|Retirement Villages: Good or bad?|
|Saturday, 06 February 2010 08:52 | Print page:|
Neville was a resident of a retirement village in NSW from 1987 to the beginning of 2008. During that time, the residents of the village in which he resided was engaged in litigation with the operator that started in the Residential Tenancies Tribunal in 1996 and ended in the High Court of Australia in February 2004. In between, cases were heard in the Supreme Court of NSW, the NSW Court of Appeal, the Federal Court and the Full Court of the Federal Court.
Many operators would argue that in an era of deregulation, retirement villages are over-regulated. First, prospective residents are asked to sign a contract with the operator – a document that has been prepared at great expense by legal experts mainly for the benefit of the operator. The operator will argue that the contract sets out the rights and obligations of the residents. Retirement villages are a State Government responsibility and each State has an Act that sets out to give protection to residents.
Status of the New South Wales (NSW) Retirement Villages Act
The NSW Retirement Villages Act (Part 2 - Section 11 - Application of the Act) prescribes that the Act "applies despite the terms of any contract, agreement, scheme or arrangement (whether made or entered into before or after the commencement of this section)". However, its provisions do not change the basic conditions set out in a contract. It is an unwritten condition that residents are responsible for paying the operating costs of a village. The contract generally contains a list of all the items for which a resident must pay.
Neither the Act nor the contract provides that the operator is accountable to the residents for disclosing how the residents’ monthly charges (or recurrent charges as defined in the Act) are spent. The residents pay audit charges but generally the amount is so small that it is clear it is not a complete audit. It doesn’t examine expenditure under the heading of repairs, for example, to determine if items of capital have been improperly purchased by the operator and charged to the residents.
The industry blossomed in the 80s and 90s but some villages now require to be modernised so that the operators can compete with new villages with all the latest facilities. It means the sale of a unit in an older village will be considerably cheaper than a new unit. The outgoing resident doesn’t usually get a great deal of capital gain as a consequence.
Take this example:
A resident "purchases" a unit in 1990 for $200,000 on a 99-year lease. That means you give the operator $200,000 of your capital as an interest free loan to that operator. He is free to make money on your money or pay off his mortgage or whatever. The contract will further provide that on vacation of the unit, the former resident (or executor) must pay the recurrent charges until the premises are resold.
The new NSW Retirement Villages Act prescribes that 45 days after vacation, the operator and the resident pay the recurrent charges in the same proportion as they share any capital gain. However, it does appear that the Act does not compel the operator to pay the proportion of the recurrent charges into the operating funds of the village. This could be a matter of concern unless the matter is clarified.
Of even greater concern, should a resident’s health deteriorate to the point when that person has to go to an aged care facility, the family or the resident is still obliged to continue to pay the recurrent charges until the unit is resold.
When the time comes for the interest free loan to be repaid to the outgoing resident, the operator is able to take the percentage specified in the contract as a departure fee. Not only has the resident paid to the operator the $200,000 for the term of the residence at the village but the amount to be repaid to the outgoing resident could be anything between 20% and 50% less than the original amount as a departure fee. Advice given by operators or their agents is that residents and operators share capital gain on sale in the proportion set out in the contract.
However most contracts do this by calculating the amount on the reduced price.
Take this example:
Assuming the capital gain is 25%, the capital gain is calculating on the amount of $150,000 and is the resale price is say $400,000 – on the net figure of $300,000. The capital gain in this example is $150,000 whereas on the purchase in and resale amount, the capital gain could have been $200,000.
As a Judge in the Federal Court said in one of the cases involving my old village, buying into a retirement village is not an investment; it is merely "buying" your final home. In many instances, operators also make an annual charge for "Administration or "Management fee".
Why is a departure fee necessary if an annual charge is also made? The construction of the village is recouped by the turnover of units. The quicker the turnover, the more profit an operator can make.
But some operators are greedy for more profits so they charge a Departure Fee and an annual charge. Double-dipping? You be the judge.
The Amendment Act - and its effect on residents
Another feature of the new Act is that it is now prescribed that the operator should not increase the recurrent charges each year by more than the CPI. If the operator overspends the budget and incurs a deficit, the operator is responsible for meeting the deficit from his own funds. However, that authority is then qualified and the Act has the opportunity of asking the residents to pay the deficit. If they refuse, the operator can apply to the Tribunal to increase the budget. The residents may then be held responsible for the over-run. What appeared to be a good result for residents has now turned into a lemon.
