How much interest can you charge on care home fees arrears?
As click-bait goes, this may not be the most compelling question, but it’s hardly surprising that you clicked on the link. Arrears in fees affects cash flow and the debt needs to be funded, either through bank debt, or by reducing profit available for distribution. Providers may accordingly wish to have clauses in their contracts that allow them to claim interest on arrears both to incentivise prompt payment and to ensure that should they not do so, the defaulting party bears the cost of late payment.
Naturally, the CMA has a view. Or views as it turns out. The draft guidance on care home contracts (page 62) opined that a term was likely to be unfair if it required
‘residents to pay interest on outstanding fees at a rate excessively above your clearing bank’s base rate since it makes the resident pay much more than the cost of making up their default (emphasis added).’
That makes sense. It ensures that a resident can be required to pay for the cost of their default but prohibits punitive costs above that.
However, the final version of the guidance (page 84) states that a term is likely to be unfair if it
“require residents to pay interest on outstanding fees at a rate above your clearing bank’s base rate, since it makes the resident pay much more than the cost of making up their default.”
The word ‘excessively’ disappeared.
This does not make sense. It is simply not correct that a resident will necessarily ‘pay much more than the costs of making up the default’ if they are charged more than a clearing bank’s base rate. On the contrary, it is likely that they will be paying less than the cost of the debt if they are only charged the base rate because the true cost of debt will never be as low as the base rate.
I asked the CMA whether this was an error in the final draft. They replied as follows:
“To confirm, the word ‘excessively’ was intentionally removed from the CMA’s final advice before publication. The overall aim of the CMA’s advice is to help care home providers understand and comply with their obligations under consumer law (see paragraph 2.1 of the final advice). The CMA takes the view that advice to businesses should be as clear and certain as possible, so that businesses can be confident of complying with their legal obligations when they follow the advice. The word ‘excessively’ was removed because it was considered too vague in this context, and therefore unhelpful to care home providers when drafting their contract terms. Such vague and uncertain wording is open to misinterpretation and abuse and therefore increases the likelihood of a care home provider’s term (or practice) being found to be unfair by court (and therefore unenforceable).”
The CMA could have dealt with the uncertainty of the word ‘excessively’ in a far more commercially sensible way. It could, and should, have said that a term was likely to be unfair if any interest charged was above the true cost of the debt to the provider.
Requiring providers to bear the cost of fee arrears would only lead to higher fees across the board, meaning that those who pay fees promptly are penalised by those who do not. That is not fair. It also does not encourage prompt payment. Despite the CMA’s amended version, I think it highly unlikely that a term would be regarded as unfair if it did not more than pass the cost of debt to the person responsible for it.
This small example shows how much care and attention is needed to draft care home contracts that are both compliant with consumer law but are also commercially sensible.
Please contact me if you need help with your contracts or any other regulatory matters:
Jonathan Landau, Barrister
5 Chancery Lane
London, WC2A 1LG
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Telephone: 0207 406 7532
Mobile: 07980 897 429