Retirement villages

The dream retirement promised by the glossy brochures can turn into a financial and emotional nightmare

George, 85, had lived comfortably in a retirement village in Melbourne’s south-eastern suburbs for nine years – in a unit that cost $595,000 – but when the time came for him to move into aged care he and his three children received two sizeable shocks.

The retirement village operator took two years to sell his unit, which meant his family was unable to pay the $1 million refundable accommodation deposit (RAD, formerly known as the bond) that was required by the aged-care facility. George was able to move in but his family had to pay an annual fee, known as the daily accommodation payment (DAP), which amounted to 5.73% of the outstanding amount of the RAD. (The DAP is paid on a regular basis, up to a month in advance, and is similar to paying rent. This fee is set by the federal government. If a person has no asset base, the DAP equates to about 80% of the pension.)

This dramatically stretched the family’s cash flow. His family’s efforts to speed up the selling of George’s

unit in the retirement village by engaging a real estate agent were firmly rejected by the retirement village management, which pointed to a clause in the contract – signed 10 years earlier – that only management could sell the unit.

There were also clauses that prevented the family bringing in their own painters and providing replacement whitegoods.

When the unit finally sold, George’s family received their second shock. Subtracted from the unit’s $1.02 million sale price was a deferred management fee (32.5% of the sale price) of $331,500, a long-term maintenance fund fee (4%) of $ 40,800, reinstatement costs (new kitchen, painting the unit, etc) of $70,440, a releasing assistance fee (2.5%) of $25,500 and legal costs of $970.

George’s $1.02 million had rapidly become $550,800. In nine years, George’s family had lost more than $400,000, despite the fact the unit had nearly doubled in value.

Welcome to the expensive and often opaque world of retirement village living, where contracts can often run to 100-plus pages and must be read with the eye of an actuary. Adding to the confusion is that retirement villages operate under state laws, which vary significantly from state to state.

It is easy to see the attraction of retirement villages. The glossy brochures promise security and companionship, the maintenance of units is looked after (at a charge) and meals can be provided. In essence, retirement villages offer comfortable and hassle-free living.

But when a person tries to move from a retirement village into aged care things can unwind. Delayed sales, expensive fitouts and obscure and unexpected exit fees can all take their toll.

Meanwhile, the funds tied up in the unit are required for entry into aged care. And if the funds are not available, penalties mount up. And, of course, all this happens at a time of stress. Moving loved ones into aged care is a difficult and emotional time, and often decisions must be made quickly.

Retirement village operators argue that all exit fees are in the signed contract. The shock often comes to the next generation, who had nothing to do with the original signing of the contract often several years earlier. Children are especially galled when their friends’ parents, who might have stayed in the family home during the same period, are benefiting hugely from increasing property prices. Buying a retirement village unit is not a property investment.

There are other important issues to consider in many retirement villages:

Because most people don’t actually own units (most are lessees) they have few rights when the time comes to exit the village.

• Retirement village units cannot be bequeathed to a child.

• Many retirement villages do not allow visitors to stay in units.

• Retirement village operators may force people to move out if they are deemed to be no longer able to live independently.

• If the names of both residents are not listed in the contract, the remaining person may be forced out of the unit if their partner dies or leaves.

According to the Property Council of Australia, 20 years ago the average age of people moving into retirement villages was around 60. Today it is closer to 80. Many owners of retirement villages have rejigged exit costs accordingly. Whereas several years ago exit fees were typically 3% of the value of the unit per year of residence, capped at 30%, some owners of retirement villages today charge a flat fee of 15% of the value of the unit if a person leaves within the first year, 25% if the person leaves between one and two years and 40% if the person leaves after two years.

In recent months, there have been accusations that retirement home operators “churn” customers in order to regularly realise these high exit fees.

People have to take all this into account when making their decisions.

Importantly, retirement village contracts are not the same as ordinary residential property sale contracts.

Retirement villages offer several different contracts, so much so that different residents in the same village may be on different contracts. For example, different contracts may apply to independent living units and assisted living. Operators may also offer different contracts at different times; neighbours in a retirement village might have signed different contracts with different rights and responsibilities.

The most common types of contracts for retirement villages are strata title, or long-term lease or licence.

Strata title is often offered in retirement villages that are run for profit. A buyer pays the agreed purchase price to the unit owner, usually through their selling agent, such as the retirement village operator or an estate agent. The new resident occupies the premises and becomes a member of the owners’ corporation (formerly body corporate), the same as any other strata title scheme. However, unlike other strata title schemes, buying a retirement village unit is conditional on the retirement village operator approving the new resident and the resident signing a management contract with the village

owner. (In Victoria, for example, any disputes about these conditions must be resolved through the Victorian Civil and Administrative Tribunal.)

A strata title unit owner will be registered as the owner of the unit on the title deed held at the state land titles office, and has to pay owner’s corporation fees during the period of ownership. The owners may also have to pay GST if the unit is new and they are the first owner. A recurrent charge, also known as a maintenance charge, is paid as well, usually monthly or quarterly.

A resident may also be asked to sign several contracts, including a sale contract and a management contract with the manager of the village, which define the services that are provided by the manager.

When it comes time to sell a strata title unit, the owner has the right to sell through the selling agent of choice, usually either an estate agent or the village operator. However, this is not the case if the contract assigned exclusive selling rights to the retirement village operator.

Depending on the terms of your contract, the resident may also have to pay the operator a share of any capital gains, departure or exit fees, and other charges from the proceeds of the sale. If a retirement village operator has a waiting list at a village but is not the selling agent for a unit, the unit owner does not have to sell to people on that list. The operator may not be obliged or able to supply the waiting list to the selling agent.

With a long-term lease or licence contract, a resident pays a contribution at the time of entry and, in return, receives a lease or licence to live in a particular retirement village unit for a period ranging from 49 to 199 years. The resident also has to pay a recurrent maintenance charge, usually on a monthly or quarterly basis. In some retirement villages, this charge is a fixed percentage of the age pension.

Depending on the terms of a contract, a resident may also have to pay the operator a share of any capital gains, departure or exit fees and other charges deducted from their exit entitlement.

Other types of contract include company title, unit trust and periodic tenancy.

Under a company title, a resident buys shares in a company that owns a retirement village. The shares give the right to occupy a particular unit in the village. A board of directors, appointed by the shareholders, operates the retirement village and the resident is required to comply with the company’s constitution.

Residents leaving the retirement village are entitled to receive the sale price of the shares at settlement, less any outgoing deductions. It is important to understand that residents under this arrangement are not buying property but shares in a company.

Unit trusts are complex legal structures. They are similar to company title schemes except that a resident buys a unit in a trust that carries an entitlement to occupy the unit. The retirement village is legally owned by the trustee, who holds it for the benefit of the unit holders in keeping with the terms of the trust. As with a company title, residents leaving retirement villages are entitled to receive the sale price of the unit in the trust at settlement, less any outgoing deductions.

Periodic tenancy arrangements are sometimes used by not-for-profit organisations running community-based retirement villages. A periodic tenancy is a lease (written or verbal) between the resident and the owner in which there is no fixed date for the end of the lease. This means the agreement operates from rental period to rental period. In some cases a resident pays an ingoing contribution, some or all of which may be refundable at the end of the tenancy period. Paying rent gives the resident the right to live in the unit and use any common facilities.

‘ The resident may have to pay a share of capital gains, exit fees and other charges