Deferred payment agreements

Following the recent ECA series of articles on capital disregards, David Coldrick of Wrigleys Solicitors tackles a ‘pseudo’ disregard – under Section 55 Health & Social Care Act 2001.

The ‘deferred payment agreement’ has some similarity to the NA(AR) Regs disregards. It is not a capital disregard contained within the NA(AR)Regs. It is a loan facility, available to residents from local authorities, and a creature of statute.

A decision will often need to be taken as to whether or not to take advantage of the loan facility at the same stage as considering whether or not the capital disregards apply to a resident’s capital. It seems appropriate, therefore, to address it in the same general context.

What is a deferred payment agreement?

The explanatory notes provided as the Health & Social Care Act 2001(HSCA 2001) progressed through Parliament, stated: “The effect of this clause [Section 55 HSCA] is to make it possible for people going into care to defer selling their homes in order to pay for their care until after they leave the care home or when they die. In practice, the local authority makes a loan to the resident and recovers the money from the estate when the person dies or leaves the care home.”

Government spin in the general media suggested, contrary to this formal explanation, that residents would no longer need to sell their homes to obtain long-term care provision. In fact, as the explanatory notes make clear, all Section 55 does is cause a delay in the local authority making a recovery of fees it agrees to pay in the meantime.

Section 55 of the HSCA 2001 is headed: “Power for local authorities to take charges on land instead of contributions.”

When a means-test assessment has been completed and it has been determined that a resident does not have enough income and capital, excluding their main/only home, to meet their care-home fees (that is, they are below the upper capital limit) then deferred payments may be offered by a local authority.

The difference between what a resident is assessed as being able to pay from their means-tested income and capital, including the former residence, and the amount the resident would be assessed as being able to contribute if their main or only home was not taken into account is deferred.

To assist local authorities, central government makes an annual, ring-fenced grant, which is intended to rise gradually as the facility is taken up. The aim is for local authorities to reach equilibrium of costs and repayments at an unspecified date in the future.

When does the possibility of obtaining a deferred payment agreement become relevant?

Under the NA(AR)Regs and the CRAG interpretation of them, it is clear that:

  • Unless a person is not going to return home then their residence should be disregarded. This is to enable the temporary resident to re-enter the community. That is in accordance with what is generally perceived to be best for the resident. It is also in line with government policy. See the commentary on NA(AR) Regs Schedule 4 paragraph 1 in this chapter;
  • If a relevant person, such as a spouse, still lives on in the family home it will be also disregarded. See the commentary on NA(AR) Regs Schedule 4 paragraph 2 in this chapter. Other disregards may potentially apply depending upon the circumstances.

This combination of mandatory disregards means that a pre-emptive assessment of the residence should not occur. A person with a short-term need should not be threatened with an assessment for care fees based upon the value of the family home.

If a person becomes a permanent resident, because it transpires that they need long-term care, subject to the relevant disregards, their former residence will generally need to be sold. That will often be when the temporary 12-week residential property disregard contained within NA(AR) Regs Schedule 4 paragraph 1A expires.

can be entered into after the expiry of the mandatory disregards.

There will usually be little point in the resident leaving their former home vacant, at least after expiry of the disregards. The former residence will be subject to rapid dilapidation and depreciation, and a vacant property is a high insurance risk. Only if it can be let out at a good rate, or if the property market is booming, might it be appropriate to retain it. Letting out a former residence does not trigger any capital disregard.

While letting a property is an option, it can be problematic, especially if it needs bringing up to modern standard. Letting is also subject to increasingly complex regulation. Letting agents, who are practically essential especially for the inexperienced landlord, charge for their services. A resident who is a landlord will also be liable to both make appropriate tax returns and pay tax upon net rental. Good tenants are sometimes hard to find. Bad tenants are easy to find and can ruin a property.

For most residents the psychological importance of keeping on the family home itself ends when they finally go into care and accept their situation. However, the importance of the family home itself converts into the importance of protecting its value for the resident’s heirs. The deferred payment agreement does not achieve that. It is simply an interest-free repayable loan.

