In many ways, buying a retirement village unit is even more complicated than buying any other type of residential property.
There are different forms of legal title and occupancy rights available, there is the ongoing cost of services and maintenance of facilities in the village, and then what fees, charges or capital gain sharing may apply when the unit is sold again later on.
Different transaction costs may or may not apply to a purchase, such as stamp duty, lease registration fees and a village operator’s legal costs.
While these legal and financial complexities should not detract from the benefits of village living, it is very important to obtain legal advice before you buy a retirement village unit. You need to be fully informed of all the costs and issues which may arise and ensure there are no surprises or unanticipated problems later on.
Seniors Housing Online (now Downsizing.com.au) has been fortunate to talk to Richard McCullagh BA LLB, a very experienced NSW solicitor who has specialized in retirement village law for the past 25 years, previously working for village operators and who now works for village residents (or prospective residents).
He has seen huge consolidation in the industry in the last 5 years as well as keeping up with ever-changing government regulation.
We asked Richard to answer some common questions about buying a retirement village unit, including the pros and cons of the different types of legal title and occupancy arrangements.
[Please note that these answers relate to the law in New South Wales; they are offered as general guidance only and do not constitute legal advice.]
1. What are the main types of legal title or right of residence available in retirement villages?
The legal basis of your right to occupy a unit in a retirement village is called a “residence right”. The Retirement Villages Act 1999 (NSW) recognises a number of different types of residence rights:
(a) strata title
(b) community title
(c) company title
(d) leasehold title
(e) licence, and
(f) Residential Tenancy Agreement that does not expressly exclude the provisions of the Act.
For short-term arrangements to permit occupation before a permanent residence right is created, the Act allows for a Residential Tenancy Agreement that expressly excludes the provisions of the Act to be used. This may be appropriate, for example, if you are about to move into the village but there is a last-minute short-term delay with the settlement of the sale of your current home.
In my experience villages offering community title are very rare, company title very few, strata title slightly more common while leasehold title is the standard type of residence right offered by 'for profit' operators and licences are standard right offered by 'not for profit' operators such as churches and other registered charities.
2. Will I have to pay stamp duty when I buy a retirement village unit?
Normally you will have to pay substantial stamp duty on (a)-(c) above - the same as if you were buying a house. The same will apply under (d) if the lease is 'assignable', ie where you can sell the balance of the term of the lease to a new resident when you leave.
Otherwise, residence rights by way of lease or licence under (d)-(f) above are not generally liable for stamp duty.
3. Does the type of residence right determine the type of entry payment?
To some extent. Most entry payments represent the current market value of the premises and are paid by way of a lump sum upon moving into occupation. The amount is not regulated by the Act. An exception is under (f) above where a rental is paid without any lump sum under a Residential Tenancy Agreement, increasingly being offered in the 'not for profit' sector.
Under strata, community and company title (a)-(c) above, you will generally be paying a 'purchase price' for the legal title to your dwelling. You will be relying on the succeeding resident to pay you the re-sale price after you move out. The same applies in the case of leases under (d) above which are assignable by you, for which you will have paid and be entitled to receive a 'lease premium'.
Under other leases and licences, the entry price is commonly set up as an interest-free loan to the operator. Other types are prepaid rent, a licence fee or simply an 'ingoing contribution'. In these cases, the operator normally has a contractual obligation to pay you a refund after you permanently vacate.
4. Does my contribution to the operator's legal fees vary according to the type of residence right?
It may do. Your contribution to the operator's legal costs on preparation of contracts under (d) and (e) above (leases and licenses) is limited to $200 for the 'village contract', or each of the 'residence contract' and the 'service contract' in some cases.
For residence rights under (a)-(c) above (strata, community and company title) there is no regulation under Act, but in practice each party generally pays their own costs. The contract itself needs to be checked in these cases.
Some operators include other documents that may fall outside the definition of 'village contract' under the Act and attribute additional legal costs to those documents for you to pay. This is not necessarily related to the type of residence right involved but other structuring of the arrangement where the document does not in itself confer a residence right or an entitlement to receive general or optional services (eg a separate deed of loan where payment of the ingoing contribution is by way of a loan, or a caveat over the title to a strata unit to secure payment of fees).
In the case of leases under (d) above that are registered, you may be required to pay the registration costs ($99.50 as at 1 July 2011). You may also be asked to pay for the fee of an agent to physically lodge the lease for registration at LPI (around $30) and, if there is a mortgagee on title, the mortgagee's fee to consent to the registration of your lease (around $250).
