PAPER B3

 

                                                                                                                Purpose : for Decision

 

                        REPORT TO THE EXECUTIVE

 

Date :              18 JUNE 2003

 

Title :               COUNCIL CARE HOMES PROPERTY REVIEW

                       

REPORT OF THE PORTFOLIO HOLDER FOR RESOURCES

 

IMPLEMENTATION DATE : 30 June 2003

 

 



SUMMARY/PURPOSE

 

1.                  This report brings back to the Executive proposals for future leasing and sale arrangements of Council-owned homes.  Negotiations and discussions have been ongoing for almost two years through independent professional advisers and legal advice indicates that it would be prudent to seek the Secretary of State’s consent to the transfers now being proposed.

 

BACKGROUND

 

2.                  In October 2001 the Executive received a series of papers outlining arrangements for the review of Council-owned homes.  At that time the Executive resolved that the Head of Property Services and the Portfolio Holder for Resources commence negotiations to review the rent of the homes as at December 2002, to also ask Islecare 97 Ltd (the leaseholder) to bring forward proposals to meet the Care Standards Act, and to progress the feasibility of developing The Polars home in Newport.  Any sale proposal should also incorporate a condition protecting the long-term use of the property as a care facility.

 

3.                  Members will be aware that in recent years the Council policy in respect of long term elderly residential care provision has fundamentally changed from that of a provider and purchaser to a purchaser only.  As such the Council has no capital plan to upgrade the homes, build more space or indeed to meet the requirements of improving standards.

 

4.                  Under the prevailing lease arrangements, Islecare 97 Ltd lease five main care homes and three small ones.  More details are given below.  The lease is for 30 years from 1996, at a premium of £30,000 for the first six years and thereafter at market value, reviewable every five years.  The first review was due in December 2002.  There is an absolute bar against assignment, although property can be surrendered and the use is restricted to residential care and nursing home.  Repairs are shared, the Council as lessor being responsible for the structure.  Apart from the Council’s 19% stake in Islecare Ltd 1997, this company is wholly owned by Somerset Care Group which is a not for profit company.

 

5.                  Since 2001 there have been significant changes in the care homes market and with care standards.  Information taken from the Care of Elderly People Market Survey indicates as follows :

 

 

                     The absolute capacity of residential places in the UK has fallen by 11% (64,000 places) over six years.

 

                     Initially all the net decrease was at the expense of the public sector.  However, since 1998, the independent sector has also been on a declining trend.

                     Key policy streams having a fundamental impact include: the Care Standards Act 2000; the NHS Plan for free nursing care; and government reluctance to prescribe fee levels required to maintain an adequate supply of places and stimulate private sector investment.

                     Many of the externalisation initiatives by local authorities over the last 2-3 years indicate a preference for a not-for-profit partner, because of their share ethos and more flexible solutions.

                     The number of publicly quoted care home companies has dwindled.

                     Most large companies have withdrawn from new development in line with the market as a whole.

                     The survival of poor quality care homes is one of the factors hindering a full scale shake-out which would raise the physical standards of care homes overall.

                     The review projects a doubling of demand for care in residential settings to peak in the mid-2000s.

                     Profitability of the care home sector has been poor as margins have been squeezed.  The operating profit per bed has been around £4,000 to £5,000 per annum, against £6,400 per annum thought necessary to attract new investment.  In the future profit per bed may be boosted in source areas following increases in baseline fees since April 2002.

                     Somerset Care have asked to emphasise that the above are national average figures.  They say margins for care homes on the Isle of Wight are generally much lower and Islecare 97’s forecast for 2003/4 before the Council’s rental charges are in the order of £1,600 per bed.