So when might a deferred payment agreement be relevant? In some cases, where a person lived with the resident, who is not one whose occupancy gives rise to a disregard of the resident’s former residence, then the facility may have some value. It relieves the pressure upon the occupant to find new accommodation. However, the relief given to the third party may only prove to be temporary until the ‘exempt period’ ends. That is when the resident dies. After that, the local authority can enforce its interest in the property unless some other arrangement has been made, which was contained within the terms of the specific deferred payment agreement. It remains to be seen whether or not local authorities will be flexible.

Terms of the deferred payment agreement

A form of deferred payment agreement, which local authorities may consider using, is referred to in the CRAG paragraph 7.018. The CRAG itself offers no advice on the application of the agreements. The CRAG also indicates that: “The use of this draft legal agreement is not obligatory, and that the agreement only applies to the placing of a legal charge.”

The draft may be obtained from the specific Department of Health website address stated in the CRAG at paragraph 7.018 (the address is subject to change, and therefore not listed here).

Despite the comments in the CRAG, any local authority choosing to depart from the suggested draft would need to ensure it had a very good reason for doing so. But on the positive side, it indicates that flexibility is important.

Advice to be given to the resident by the local authority prior to entering into a deferred payment agreement

The draft agreement issued by the Department of Health states that: “The resident has been advised by the Council to seek independent legal and financial advice before signing.”

I consider that inadequate. As a matter of professional ethics, the local authority solicitors must ensure that the resident has not only been given an opportunity to seek independent legal advice, but has actually done so. There is a serious potential conflict of interest between the local authority and the resident. That is not resolved by the mere opportunity to take independent legal advice. Local authority solicitors acting in such a conflicts situation are likely to face disciplinary action by the Law Society if they fail to ensure that a resident has taken appropriate independent legal advice.

Specialist independent financial advice is also a sensible prerequisite before a resident enters into a deferred payment agreement. Neither the resident nor the legal adviser can be certain that rounded financial advice, covering all other possible means of payment apart from a deferred payment agreement, could not have created an improved financial situation for the resident.

Department of Health Advance Notice: September 2001 observed that:

  • Residents should be made aware of their entitlement to benefits by the local authority. (The local authority should take a holistic, helpful approach. The resident cannot be expected to be familiar with the system.);
  • All must be in writing. (This is primarily to avoid lack of clarity and disputes. How else could it be proved that such a complex agreement had been reached?);
  • The local authority must also ensure that the resident understands what they are committing to. (That reinforces the professional ethics position in respect of the necessity of independent legal advice. It implies that such advice must actually be obtained by the resident or by the person legally responsible for handling the resident’s financial affairs.)

The detailed provisions of HSCA 2001 Section 55

HSCA 2001 Section 55(1) states:

“(1) Where a person (‘the resident’):

(a) is availing himself of Part III accommodation provided by a local authority, or is proposing to do so, and;

(b) is liable, or would be liable, to pay for the accommodation (whether at the full standard rate determined in accordance with section 22(2) or 26(2) of the 1948 Act or at any lower rate),

the local authority may enter into a deferred payment agreement with the resident.”

HSCA 2001 Section 55 (2) states:

“(2) The relevant authority may by directions require local authorities, where:

(a) they provide or are to provide Part III accommodation for a person falling within subsection (1) (‘the resident’), and;

(b) any conditions specified in the directions are satisfied; to enter into a deferred payment agreement with the resident.”

HSCA 2001 Section 55(3) states:

“A ‘deferred payment agreement’ is an agreement whereby:

(a) during the exempt period the resident will not be required to make payment to the authority of any relevant contributions in respect of periods (or parts of periods) falling within the exempt period, but;

(b) the total amount of the relevant contributions shall become payable to the authority on the date on which the exempt period ends, and;

(c) the resident will grant the authority a charge in their favour in respect of any land specified in the agreement in which he has a beneficial interest (whether legal or equitable) for the purpose of securing the payment to the authority of the total amount payable to them as mentioned in paragraph (b).”

