The number of retirement villages is only likely to increase to accommodate our ageing population. Retirement villages are an attractive option because they can offer a good balance between living independently and having access to support and healthcare. Villages comprise independent living options in a townhouse, villa or apartment, and (as needs increase) serviced apartments, care suites, rest homes, hospitals and dementia care units. Village living is becoming increasingly popular with a large percentage of residents reported as being happy with their experience.
Retirement villages are a lifestyle choice not an investment decision. There are many positives to the retirement village option including greater security, companionship, no house maintenance and access to support and healthcare. Downsides include limitations on the use of the unit, no capital gain and a deferred management fee structure. However, for most intending residents, financial considerations usually give way to the lifestyle offered.
The Retirement Villages Act 2003 (‘the Act’) provides that an intending resident must receive independent legal advice from a lawyer before signing an Occupation Right Agreement (‘ORA’). Common questions we receive from our clients about moving into retirement villages are:
How does this differ from usual home ownership?
Rather than buying the unit, a person is buying the right to occupy it and to use the facilities and services at the village. The ORA is not an interest in land. The resident does not acquire ownership rights. There are limitations on the use of the unit and who may stay in the unit with the resident. The resident does not have the right to assign their interest or rent out the unit.
How secure is the right to occupy?
All units in registered retirement villages have memorials on the title to the land where the village is situated. That gives the resident security over any individual or company that may have lent the operator money. Practically speaking, if the operator cannot repay the loan, the lender cannot evict the resident and sell the unit to recover their money.
What restrictions are there?
All villages have age restrictions. Intending residents usually need to be 55 years or older (in some cases 75 years) to apply. The unit is for the resident’s personal use and occupation. Residents may have friends or relatives stay but not long term. They are only allowed to alter the structure of the unit with the operator’s consent and usually only if a resident develops disabilities.
What are the financial implications?
Residents do not usually receive any capital gain and will generally not get back what they paid for the unit. This is because a ‘deferred management fee’ (DMF) applies. This term describes the amount deducted by the village on sale, generally a percentage of the purchase price multiplied by the number of years of occupancy. It is typically capped at between 20-30 per cent accruing over three to five years. Residents will pay a weekly or monthly fee for outgoings which may be fixed for the life of the ORA or adjusted for inflation. In some villages the fee could continue until the resident’s unit is reoccupied (although after six months the operator must reduce it by 50%).
What if the unit is damaged or destroyed?
The Retirement Villages Code of Practice 2008 (‘Code’) sets out the minimum requirements that operators of retirement villages must carry out, to meet their legal obligations under the Act. The Code is enforceable as a contract by a resident and prevails over any less favourable provision in the resident’s ORA. Under the Code, if a unit is damaged or destroyed and cannot be rebuilt, the ORA is terminated and the resident must receive an amount equal to the entry payment without any deduction.
According to its website, the Retirement Villages Association’s (RVA) village membership accounts for more than 95% of all registered villages in New Zealand.
Most villages require intending residents to have Enduring Powers of Attorney for both Property and Personal Care and Welfare and a Will.
The Commission for Financial Capability has produced a useful resource for intending residents titled ‘Thinking of living in a retirement village?’ You can find a copy of this resource at www.cffc.org.nz.
Typically operators do not permit trustees of a family trust to enter into an ORA. However, some ORAs recognise that funding may be provided by a family trust and are willing to accept an instruction from the resident/s where termination proceeds are repaid to the trustees of the family trust.
If trustees are advancing funds to a resident to pay the occupancy advance or entry payment, the loan can be documented between the trust and the resident. Trustees need to understand that some of the loan will not be repaid because of the deferred management fee (DMF).
Most ORAs provide that where there are two residents, they hold the occupancy rights jointly. On the death of one of the residents the ORA transmits automatically to the surviving resident. On termination of the ORA the termination proceeds are then payable to the surviving resident or his/her estate.
