial ground works to the final fit-out and furnishing. The developer accepts the risk and cost of undertaking the development, until it has been completed. At that point, they hand over the keys to you in exchange for the payment of a fixed sum.
Several construction companies offer a specific service for the development of care homes, even down to finding the relevant land, demonstrating the popularity of this type of development.
If the development involves the extension of an existing care home, it is likely that the option of a turn-key development will not be available.
With a custom development, you would employ the construction company and a team of professionals, including architects, structural engineers etc, either directly or indirectly. You would enter into a main building contract, probably based on the JCT Standard Design and Build contract, which requires the contractor to first design the building and then build it, receiving staged payments from you every four weeks or so. Although the contractor bears the risk during the development, they are paid as the job proceeds.
Financing
The different approaches mean that bank funding must be structured differently. With turn-key developments, the time lapse between making the lump sum payment to the start of its income-stream will be fairly short, particularly if completion is depending upon receipt of Care Quality Commission registration.
With custom development, bank funding will normally be required much earlier in the development process, although a bank may agree to defer some of the loan repayments until the home is operational.
The legal process
The structure of the development will determine the type of legal documentation required. In the case of a turn-key development, the primary document will be a 'development agreement'. This commits you to acquiring the care home for a specific price, provided the agreement conditions are met. These conditions will normally be negotiated individually, but include practical completion of the building, together with delivery and installation of the agreed furniture fixtures, fittings and equipment. As mentioned, it should also include Care Quality Commission registration.
In return the developer will agree to build the care home and provide the internal fittings to an agreed standard. The agreement will include a detailed specification of the care home that you require, so that everyone knows exactly what is to be delivered by the construction company at completion. It should allow for alterations, although this will usually impact upon the price.
Under the turn-key option, you will have little risk until completion when you hand over the money. Provided that you are satisfied that your expectations have been met, you can complete with confidence.
In the case of a custom development, you contract with a construction company to undertake the building. Unlike the development agreement, which is normally negotiated individually, the building contract is usually based upon the industry standard form of contract, with just one or two important amendments. Again, the agreement will provide a fixed price and detailed sets of drawings and specifications.
In both cases, the agreement should include a requirement for the developer or main contractor to obtain collateral warranties and step-in rights from all members of the professional team as well as any subcontractor with design responsibilities.
Managing construction problems
There is always a risk that something may go wrong during the construction phase, for example, the builder might discover ground that needs more substantial and expensive foundations. These are the normal risks of any development and both development and construction agreements will provide for a process of additional payments for unavoidable costs.
However, disputes may arise between the developer or main contractor and the professional team. If the architect refuses to work with the main contractor half way through a job, this would have a major effect upon the schedule and nature of the development.
It is not unknown for the developer or main contractor to cease trading whilst working on a development, leaving the professional team to "melt away" without responsibility.
In the event of a turn-key development, such events are not so damaging, as the developer has a contractual obligation to deliver a building to a certain standard without other necessary pre-requisites. If they do not do so, they are unable to complete. Whilst time will be lost, you would be able to walk away from the development, hopefully with very limited costs.
In the case of a custom development, it is far more damaging if the building is part constructed when all work ceases and a professional refuses to continue work.
If the main contractor ceases trading, you have the option to appoint another to complete the work. This new contractor will need agreements with all professionals. We can help ensure you have the right to require the professionals to finish the work, working with a new contractor on exactly the same terms as before. These step-in-rights would enable you to complete developments with the minimum of delay, despite the failure of the main contractor.
Negligent or wrongful work
There is always a small risk with a new building, for example, perhaps the foundations were not up to standard or inappropriate building materials have been used. Faults in buildings are notoriously difficult to identify at the outset and often do not materialise until several years after completion. After completion, you are protected and have a remedy against the developer or main contractor if they failed to build the home to the standards set out in the development agreement as a contractual liability of 12 years is normally insisted upon. However, this is only effective if the developer remains in business until the fault is found and is able to satisfy any claim. For this reason, it is important to obtain an obligation to maintain appropriate professional indemnity and liability insurance.
It is also usual to take secondary agreements, called 'collateral warranties', with all members of the professional team appointed by the developer. These create a direct liability on the professional, allowing you to recover from the professional, as well as the developer, if the work undertaken by the professional is wrong. Again, these warranties should be effective for a 12 year period and include an obligation to maintain a minimum level of professional indemnity insurance for such period.
Without these warranties, your only option would be action against the developer or main contractor. Whilst this may provide sufficient protection, the collateral warranties add substantial protection. In the event that you sell on the care home within 12 years, these warranties and the rights they grant would be passed to the new buyer.
Conclusion
Undertaking a new care home development is not for the faint-hearted or indecisive. However, with experienced professional support, it does provide an advantageous way of growing your business. As with any entrepreneurial activity, although there are risks, these can be minimised with a methodical approach and sound legal advice and assistance. We would be delighted to help.
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The contents of this briefing are for the purposes of general awareness only. They do not constitute legal or professional advice and readers should not act on the basis of the information included. It is essential to take appropriate professional advice regarding your own particular circumstances.
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