 

6.                  Members may also be aware that in July 2002 the Secretary of State for Health made an important announcement about old people’s services and the application of care standards.  The Secretary of State’s announcement reads as follows :

 

The size of rooms and doors, the availability of single rooms and the number of lifts and baths are important.  This should not mean good local homes having to close.  We will therefore shortly issue for consultation an amended set of environmental standards to remove them as a requirement on existing homes, instead making it clear that they are good practice to which all care homes should aspire.  We will require care homes to spell out whether they do or do not meet those standards and let those who are choosing homes make an informed choice for themselves.  Other standards, for example those covering qualified staff, make a greater contribution to the quality of care provided for old people.  I therefore tell the House that we will make £70m available by 2006 ring-fenced to support training for social care staff, most of whom currently do not have a qualification and many of whom are employed in the care home sector.”

 

7.                  There is also thought to be an opening gap between the profit and not for profit provision of care homes.  Additionally, since 2001 major decisions have been taken by the Isle of Wight Council to increase Council Tax for the specific purpose of supporting Social Services’ budget and increase resources for care home provision.

 

8.                  Islecare 97 Ltd took over the business of Islecare in December 1996 when the company was financially insolvent, in a poor state and staff were demoralised.  Since then, the company has been turned around and now caters for some 219 frail and vulnerable elderly people, mostly the financial responsibility of the Isle of Wight Council.  The Islecare 97 Board believes it is uniquely placed to assist the Council in achieving its service objectives for older people and people with learning disabilities.  In bringing forward major investment proposals for the elderly care provision market on the Island, the Islecare 97 Board wants to be sure that it has the Council’s whole-hearted support and wishes to develop a protocol agreement to give the Board the confidence and certainty necessary for that investment.  The Board is particularly keen to see the move towards a productive partnership working with commissioners in the Council and the health sector.  Further, the Board sees the development of a more mature relationship than has existed in the past with a spirit of co-operation and partnership dominating the challenge of providing adequate high quality accommodation and services for the people of the Island through a Protocol Agreement putting Island residents first.  In the future the Board also looks forward to the introduction of block contracts.

 

9.                  The Somerset Care Group is different from the majority of providers by virtue of the group’s not for profit status and it should be borne in mind that operating surplus generated within the Islecare 97 account is reserved for reinvestment in core business operations on the Island.

 

10.             This year the Islecare Board has gone through a business planning exercise and the proposals negotiated set out below follow on from that exercise.  In terms of the prevailing market place for care homes, because existing homes have no compliance date, there will be some time before a market driven by client choice settles down and it will be interesting to see how that choice drives market changes over the next one or two years.

 

STRATEGIC CONTEXT

 

11.             This paper supports theme three of the Corporate Plan, especially actions 2.34 – the development of services for older people and 2.35 – to prevent entry into hospital and social delayed discharge.

 

CURRENT OPPORTUNITY AND FUTURE VISION

 

12.             Because the entire elderly care market on the Island is now better understood, because new care standards are to be market lead and because arrangements with Islecare 97 are under review, now is an opportune time for the Council, as a purchaser, to take a major step towards sustaining entirely independent market provision for elderly care on the Island.

 

13.             Details of the care homes owned by the Council and leased to Islecare 97 are as follows :

 

(a)               17 Newport Road, Cowes

 

This is a detached two-storey former dwelling house constructed in the later part of the 19th century in reasonable condition for its age.  There is a backlog of external repairs amounting to some £6,800 and the home provides accommodation for three residents.

 

(b)               41 Newport Road, Cowes

 

Again this is a detached two-storey former dwelling house constructed at the turn of the century in traditional construction in reasonable condition for its age.  It would easily convert back to a private residence.  There is a backlog of external repairs amounting to some £9,200 and the home is registered for six residents.

           

(c)               31 Carter Avenue, Shanklin

 

This is a substantial double-fronted two-storey former dwelling house of traditional construction in fair to good condition.  The backlog of external repairs amounts to some £6,400 and the home is registered for six residents and currently used for persons with learning disabilities.