Couples in second or third relationships may have signed life interest wills to provide a residence for the survivor of them but intend for their interest in the residence to ultimately pass to their children. They may not intend for the survivor of them to receive the termination proceeds outright. Because of the joint ownership structure, intending residents should consider signing an agreement which provides for the exit payment, or termination proceeds, to be divided equally between the residents or their respective estates. In addition, it would be prudent for the couple’s wills to provide that the life interest includes occupancy rights in a retirement village unit with the executors authorised to lend the deceased’s share of the termination proceeds to the survivor, to acquire occupancy rights in alternative accommodation, for example a serviced apartment.
Maintenance and upgrading of retirement village property
In the majority of retirement villages, the operator is responsible for the maintenance and upgrading of village property. The sections in the Unit Titles Act 2010 which relate to long-term maintenance plans, funds and ancillary matters, do not apply to a unit title development that is a retirement village. Therefore, it is important for intending residents to be advised who is responsible for maintenance and upgrading of retirement village property. Disclosure Statements must contain details of the retirement village. These should include details about the condition of the buildings and facilities and what maintenance, if any, is required. If an operator is aware of significant maintenance issues but this detail is not set out in the Disclosure Statement, a resident could cancel the ORA on the basis of substantial and/or material non-disclosure. Furthermore, any misrepresentation about the state of the village and its facilities could give rise to a right of cancellation under the Contract and Commercial Law Act 2017. If an ORA is cancelled the resident is entitled to receive a refund, without deduction, of:
- all capital sums paid before or after the resident’s occupancy as consideration for the right of occupation of the unit;
- any other payments made for which services or facilities were not provided;
- interest (at the rate set down in the regulations to the Act); and
- the actual and reasonable costs associated with ending the ORA, such as legal expenses and removal costs.
What if I change my mind?
By the time clients have come to see a lawyer they have usually done their homework and made up their mind to shift into a retirement village. However, there is a cooling-off period of 15 working days after the resident signs during which the resident can cancel. In addition, if the unit is to be built and is not finished to the point of practical completion within six months after the proposed date of completion, the resident can cancel the ORA. It is recommended that intending residents consider a village that is a member of the RVA.
Disposal of a residential unit
Retirement village operators have responsibilities in relation to the sale or disposal of a vacant residential unit (as set out in section 51 of the Code). A former resident can issue a dispute notice concerning the operator’s breach of the Code in disposing of a residential unit, but must wait nine months after the unit becomes available for reoccupation or disposal to do so. The operator must appoint a disputes panel to resolve a dispute for which a disputes notice has been given. The panel must be appointed within 20 working days after the operator has received the disputes notice. One of the members and chair of the panel must be a retired judge or have held a practising certificate as a barrister and solicitor for at least 7 years. The operator is responsible for the cost of the panel.
A disputes panel may order that the operator:
- market the residential unit concerned in a particular way, or at a particular price;
- pay the resident a sum in compensation;
- pay the resident interest not exceeding the rate of interest prescribed under section 87 of the Judicature Act 1908; and
- if the resident has a legal or equitable estate or interest in the unit, buy the resident’s estate or interest at a price within the time fixed by the panel, or pay a sum fixed by the panel.
The cost associated with appointing a disputes panel could be significant. It is important for operators to resolve disputes with residents as quickly as possible, to avoid the cost associated with the disputes process.
Variations to the Code of Practice
The Code has been updated to include variations to the disputes resolution process. The variations came into force on 1 April 2017 and are intended to facilitate early resolutions of disputes. The amended Code:
- requires operators to have and use a written procedure so that residents may raise concerns or issues informally;
- requires operators to report to the Retirement Commissioner six-monthly in relation to formal complaints for each village;
- includes a step-by-step procedure for formal complaints to encourage early resolution;
- includes a diagram explaining the complaint process to assist residents to understand the options available;
- requires operators to pay for mediation services for disputes between operators and residents; and
- requires operators and residents to share the cost of mediation services equally.
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