Adult Care and Health Cabinet Panel

HERTFORDSHIRE COUNTY COUNCIL

ADULT CARE AND HEALTH CABINET PANEL

THURSDAY 10 APRIL 2008 AT 10.00 A.M.

QUANTUM CARE LIMITED - CARE CONTRACT AND PROPERTY OPTION AGREEMENT TO SECURE REPROVISION OF CARE HOME PLACES

Report of the Corporate Director (People and Property) and the Director of Adult Care Services

[Author:Dick Bowler,Head of Corporate Estates

Tel:01992 556223

Mark Lobban, Assistant Director, Community Commissioning

Tel:01992 556350]

Executive Members:David Lloyd (Performance and Resources)

Sally Newton (Adult Care and Health)

1.Purpose of report

1.1At the meeting of Cabinet on 14 April 2008, agreement is to be sought to make arrangements with Quantum Care for:

• A fifteen year contract for the purchase of care and accommodation services for older people;

• A property agreement under which the County Council will have the option to provide sites and require replacement care places to be developed;

• The replacement of Newhaven, Stevenage as the first scheme under these new arrangements.

1.2The Adult Care and Health Cabinet Panel is invited to consider and comment upon these proposals prior to the Cabinet meeting.

2.Summary

2.1The characteristics of the Hertfordshire demography of older people and of the supply of affordable places in residential care homes indicate there will be ongoing difficulty in securing enough places for people eligible for placement by the County Council.

2.2Of the portfolio of 30 homes owned by the County Council, eight are likely to become obsolete on physical condition, suitability and economic grounds in the next few years. A land supply strategy has been established for the phased replacement of the places that will be lost.

2.3The County Council intends to provide sites for new development alongside block care contracts in order to stimulate developments that will allow re-provision of places and meet additional demand.

2.4Negotiations regarding the Quantum Care block contract have taken place to secure longer term access to the services and to ensure a mechanism for re-provision of obsolete Quantum Care operated homes where there is a good fit with the overall places required in an area and there is continuity of the services required.

2.5Quantum Care now has a good expectation of being able to fund replacement care places having regard to progress on the first intended scheme at Stevenage.

2.6Full proposals to replace Newhaven have been developed and a scheme is capable of early implementation under the new arrangements.

3.Recommendations

That arrangementsare made with Quantum Care Limited for:

3.1A revised fifteen year contract for the purchase of care and accommodation services for older people and that the Director of Adult Care Services be authorisedin consultation with the Executive Member for Adult Care Services to agree the carecontract.

3.2An option agreement for the grant of leases that enable the construction of extensions to existing homes, redevelopment of existing homes or the development of new homes on new sites provided by the County Council, and thatthe Corporate Director, People and Property, in consultation with the Executive Member for Performance and Resources, be authorised to agree the property contract.

3.3That, subject to the care contract and the option agreement being completed, the proposed scheme at Pin Green, Stevenage for the re-provision of care places at Newhaven, Stevenage, with additional places to meet the needs of the area proceed as soon as possible.

4.Context

4.1On 18February 2008, Cabinet considered the Commissioning Strategy for Older People which emphasised the need to provide a range of services which would offer older people more control over their lives and more choice as to how their needs are met. An important element of the commissioning strategy is the development of suitable accommodation for older people.

4.2On 22 January2007 Cabinet considered a report entitled ‘Accommodation for Frail Older People – Delivering Increased Capacity and Choice.

4.3Adult Care Services (ACS) needs to increase its capacity for frail older people’s accommodation by approximately 619 places by the year 2010. In order to achieve this and to increase choice for older people, it is proposed to significantly increase the amount of extra care housing developed. This will mean that by 2010, there will be a total of 1833 places (1050 residential care home places and 783 extra care housing places) for frail older people, compared with a total in June 2005 of 1608 places (1475 residential and 133 extra care). There will also be increases in nursing, nursing dementia and residential dementia provision.

4.4In order to change this ratio and achieve a shift in the mix of services that will be provided, ACS will need to commission fewer residential places from Quantum Care and instead develop more extra care places. Some of the existing Quantum care residential provision will be remodelled to provide the increases needed in specialist services – residential dementia, nursing and nursing dementia.

5.Background

5.1At the meeting on 21 February 2005 Cabinet considered a report regarding a review of the residential care homes owned by the County Council with the context of the need to re-provide places at some of those homes and to secure additional places.

5.2The central decision was to adopt a land supply strategy in order to stimulate re-provision of obsolete care home places and to add to the supply of such places, both at fee rates that are affordable by the County Council.