 

(d)               Polars, Staplers Road, Newport

 

This is a detached two-storey building that has been extensively extended over the years to include a substantial two-storey purpose built extension constructed approximately 1955.  The building is a traditional construction with a mixture of architectural styles and designs.  The home has a backlog of external repairs amounting to some £145,000.  Polars is registered for 37 residents and some 16 rooms are under the 9.3 square metres minimum standard.

 

(e)               Inver House, Bembridge

 

Inver House comprises of two former Edwardian and Victorian houses that have been converted and linked to form a substantial care home with the addition of a significant single storey extension to the rear.  The home has an external backlog of repairs amounting to some £104,000, is registered for 32 residents and five rooms are under the minimum size.

 

(f)                 Steephill, Ventnor

 

The property comprises of a substantial three-storey structure thought originally to be constructed in the 19th century, having been purpose built as the original home for nurses and doctors in connection with the isolation hospital formerly located within the Botanic Gardens.  The building is in traditional construction using natural stone, its layout may prove difficult to undertake major adaptations.  There is a backlog of external repairs amounting to some £96,000 and the home is registered for 35 residents with 15 rooms below the minimum size.

 

(g)               Osborne Cottage, East Cowes

 

The original section of this building is a two-storey structure probably constructed in the later part of the 19th century with some attractive ornate features.  To the rear is a two-storey extension of traditional construction.  There is an external repair backlog amounting to £43,000 and the home is registered for 34 residents with two rooms under the minimum size.

 

(h)               Elmdon, Shanklin

 

Again this is a two-storey dwelling house built in the late 19th century with a further single and two-storey extension on the side and rear.  The property is sub-divided to form two learning difficulty units known as High Mead and The Laurels, together with a vacant wing known as The Beeches and refurbished offices utilised by Islecare 97 as an administration centre.  In addition, there is a small second floor self-contained flat unit.  The property has a backlog of external repairs amounting to £54,000.  Overall there is registration for 11 beds.

 

PROPOSED TRANSFER ARRANGEMENTS

 

14.             In respect of the three small homes, it is proposed to grant new 25 year leases that are non-assignable.  Islecare 97 will have the ability to hand the properties back to the Council if no longer viable.   Islecare 97 will take on responsibility for structural maintenance other than those items which have been identified in the condition survey report.  Rents will be reviewed every five years and a user provision as set out below will apply.

 

15.             The proposed annual rents are 17 Newport Road - £5,250, 41 Newport Road - £10,000 and 31 Carter Avenue - £11,000.

 

16.             The proposal for three of the larger homes, namely Inver House, Steephill and Osborne Cottage is that the homes should continue to be leased under the present arrangements at rents of £36,000, £38,250 and £39,000 per annum respectively.  In addition, Islecare 97 shall be given the opportunity to purchase the freeholds of these properties at prices of £433,500 for Inver House, £477,500 for Osborne Cottage and £385,000 for Steephill.  Such transfers would be subject to a covenant restricting use to the provision of accommodation for and care to older people and/or other people with special social, mental or physical needs and related and ancillary care, community services, administrative office and training services, and such other uses that are ancillary and related to the foregoing. 

 

17.             In terms of Elmdon at Shanklin, Islecare 97 are now at the planning and commissioning stage of a new learning disabilities home which is expected to take some three years to replace.  Subject to that replacement, Islecare 97 would hand back Elmdon to the Council and in the interim would wish to continue leasing this property on the basis of an annual tenancy for up to three years, with the Council retaining maintenance responsibility for the structure and paying a rent of £21,000 per annum based on the areas still occupied.  The Isle of Wight Council would be able to use the unused parts of the buildings, namely The Beeches and the third floor flat, providing such use does not aversely affect the residents in High Mead and The Laurels.  This is a sensitive issue and staff, clients and families have been advised of the proposals.