HSCA Section 55 (5) states:

“The provisions of any deferred payment agreement and any such charge as mentioned in (3)(c):

(a) shall be determined by the authority in accordance with any directions given by the relevant authority; but;

(b) shall secure that the agreement and any such charge may be determined by notice given to the authority by the resident on payment of the full amount which he is liable to pay, as mentioned in sub-section (3)(a) down to the date of the payment.”

A number of points may be made arising from the wording of the statute:

1. Accommodation provided by a local authority. On the face of it, this only applies to council-owned homes where the local authority is truly ‘providing’ the accommodation but by virtue of HSCA 2001 Section 59(3) it covers provision paid for through a local authority. However, under that same section, it is limited to cases where the local authority has the power to make such provision in the first place;

2. The local authority may enter into. The facility is not compulsory for either the local authority or the resident. Some local authorities may possibly choose to ignore its existence. HSCA 2001 Section 55(2) may however be used to make it compulsory upon the local authority;

3. The arrangement is to be an ‘agreement’ between the parties. Either party, again subject to the possible operation of HSCA 2001 Section 55(2), may not wish to enter into an agreement. It is therefore not compulsory for the resident to agree to any proposed facility put to them by the local authority. Any suggestion of compulsion or of care only being available upon agreement to the facility should be rejected and probably a formal complaint should be issued against the local authority. The meeting of a resident’s assessed care needs cannot be made contingent upon such an agreement;

4. HSCA 2001 Section 55(1) refers to the agreement being made ‘with the resident’. A person acting under a registered enduring power of attorney or as the resident’s receiver may agree to effect an agreement on the resident’s behalf. The authority of the Court of Protection is necessary in cases involving receiverships. An attorney and possibly a receiver may possibly be held liable to account for any loss if a more appropriate course of action should have been considered. They must take independent advice to avoid this potential problem.

5. The references to the resident ‘availing himself of Part III accommodation’ restricts the availability of the facility to residents who are applying for local authority assistance. The deferred payment facility is not available to a privately funding resident. An interest free loan from a local authority, based upon the value of an unsold property, might otherwise be an attractive payment option.

That is subject to the negative considerations referred to above relating to vacant properties. In effect, until a resident has run out of cash or other investments, and is just left with the value of his property, the deferred payment scheme is not available;

6. Under HSCA 2001 Section 55(2) the Secretary of State for Health can issue directions to require local authorities to provide the deferred payment facility. That is where the local authority is responsible to fund/part fund a resident’s care, if the ‘conditions’ specified in the directions are met. This indicates that some local authorities might be reluctant to offer the deferred payment facility. Perhaps they might prefer the ‘collection’ route offered by Section 22.HASSASSA 1983 charges instead? Perhaps they might not want the administrative hassle of the scheme? Perhaps local authorities never liked the idea in principle?

7. The ‘conditions’ referred to in HSCA 2001 Section 55(2)(b) relate to the willingness of the parties to agree terms in relation to a particular property. The property would need to amount to suitable security. However, the conditions may also perhaps operate as a useful ‘opt out’ for any local authority faced with somehow ‘unreasonable’ demands for deferred payment. That might, for example, arise if unsuitable security is offered. It should be noted that the ‘conditions specified’ are those within the directions and not amid any terms a local authority might seek to impose as, for example, a ‘standard contract’. Thus any adviser who feels his client would benefit here will need to familiarise himself with the directions;

8. The definition of a deferred payment agreement restricts it to the making of loans fully secured upon interests in land. It is also restricted to land owned by the resident. The resident must be capable of granting a charge to the local authority. It cannot be granted by a resident over a trust interest or other interest, which does not amount to their own property, which they cannot charge of their own volition. In cases where there is net equity but another charge exists arising from a mortgage or other lender, the local authority will need to check the situation very carefully and bear in mind the rate of interest that the commercial lender will be charging. That will be a first charge upon the property;

9. The issue of associated legal costs is clouded. The Department of Health Guidance (Advance Notice, September 2001) and the draft deferred payment agreement both note that local authorities may ask residents to cover the costs of land registry searches and other such legal expenses. There is no clear statutory authority for this, and I suggest that this should be resisted. The words ‘may ask’ suggest uncertainty on the part of the draftsman;