5.3Negotiations were authorised with Quantum Care with a view to achieving necessary modernisation of parts of the portfolio of homes that is leased to Quantum Care. Revised care contract and property arrangements were contemplated that would allow such modernisation and for it to be funded and implemented via the same mechanisms that very successfully supported theoriginal Quantum Care building programme.

5.4Thebackground demographic characteristics, the availability of affordable care places in Hertfordshire and the relative property economics have not changed significantly since the 2005 report.

5.5At the end of March 2007 ACS was funding 3,139 older people in residential and nursing home care (figures exclude legal charge and property disregard cases). In the previous 12 months ACS had placed 1,447 people in residential and nursing care. These numbers have remained constant over a number of years. The most recent market analysis of the care home sector in Hertfordshire, showed that occupancy levels were very high, at 96%.

5.6ACS has block contracts in place with Quantum Care [26 homes] and Runwood Homes [4 homes] for 60 % of their residential beds.

5.7Cabinet at its meeting on 18 February 2008 agreed the Commissioning Strategy for Older People 2008 – 2012, including arrangements for care home purchasing.

6.Background to theportfolio of homes leased to Quantum Care

6.1This contains 26 homes.

6.2Quantum Care was established in 1992 as a not for profit organisation to assume management of the majority of the County Council’s residential care homes for the elderly and to undertake a major programme to bring the home to registration standards.

6.3The general principles at the formation followed those of Care in the Community national policies. They were to clearly separate the roles of strategic social services authority, purchasing authority, regulation and provision of services. Also to establish a long term partnership arrangement with the newly formed and largest supplier of care services to the County Council.

6.4The business model adopted was for the County Council to place a major long term block contract for the delivery of residential, care and day services at specified levels and for Quantum Care to sell the majority of its services to the County Council and marginal capacity to private clients. Quantum Care took occupation of the homes under normal, full repairing, commercial leases and paying market rents.

6.5Quantum Care’s block care contract expires in 2010. The leases are for 50 years and contain provision for termination in the event of there not being a care contract with Quantum Care.

6.6A capital programme was planned, financed over a period ending in 2009, agreed with the County Council and implemented. Quantum Care’s bank borrowings were on the basis of a repayment mortgage. Their capital expenditure effected improvements to the County Council’s properties and to their commercial rental value.

6.7The capital programme has been fully implemented and has resulted in a stock now comprising 14 newly built homes, 1 modern home adjoining a Housing Association Scheme, 3 bungalow style homes and 8 older two or three story homes adapted and refurbished.

6.8The improvement of the properties by Quantum Care as lessee was recognised by the County Council as landlord allowing standard commercial abatements of rent equivalent to the amortisation of the capital expenditure on improvement, and over the same period ending in 2009/10.

6.9Quantum’s capital funding commenced in 1995. Full repayment of the loan is required by the end of 2009/10 and so the maximum borrowing period has been only 14 years, an unusually short period for such major capital expenditure. The loan repayments and the rent abatements reflect that period. A most important feature of these arrangements has been to seek to ensure that the economic life of the properties met or exceeded the period over which the capital invested has been defrayed.

6.10The impact of these funding arrangements is contained in the accounts for the Corporately Managed Properties service. Initial net income surpluses have been transferred to a special reserve set up at the commencement of the leases in order to defray the net rent deficits that arise over the latter part of the funding period. At the end of March 2010 the rent abatements end and the gross rents accrue for the remaining useful life of the properties.

6.11The purpose of arrangements set out in this report are to secure the long term supply of the services provided by Quantum Care and in a way that will facilitate, over a number of years, appropriate re-provision of the care places contained in the 8 older homes and the 3 bungalow style homes as the reach the ends of their useful lives.

7.Revised Care Contract

7.1The original care contract has been extended and has now been the subject of extensive review and negotiation with a view to putting in place a contract, to replace the reminder of the existing contract, and to be fit for many years to come.

7.2The contract period is proposed at 15 years in order to secure the supply of places for the foreseeable future and having regard to the commissioning strategy for older people. The County Council will agree to purchase a minimum of 50% of the available places at any time.

7.3A summary of the proposed revised care contract terms is set out in the confidential report on the Part 2 agenda.