 

18.             In terms of The Polars at Newport, Members will be aware of the recent setback in relation to the feasibility of redeveloping this site that resulted from no funding allocation coming forward this year that would enable the project to move forward.  Members will recall the paper on this subject which was withdrawn from the Executive meeting on 26 March 2003.  Despite the setback, the partners concerned remain committed to moving the project forward.  In the interim, it is proposed that the lease shall remain on the same terms as currently provided with the Isle of Wight Council retaining responsibility for essential structural maintenance and an interim rent should be set at £39,000 per annum.

 

SALE AND RENT ADVICE

 

19.             The valuation advice given above is based on market conditions as known and understood by professional advisers at this time with the properties in their present condition.

20.             By transferring the freehold of the large homes, subject to restriction, Islecare 97 will then have the same asset management liability as most homes.  The freehold tenure will also ensure that Islecare97 will be in a position to maximise loan funding capabilities, from a commercial bank. 

21.             Independent Valuation advice confirms that the installation of a restriction will depress the value, but this is not a discount.  For that reason a disposal consent is still required although, at the time or writing this report, new legislation has been drafted but not enacted that would delegate such decisions to local authorities within limits.

 

22.             The rents for Inver House, Osborne Cottage, Steephill, Elmdon and Polars have been calculated on the assumption that the tenant is responsible for all repairs, although it has been agreed that in the interim the Council will continue to be responsible for essential repairs only to the structure of these buildings.  As such the Council’s advisers recommend that these rents are accepted as interim arrangements and that the Council reserves its position in respect of rent review if the sales, development and surrender do not proceed within agreed timescales.

 

ANNUAL AUDIT LETTER

 

23.             All Members will have received a copy of the District Auditor’s letter closing the Council’s accounts for the years ended 31 March 2000 and 31 March 2001.  In closing these accounts the District Auditor has reserved his position to challenge the proposals to dispose of Council care homes.

24.             The primary issue is whether or not the Council can dispose of property by specifying its use in this case as a residential home and still obtain “best consideration”.

 

25.             The advice received from Counsel dated 29 July 2002 distinguishes this issue in relationship to the powers enacted under Section 123 of the Local Government Act 1972, Sections 24 and 25 of the Local Government Act 1988 and the General Disposal Consents issued by the Secretary of State.  Counsel considers the District Auditor view and advises.

 

“In my opinion, this approach is too strict.  The particular problem is created by the reading of the 1988 Act consent.  This is not perfectly drafted; but it seems to me clear that the Consent must be read as a whole and construed in a way which will produce a coherent and workable scheme.  It also seems to me clear once this is done, it is apparent that the Secretary of State is giving his general consent to financial assistance in the context of disposals of old persons homes subject to a requirement that a user covenant be imposed securing the achievement of the underlying purpose and that best consideration be obtained for the disposal that is subject to such a condition.  Thus a disposal of an old persons home in circumstances where the only arguable undervalue arises because of the insertion of a condition complying with paragraph H2(a) is within the consent read as a whole.”

 

26.             Counsel then describes the links between all the above provisions and says  “The issue on which I have to advise is whether, viewed objectively and read as a whole, paragraphs H1 and H2 confer consent where the only arguable element of undervalue is the result of the covenant required by paragraph H2.  In my opinion it does.”

 

27.             Finally counsel advises “However, I accept that the matter is not without doubt; and unless there are powerful practical reasons why the course suggested by the DA should not be taken, I agree that it would be prudent to seek the Secretary of State’s views on whether the matter is covered by the existing consents and/or actual, specific consents.  Such a request would need to cover the position under both s123 of the LGA 1972 and s25 of the 1988 Act.”

 

SECRETARY OF STATE CONSENT

 

28.             Given the Counsel’s advice that the restriction of use set out above causes a depression of value and is a restriction creating an under-value that may or may not require Secretary of State consent, then an application for a special consent would be submitted to the Government Office for the South-East in respect of the proposed disposals of Inver House, Bembridge; Steephill, Ventnor and Osborne Cottage, East Cowes.