5. Does the type of residence right determine my share of capital gain or loss?
No. In all cases, it is important that you ascertain at the outset your entitlement to any capital gain when you leave the village, or your liability to bear any capital loss. This is not regulated and it comes down to whatever the village contract states. If you 'own' your residence right under strata title, it does not follow that you get all the gain or bear all the loss. It may be that you get 50% of the gain but bear 100% of any loss. If you are a lessee, you may get all the capital gain, though 50% is more common. You have to check the contract for this.
6. Does the type of residence right determine the calculation of the departure fee?
No. The 'departure fee' is a usually substantial payment due by you to the operator after you permanently vacate based on the duration of your stay in the village. It typically takes the form of a stated percentage of your entry payment, or that of the resident moving into the dwelling after you, for a stated maximum number of years (eg 3% pa of your entry price for up to 10 years). If your contract commenced on or after 1 July 2000, that fee will cease to further accrue when you permanently vacate even if the maximum period has not expired.
The percentages may be different for different years (eg 5% pa for the first 2 years followed by 2.5% pa for the next 6 years). There may also be a lump sum (eg a 'donation' of $10,000) or an additional single fixed percentage (eg 3% of the re-sale price). It is questionable whether these are 'departure fees' under the Act strictly speaking as they are not time-based, but they are frequently described as such.
Any of the above features may apply regardless of the type of residence right, so the village contract needs to be checked.
7. Does the type of residence right determine whether or not I am a 'registered interest holder'?
Yes. Why is this important? Because it affects your rights and obligations once you permanently vacate your dwelling as to recurrent charge, setting the list price and, if you are entitled to a refund from the operator, when that is payable.
A 'registered interest holder' includes all residence rights under strata, community and company title (a)-(c) above.
A 'registered interest holder' also includes a residence right under leasehold title under (d) above (whether assignable or not), but only where all of the following apply:
(a) the lease is registered at LPI, and
(b) the lease is for a term of at least 50 years, or is for the term of your life, and
(c) the lease entitles you to at least 50% of the capital gain.
Other residence rights - under (d)-(f) above - do not qualify you as a registered interest holder. Examples are leases which are not registered, or are less than 50 years in duration or entitle you to less than 50% of any capital gain, as well as all licences and Residential Tenancy Agreements.
8. Does the type of residence right determine my liability for recurrent charges after I leave?
Yes. 'Recurrent charges' are your contribution to the day-to-day operating costs of the retirement village, usually payable monthly in advance.
If your residence right means you are not a registered interest holder, your liability to pay for recurrent charges for general services continues for 42 days after permanent vacation and then ceases. This would apply, for instance, to a licence even if you get all the capital gain or to a lease where you get less than 50% of the capital (even if the lease is registered and for a term of 50 years or more).
If your residence right means you are a registered interest holder, your liability to pay for recurrent charges continues for 42 days after permanent vacation and is then limited to your share of capital gain until a new resident moves in. If your stated share of the gain is 100%, there is no reduction. If your share is 50%, you pay 50% of recurrent charges as from 42 days after permanent vacation until a new resident moves. This sharing applies even if there is no actual gross capital gain when you leave (eg if the new resident pays the same or a lesser purchase price or ingoing contribution than you did).
Under strata and community title (a) & (b) above, you are in addition liable to pay levies which will continue to be owing in full until a new resident moves in, regardless of any sharing of capital gain.
9. Does the type of residence right determine my liability for reinstatement when I leave?
Yes, but indirectly. For village contracts commenced on or after 1 July 2000 your liability for reinstatement of your dwelling is limited to rectification of damage beyond fair wear and tear. This restriction applies regardless of the type of residence right. Further, the Act was amended in 2010 to specifically prohibit an operator from 'selling', and passing responsibility for, fixtures to you under a lease or licence.
However, for residence rights under strata or community title (a) & (b) above, items disclosed in the contract for sale of land as 'inclusions' are your property and the operator has no ongoing obligations in relation to them. Examples are the stove, built-in wardrobes, air conditioners and fixed floor coverings. While you do not have a legal obligation to reinstate these items, neither does the operator. When you come to sell, you may have a commercial incentive to replace or reinstate those items, depending on your share of capital gain. The prohibition on a lessee or licensee Act 'owning' fixtures above does not apply under strata or community title.
10. Does the type of residence right determine whether I can set the sale price for my dwelling?
Yes. If your residence right means you are a registered interest holder, you can list your dwelling with any licensed agent of your choosing and set (and vary) the listing price. This may or may not be the operator, but if a fee or commission is charged the operator must be separately licensed as a real estate agent.
If you are not a registered interest holder, the operator controls the re-sale price and process but you will be due a refund on 6 months after permanent vacation if no new resident has moved in by then (see below).