7.4.In considering how to take this forward the following factors were considered to be key:

• ACS wish to provide continuity of care to existing residents and ensure a smooth transition to any newly developed care homes operated by a provider with a proven track record;

• ACS want to continue a long term partnership arrangement with the largest supplier of care services to the County Council;
• The County Council has sought advice from specialist care property consultants AtisReal and they too support the strategy to negotiate a longer term care contract with Quantum Care in association with a revised property arrangement;

• Ultimately this route will enable HCC to secure long term social funded bed provision whilst retaining ownership of a well founded portfolio of homes, the reversionary value of which should become increasingly valuable;

• Quantum Care provide over 50% of the County's dementia beds and ACS value the specialist service offered by Quantum Care which will be developed over the coming years;

• Quantum Care have agreed to provide nursing care, where required, and also develop intermediate care services.

7.5This proposal has been subject to scrutiny by both lawyers and property consultants and is deemed to be the most appropriate way forward.

8.Property Agreement

8.1The purpose is to provide the County Council, as commissioner of services, with the option to require Quantum Care to provide specified replacement care places by extensions to existing modern homes in the portfolio or at new sites to be provided by the County Council, and as a consequence to take out of use specified older home places.

8.2Once the feasibility of extension to an existing home or the development of a new home has been established and the number and type of places to be provided in the new scheme has been settled, the County Council proceeds to formally notify Quantum Care of the requirement by triggering an Option under the property agreement. After successful completion of procedures under the agreement there results a binding contract for the surrender of the existing lease and grant of a new lease under which Quantum Care is required to construct the extension or new home scheme.

8.3Where a home is to be taken out of use consequent upon the re-provision arrangements, a new short lease will be granted to allow continued occupation pending the bringing into use of the re-provided places and any further flexibility that the County Council may wish to achieve.

8.4The new lease arrangements regarding the scheme funding, construction, rent and rent abatement terms, and use of the completed development will be, in principle, the same as are contained in the existing leases. The principle difference will be that it is intended that the period over which the capital is defrayed is 25 years and so in line with usual commercial practice for investment of this nature.

8.5The new leases would be for periods that end in 2044, to be co-terminus with the existing portfolio leases and have the same 5 year pattern of rent review.

8.6A summary of the proposed property contract terms is set out in the confidential report on the Part 2 agenda.

9.Scheme Funding Arrangements

9.1The property agreement and lease require Quantum Care to secure and to provide the capital to fund the schemes. Capital would need to be raised on a scheme by scheme basis and the suitability of the new arrangements has been reviewed by the existing Banks in relation to the intended first new home scheme on a site provided by the County Council, at Stevenage.

9.2Quantum Care has received a draft proposal of funding for that scheme, subject to completion of the new care contract and property agreement.

9.3In summary the proposal is for senior debt development finance, to cover the whole of the estimated development costs, on a repayment mortgage basis and over a period of 25 years. It would be secured on same basis as the earlier funding, i.e. a charge on the lease and an assignment over the revised care contract. Interest would be charged at a margin of 1% over the variable (3 months LIBOR) rate and that would be slightly less margin than under current loan.

9.4The proposal is subject to receipt of satisfactory advice from the Bank’s solicitors upon a number of technical matters and these would be dealt with prior to completion of the care contract and property agreement. At that point a letter of comfort would be sought from the Bank upon the final draft proposal and the likelihood that similar proposals may be forthcoming for future schemes of new build and also existing modern home extension.

10.Re-provision of Newhaven

10.1Following the decision of Cabinet on 11 July 2005 to retain a part of the site of the former Pin Green primary school as a new home site, further work has been carried out by the County Council and Quantum Care to establish the feasibility of such development.

10.2Detailed planning permission has been granted for a three story 90 place home. Full scheme design has followed and tenders for construction have been received and are now the subject of post tender detailed evaluation. It is now expected that, subject to completion of the care contract and the property agreement, the procedures under the property agreement will be capable of rapid and successful implementation and can lead to an early start of the scheme.

10.3This case has also provided a sample scheme for the proposed new arrangements. A total capital cost of c £6.6m is indicated and the advice received from Atisreal on the property economics of the scheme show that it is expected that the rent payable for the new home under the lease would be at least equal to the amount of the rent abatement that would arise. This leaves just the provision of the site as a resource contribution from corporate resources.

10.4The difference in the site values, new site and existing Newhaven site, were advised in the report to Cabinet on 11 July 2005 as £0.6m, both on the basis of residential land value estimates.

11.Financial Implications

11.1The revised care contract would give rise to expenditure on care and accommodation services per place taken up by the County Council and at the County Council’s standard rates for such services. The volume of expenditure would be similar to that now and projected under the existing care contract.