10. ‘Relevant contributions’ referred to in HSCA 2001 Section 55(3) means properly assessed contributions in accordance with the NA(AR) Regs (see also HSCA Section 55(7)). The resident’s adviser should ensure that no client with a deferred payment agreement has a charge imposed upon them for an amount above that which may be properly assessed. If, for example, the net equity within the charged property falls towards the upper capital threshold for assessment purposes, then the local authority will need to be informed. That is to stop the fees covered by the charge inadvertently eating into the capital below the lower capital limit that the resident can retain. Advisers should also bear in mind that interest accruals on any mortgage or other debt secured upon the property may have the same effect;

11. The ‘exempt period’ when no repayment has to be made to the local authority is defined in HSCA 2001 Section 55(4). That is: “…the period beginning with the time when the agreement takes effect and ending:

(a) 56 days after the date of the resident’s death, or;

(b) with any earlier date which, in accordance with the agreement, the resident has specified in a notice given by him to the authority for the purposes of sub-section 5(b).”

No repayment is thus due while the agreement applies when the resident is alive and until 56 days after death. The period of 56 days after death does not mean that there is no liability at death for probate purposes. It just provides a further 56-day interest-free period. After the 56 days are up, the local authority may start to press the personal representatives for repayment. The 56-day window will not generally be enough to allow a sale to take place. It is however an improvement on the original 28 days contemplated as the HSCA started its passage through Parliament. Personal representatives will need to take account of interest accruing in their calculations of payments due in the administration. It is a good reason to ensure a speedy resolution of that administration;

12. Cancellation of a deferred payment agreement and observations on contractual breaches. The resident can cancel the deferred payment agreement by way of repayment. The draft agreement indicates that they may also do so by way of notice but that: “The council is not allowed to terminate the agreement, so there is no provision in the agreement for this,” (Note 1.5 to the draft deferred payment agreement). The possible inability of the resident to cancel the agreement, except by way of repayment, if the particular agreement signed does not encapsulate a termination provision may make the resident feel rather ‘stuck’ with whatever the local authority provides by way of care. But the normal principles of care choices still apply. The binding nature of the agreement must also be subject to any breach of contract action in relation to the terms of the agreement and the care package supplied. Any care aspect of the overall agreement that is not fulfilled by the local authority may well create a payment-free and interest-free interlude or a fee reduction to be accounted for appropriately. This amounts to a potential source of leverage against the local authority in the hands of the resident. If there is a breach of contract on the part of the local authority, I would suggest that the resident cannot be expected to pay for the services offered as part of the overall ‘deal’. In particular the resident should not pay for the element that is not actually provided. If the contract is breached more fundamentally, then although the agreement may end as a result of that, without any action by the resident interest should not run on the outstanding debt. As a result of the local authority’s action or inaction, the contract is at an end but the ‘exempt period’ has not ended because the criteria of HSCA Section 55(4)b have not been fulfilled. The resident did not end the contract – the local authority did. There is no stated end to the exempt period in those circumstances. The aim of both parties may be to re-instate the agreement, but negotiations may save the resident – or more likely their heirs – some money in the longer term;

13. Interest is not usually payable by the resident. HSCA Section 55(6) relates to interest upon the deferred payment:

(a) no interest shall accrue at any time on or before the date on which the exempt period ends in respect of any sum that he is liable to pay as mentioned in sub-section (3)(a); but

(b) as from the day after that date, any such sum shall bear interest at such reasonable rate as the relevant authority may direct or, if no such directions are given, as the authority may determine;

and accordingly any charge granted in pursuance of sub-section (3)(c) shall secure payment to the authority of any interest falling due by virtue of paragraph (b) above.”

Note that interest charges after death can eat into the capital value, which would have been protected as being under the capital threshold while the resident was alive. So I would reiterate the point that the administration of the estate of a deceased resident with a deferred payment agreement should be dealt with as quickly as possible. David Coldrick is a partner in charge of the Sheffield office of Wrigleys Solicitors. He can be contacted at david.coldrick@wrigleys.co.uk

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