11. Does the type of residence right determine whether or not the operator can make me move out?
Yes. The operator has certain limited rights under leases and licences (d)-(f) above to seek an order from the Consumer Trader and Tenancy Tribunal requiring you to leave. These rights apply, for example, if you persistently and seriously breach the terms of your village contract, if you cause serious damage or injury, or if your physical or mental condition deteriorates so that the services and facilities in the village are no longer satisfactory to your needs in the opinion of a medical practitioner.
The Tribunal, however, does not have jurisdiction to terminate a residence contract under strata, community or company title (a)-(c) above. In these cases, your security of tenure is greater.
12. Does the residence right determine when I get my refund after moving out?
Yes. Generally, where the operator has an obligation to pay a refund under (d) & (e) above, you are entitled to receive it within 14 days of a new resident moving in or paying an ingoing contribution.
However, if you are not a registered interest holder, the time limit for payment is 6 months from permanent vacation by you, even if no new resident has moved by then.
The operator does not usually have an obligation to pay a refund under strata, community or company title (a)-(c) above or where the lease is assignable and you are a registered interest holder (some cases of (d) above). Payment will normally be determined by the terms of the contract with the incoming resident.
13. Does the type of residence right determine how secure my right to a refund is?
To some extent, yes. As a generalisation, a registered interest holder will be in a potentially stronger position than a non-registered interest holder to the extent that the residence right is in the form of a saleable asset and that sale is not fettered by the operator. That, in turn, may be constrained by the terms of the particular village contract.
This question is directed to circumstances where the operator is experiencing solvency issues and may lack the ability to pay your refund on time. This is a complex issue that is very much dependent on the particular factual situation.
If your residence right does not qualify you to be a registered interest holder (eg licence or unregistered lease under (d) & (e) above then under the Act you will have the security of a 'charge' in your favour. This entitles you to apply to the Supreme Court for an order forcing the sale of the village, or so much of the village as is within in a registered parcel of land containing your dwelling. However, that order can only be made if the Court is satisfied such an order is in the best interests of the majority of residents. So, while this does give you a higher priority amongst certain other creditors of the operator, there are significant costs and burdens involved in using that enhanced priority to achieve payment of your refund. If you are one of only a few residents seeking payment of an overdue refund, it seems highly unlikely that the Court will be disposed to make an order forcing the sale of (part of) the village.
If you are a registered interest holder, you also have enhanced security from the registration of your title over part of the land comprising the village. In the case of strata and community title (a) & (b) above, your dwelling will not generally be available to a secured creditor. Similarly, a registered long-term lease (d) above will not be available to a secured creditor until the expiry of the term. In all these cases, you can appoint an agent and set the listing price, so you can to an extent take control and dispose of your asset as outlined above. However, this may be subject to contrary terms in the contract and, if the operator is under administration, you may still have to seek leave of the court to enforce payment, under section 440D of the Corporations Act 2001.
As is apparent, it is difficult to make useful generalisations about the security of your right to a refund as it will often turn on the particular terms of the village contract and circumstances of an insolvency, rather than on the type of residence right.
Finally, the Act has been amended to allow you to apply to the Tribunal for a re-calculation of the refund under non-assignable leases and licenses (d) or (e) above if the village contract issued to the new resident is substantially different to yours and this has a negative financial impact on you and a benefit to the operator.
14. What is the best type of residence right?
In my view, the best residence right from your point of view as a resident will have the following features:
(a) a registered long term lease giving you at least 50% of any capital gain but nil liability for loss - if it is assignable you will have to pay duty (so you will be a registered interest holder with the right to set the sale price when you leave)
(b) registration being consented to by any mortgagee on the title - you may be asked to pay the consent fee (so that your interest takes priority over that of the mortgagee)
(c) an ingoing contribution in the form of a loan (which may give you rights to a refund supplementary to those in the Act)
(d) recurrent charges that are varied according to a fixed formula, eg a percentage of the single age pension (to give you protection against unforseeable increases in costs), and
(e) a departure fee based on your entry price (to give you certainty of the amount payable at any time).
Such a lease, compared to strata, community title and assignable leases - saves you stamp duty on entry. Also:
• Compared to strata and community title it limits your exposure to recurrent charges when you leave, unless you retain 100% of the capital gain.
• Compared to strata and community title it limits your exposure to reinstatement costs on departure in two ways: first, because you 'own' less, ie all fixtures in the dwelling remain the property and responsibility of the operator, other than for alterations or additions you have made to the dwelling; and second, because your liability is limited to rectification of damage beyond fair wear and tear.
• Compared to a lease or licence where you are not a registered interest holder it gives you the right to appoint your own agent and set the sale price of your dwelling when you leave. Depending on the contract, you may potentially have a more saleable asset.
More information and contact details for Richard can be found on his website www.retirementvillagelawyer.com.au
Richard is based in Gosford on the Central Coast, and he covers the Sydney, Newcastle and Hunter regions – visiting clients in their home if that suits them best.