Future review of industry needed
There needs to be a fundamental review of the contractual system. The Coalition Opposition in NSW has announced that it will provide for standard contracts if they are elected at the 2011 election. That is a step in the right direction but there is also a downside. Operators always ensure that they have a number of different contracts in the village at the same time. There is thereby no opportunity of residents getting together for a class action against the operator as a Judge would have to look at individual contracts to check if they all had common clauses. As this contract versus legislation argument applies to every State, only an agreement of State Premiers or the intervention of the Federal Government will resolve this vexed problem.
Other forms of contract
The above comments relate to a long-term leasehold situation. There are other forms of contracts/agreements and prospective residents have to understand the subtle difference before making their decisions. It is appreciated that sometimes the village nearest to a family member is the choice of convenience rather than the best type of arrangement. There is a loan/license system whereby the prospective arrangement may obtain entry to a village by paying a sum up front. On vacation, the resident or the estate will be repaid the sum less the departure fee at the percentage specified in the contract. Again the resident loses the interest on the capital loaned to the operator and so many years later, obtains a lesser sum than originally paid.
One more favourable provision in the NSW legislation is that the refund must be made no later than six months after vacation. The resident does not have to wait until the unit is resold. There is also the strata title contract but it has to be borne in mind that the strata title only relates to the building on the land owned by the operator. Any capital gain at the termination of the contract only relates to the building and the land appreciation stays with the operator.
Good advice is essential
The legislation and the contract both emphasise the requirement for a prospective resident to obtain advice before entering a village. It is question of where do you find a solicitor with experience of retirement village contracts and the legislation. There will be practicing solicitors without any knowledge of village contracts and the law.
A prospective resident should ask their solicitor if he/she is experienced in this field. Alternatively, consult the Law Society and ask if they are aware of any solicitor who has the necessary knowledge. There are some firms that are very experienced in writing contracts for the operator. They may not be the ones that the prospective residents want. So many problems in villages relate to the budget and the actual expenditure of running a village that advice from a good accountant can be very valuable to a prospective resident.
Some contracts can be as long as 30 to 40 pages. The current Act is another 142 pages. If prospective residents are to take an intelligent interest in their retirement years, they should make a conscious effort to become familiar with the conditions that apply to them. Prospective residents should also consult with family members so that they too are familiar with the arrangements the parents have entered into.
So many families have been horrified to find that the estate or the family has to meet the recurrent charges until the parents’ unit is resold. Under the terms of the contract and law, the unit cannot be willed to the family. It has to be sold. If the operators has a number of vacant units, it could be that resale could be a year or more after the date of vacation.
While an executor or a power of attorney to a family member may have certain rights under the Act, the operator or the Residents Committee does not always ensure that the family has a right to vote on the financial budgets. However, it could be that the residents are prepared to pay for additional facilities in the next financial year. There is no benefit to the outgoing resident or his/her representative but they also have to meet the additional costs voted for by the existing residents.
What do you need in a village?
The operators sell a lot of units based on lifestyle considerations. Some villages are called resorts and they provide such extra facilities as golf courses, bowling rinks or are built near lakes where residents can moor a yacht. The move towards these extra facilities naturally increases the entry price and the recurrent charges.
There are villages where there are residents who can easily afford the higher costs but these facilities may not have been available when an aged pensioner first bought into the village. That person becomes just another voter when the residents vote on the budget. They may not be able to afford the new increases and he/she may not be able to afford to sell the unit, as the amount received will be insufficient to restore the person to his/her former position.
I am aware of a number of people who consider themselves to be prisoners in a village simply because they would have insufficient capital to buy a suitable residence in the current market.
It should be apparent that deep thought has to be given to a move to a retirement village. Having said that, it should be said that the friendship with fellow residents could be an important factor in making a decision to enter a village. For instance, it can be a lonely existence for a widow or widower to continue to live in the family home that is too big for one and costly to maintain. The moves to a village where there are people to talk to or cards to play provide rich rewards for those currently living alone.
Some sales people will try to convince a prospective resident that they should move into the village and not think about the family inheritance. This is a matter that only the prospective resident should consider but unfortunately many people rush into a village before thinking through the biggest decision in their life – where to spend your twilight years.
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