 

CONSULTATION

 

29.               Following the Executive decision in October 2001, a draft proposal about Inver House only was circulated in January 2002.  That paper was scrutinised by Social Services Select Committee on 6 January, by Resources Select Committee on 22 March and a joint Committee was held on 24 April.

30.             In respect of the proposal to sell Inver House only, consent was granted by the Secretary of State to the transfer with a restriction on the terms then proposed.

31.             Details of this paper have been circulated widely including the Health Trust and PCT and no adverse comments have been received.

 

FINANCIAL/BUDGET IMPLICATIONS

 

32.             Under these proposals total revenue income will increase by £199,500 (plus interest).  Subject then to a capital receipt later of £1,296,000 income will change to £86,250 and give another capital receipt of approximately £500,000 in 2 years income would then rest at £65,250 per annum.

33.             The sale and value of the Council’s 19% shareholding is being negotiated by independent accountants acting for the Council.  This value has yet to be agreed.

 

 

LEGAL IMPLICATIONS

 

34.             In order to seek consent from the Secretary of State a report is required setting out specific details including the amount of under value caused by the imposition of the restriction described above.  That report has been prepared and recommends the following values :

 

 

Unrestricted Value

Restricted Value

Inver House, Bembridge

£900,000

£433,500

Osborne Cottage, East Cowes

£550,000

£477,500

Steephill, Ventnor

£525,000

£385,000

 

OPTIONS

 

35.             (a)       To agree the new lease and proposed sale arrangements set out in the report

(b)               To maintain lease arrangements only

(c)               Sell any or all of the properties on the open market subject to existing arrangements.

(d)               To dispose of the Council’s 19% shareholding in Islecare 97 on terms to be agreed by the Chief Financial Officer in consultation with the Portfolio Holder for Resources.

 

EVALUATION/RISK MANAGEMENT

 

36.             For a long time there has been a perception by the private care home owners on the Island that the Council has unfairly favoured its own homes.  This perception has in the past grown into criticism and complaints against the Council that lead to the “Bound Report”.

 

37.             By maintaining ownership of its care homes the Council is in danger of still further criticism at times of rent review and when setting fees.  The move to a “purchaser status” only for the Council will allay such criticism as to fairness and allow market forces to deliver standards and quantity.

 

38.             Whilst there is a risk that Islecare 97 Limited could be dissolved through some unplanned occurrence or poor management, the current Company Board and principal officers have wide experience and seem to have the Company on a sound footing, albeit that surpluses to date have been minimal.

 

39.             Transferring building ownership to Islecare 97 will also transfer building liabilities, such as structural repair, representing a potential saving to the corporate budget.

 

40.             The existing lease arrangement for the large homes is impractical since the Council, as landlord, has no guarantee about service provision because the tenant can surrender the lease at any time.  Equally the tenant has no equitable interest in the property and as such is unable to use the property as surety because the lease is not assignable.  These same reasons also make it unattractive to offer the freehold of the existing lease arrangements for sale as an investment.

 

41.             In summary, both options (b) and (c) have been rejected because the former only maintains an inadequate status quo and the latter would not prove good value whilst probably prejudicing the strategy to secure sustainable care.  The Council is also best placed by disposing of its 19% shareholding in Islecare 97  because that way the Council need not be party to securing new capital finance for the company and with it a proportional liability.  In addition, by untying this relationship now the Council’s strategy to be a purchaser and commissioner of care is unfettered.

 

RECOMMENDATIONS

 

42.             Option (a) and (d) be adopted.

 

BACKGROUND PAPERS

 

43.             Executive papers 31 October 2001.

 

 

Contact Point :  Tony Flower, ( 823263, e-mail: tony [email protected]

 

 

M J A FISHER

Strategic Director of Corporate Services and Chief Executive Officer

R R BARRY

Portfolio Holder for Resources