Retirement villages are a popular choice for many Australians looking to downsize however buying a retirement village is a major financial decision which needs careful consideration and is more complicated than buying other types of residential properties.
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 lease registration fees and a village operator’s legal costs. Whilst they can be a viable option, you need to read the fine print and make sure you understand exactly what you are signing.
What Is A Retirement Village?
Retirement Villages in Queensland are controlled by the Retirement Villages Act 1999 (“the Act“) In order to operate the retirement village must be registered under the Act. The Act provides important protections to residents including being provided with a Public Information Document prior to entering into a contract and a 14 day cooling off period from the date the residence agreement is signed.
A retirement village is premises where older members of the community or retired persons reside, or are to reside, in independent living units or serviced units, under a retirement village scheme. Generally to be eligible to reside you need to be over 55 and able to live independently. It is important to note that retirement villages do not include manufactured homes, nursing homes or mobile home or caravan parks which operate under a different legislation.
Will I Own The Unit?
There are three main types of tenure which include freehold, leasehold and licence. With most retirement villages, you don’t own the title like you would with your home, but instead you have a right to occupy the dwelling, and as such leasehold is the most common form of tenure with retirement villages. A lease terminates automatically on the death of the surviving resident or when the unit is on-sold to a new resident.
However there are some schemes that offer freehold title but you have to remember that although you own the property you are still restricted in dealing with the property. Generally the operator will lodge a caveat over the property and you will require consent of the operator to deal with the property. For example you are not able to take out a mortgage or sell the property without the operator’s consent.
The main reason people choose to move into a retirement village is for a lifestyle change with the benefits of living in a village community and having the security of 24 hour emergency medical assistance. The care free lifestyle is appealing especially with the variety of recreational facilities offered, however the relaxed lifestyle comes at a price.
Not only do you pay an ingoing contribution entry fee but you are charged exit fees, monthly general service charges and resale fees when you no longer wish to reside in the village.
The Ingoing Contribution is what you need to pay to reside in the village which is essentially the purchase price of the property. General Service Fees are monthly fees that you will pay for your right to use the facilities which may be increased annually. You are expected to contribute to the costs associated with the day-to-day and ongoing management and maintenance of the village. General Service Fees will differ with each village but an estimated general amount would be $500-600 per month.
Generally you will also be responsible for payment of the Operator’s Legal Costs of around $1,500.00 plus GST plus the costs to register the lease. Personal Service Fees are optional and are additional to the General Service Fees and may include such services such as laundry, meals and cleaning services. You will be required to maintain and repair your unit and you will be responsible for payment of utilities and insurance for your unit. The operator is only required to maintain the village and grounds.
Terminating A Residence Agreement
The Act sets out the ways that you and the operator can terminate the agreement. You are able to terminate your agreement by giving the operator 1 month’s written notice.
The operator may terminate for a number of reasons including if it is determined that you are no longer able to live independently due to illness. The operator may assess your health and if may arrange to remove you from the village to accommodation more suitable to your health needs. A right to reside in an independent living unit does not automatically confer a right to move to an assisted living unit or a nursing home in the same village. You need to consider when buying into a retirement village unit that the village offers assisted living as well and the costs involved when having to terminate your existing lease.
You are required to continue to pay the General Services Charge for at least 90 days from when you vacate your unit unless you are able to sell your unit earlier. The obligation to continue to pay the General Services Charge can continue for up to 9 months.
When an agreement is terminated and you stop living in the village you will need to pay the operator an Exit Fee which differ with each village and are calculated in reference to a percentage of your ingoing contribution and the length of time you have lived in the village. The Exit Fee may start at a percentage of 5% and increase each year you remain in the village. Generally the Exit Fee is capped at a maximum of 35% for your ingoing contribution. There is always a minimum and maximum exit fee payable which is set out in the Public Information Document. Most people would be aware of having to pay an Exit Fee but there are other costs that you should be aware of.
Resale & Reinstatement
When you wish to leave the village and sell your unit the operator will be in control of the selling process. You and the operator need to agree on a Resale Price for your unit. If there is no mutual agreement, the operator must obtain an independent valuation from a suitably qualified valuer which you will be liable to pay half the cost. You must also agree on any Reinstatement Work that may be required to return your accommodation unit to the condition it was in when you moved in. This may include work such as cleaning, painting, repairing, replacing floor coverings, fittings, equipment, appliances and furnishings provided by the operator.
The reinstatement costs are unknown at the time of entering into the resident agreement and the cost will depend on the age and condition of the unit. You should always ask the operator prior to entering into the agreement of the likely costs for reinstatement of existing units. The reinstatement costs can be as little as a $4,000.00 but can be $50,000.00 or higher in some cases.
Generally the operator will have the right for a period of 6 months to sell your unit and you will not be able to engage an independent selling agent until after this time. If the unit is not sold after 6 months then you may engage an agent but will liable to pay the agent’s commission in addition to any resale costs of the village.
Once your accommodation unit is resold, you must receive your Exit Entitlement which is calculated by you’re the Resale Price less the Exit Fee and capital gain or loss, your share of costs of reselling the unit, any alterations or addition costs, any outstanding service charges, reinstatement costs and operator legal and other fees.
What you need to understand is that your Exit Entitlement reduces over the course of time and in essence, you are paying for a right to reside and this is not an investment in property for capital gain.
Capital Gain Or Loss
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. The village may receive 50% of any capital gain. In some cases there is no provision for capital gain or loss. You have to check the contract for this. In a recent sale of an accommodation unit on a resale price of $600,000.00 the outgoing resident received total funds of around $356,000.00 after deduction of the Exit fee based upon 33% of original ingoing contribution $148,000.00, Capital gain $76,000.00, Reinstatement costs $4,000.00, Costs of sale $11,000.00, Levy adjustment $4,000.00 and Legal and registration fees of $1000.
How We Can Help
It is essential to obtain legal advice before you buy a retirement village unit in order to be fully informed of all the costs and issues which may arise and ensure there are no surprises later on.
Quinn & Scattini Lawyers’ experienced retirement village lawyers arm you with all of the information you need so you can make an informed, practical decision if buying into a retirement village is the right lifestyle choice for you. The main point is that entering into a retirement village is a lifestyle decision and not a property investment decision.
We are available to meet with you at any of our local offices (Brisbane, Gold Coast, Beenleigh, Cleveland and Jimboomba) or by telephone or video-conference.
This article is for your information and interest only. It is not intended to be comprehensive, and it does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.