This article considers the state of the care homes industry, certain issues that arise when dealing with the imminent insolvency of care homes and initial considerations about what to take into account when determining sales strategy.
The care home industry has seen a massive influx of investment over recent years with banks prepared to lend within the sector due to the long term income streams from care home residents. However, statistics by Companywatch in October 2014 suggested that around a third of care home operators (some of whom operate a number of care homes) were in financial distress. Nick Hood, Business Risk Analyst, has previously stated that the precarious position of many care homes is unlikely to be helped by low profit margins, rising energy bills and the prospect of rising interest rates.
Whilst there has been some improvement in property values, distressed sales in this sector are likely to be prevalent for some time. The challenges faced by care homes include the following:
- Outdated and dilapidated care homes are not attractive to investors, potential buyers or would-be residents. The costs to upgrade such homes can be prohibitive
- Care home operators must have the right staff for the job and maintain the right staffing levels to deliver the proper care required
- Many operators are finding it difficult to comply with financial or occupancy covenants required by their lender and are in default. The value of the property is usually key to the lender’s return on investment
- The Care Quality Commission (CQC) regularly inspects care homes and for those found to be sub-standard, can issue warning notices requiring rapid improvement, restricting the services that the care home provides, stopping admissions, issuing fixed penalty notices, suspending or cancelling the care home’s registration, or even prosecution. The costs of compliance and making improvements can put added pressure on a care home already struggling financially.
Think before you enforce
The following are some initial issues that a lender should consider prior to taking enforcement action against a care home business:
- Politically, a lender may be reluctant to take positive steps to recover its investment for fear of bad publicity and the effect of closure on the residents of the care home. Consider whether publicity will be negative and how it will be managed.
- How will an insolvency practitioner’s fees be paid and will the lender take the financial strain if there is a requirement to trade?
- At what point should the insolvency practitioners take office? The proposed insolvency practitioners might consider advising management for a period of time before taking office to minimise risks, although this would require significant co-operation between the troubled business and its lender (which may not be forthcoming).
- Potential for insolvency practitioners incurring personal liability (e.g. pursuant to health and safety legislation or the requirements of the CQC).
- Criminal offences and fines – it is important that insolvency practitioners are aware of the complete picture. For example, a care home business could be prosecuted for providing regulated services or activities when not properly registered with the CQC, if CQC regulations are not complied with, conditions of registration are not complied with, or there is a failure to allow inspection of documents etc. As one would expect, there are also a plethora of other potential criminal offences linked to neglect, misuse of medication, gross negligence or ill treatment, so if the business is to be traded for even a short period of time the insolvency practitioners will want to ensure they are satisfied that the care home is and remains compliant with legislation and is providing an acceptable level of service to its residents.
- Where a care home business and the property it occupies are held in two different companies does the lender have appropriate security and cross collateralisation across both companies?
Realisations through insolvency
Business and assets sale
A sale from insolvency provides an opportunity for a buyer to acquire a business and its goodwill without all of the historic liabilities.
Successful and speedy CQC registration is often critical to the deal and the sale will be structured around this requirement. The buyer must be CQC registered and the CQC must approve the transaction. Even if the buyer is well known to the CQC, there can still be a delay in obtaining approval in relation to a specific care home which may have inherent problems.
Generally a sale and purchase agreement (SPA) will be agreed between the parties and upon exchange of contracts, either the buyer will operate the care home under an operating licence from exchange or the administrators will appoint managing agents to run the home until completion. We advise regularly on the correct structure and content of such agreements.
It may be possible to sell the shares of the care home owning company. A share sale may be attractive where there is a property of significant value held within the target company – the stamp duty on acquiring the property as an asset compared to the stamp duty on shares could amount to a difference of tens or even hundreds of thousands of pounds. Contracts continue without novation and the registered person with the CQC would stay the same, saving a lot of time.
However, a share sale would also mean acquiring historic liabilities, and when considering taking on a care home which is in distress, the liabilities may outweigh all other advantages of a share sale. For this reason it is usually the business and assets which are sold.
Closure of the care home
This is likely to be the last resort. If the lender has security over the property, it may consider appointing a fixed charge receiver or a liquidator to sell it and any other fixed assets.
It is critical that those involved in the care home sector try to mitigate against the spectre of insolvency by understanding the legal and regulatory framework, the issues and pressures that can arise and also plan ahead with a view to avoiding unpleasant surprises that may ultimately lead to distressed residents, bad publicity, and possible care home closure.
This note is a summarised version of a practice guide produced in collaboration with LexisNexis PSL – please click here for the full article (subscription required).