Kids & family

Retirement villages

Updated: 13 Mar 2007
Retirement-villages-hero

Introduction

The retirement-village lifestyle may look idyllic, but it comes at a price. We look at the financial implications of "village" life.

New legislation designed to protect the consumer is a step in the right direction. But buying into a village can still be a financial minefield, so it's a case of buyer beware.

Our report also includes a handy downloadable checklist for assessing a retirement village.

Overview

Over the last few years, the Retirement Villages Act 2003 has begun to change the retirement-village landscape - and it comes fully into force on 1 May this year. The Act is designed to protect residents by setting clear regulations about what's expected of the industry.

Until now, only operators who voluntarily belonged to the Retirement Villages Association (which has its own code of practice and disputes process) have had any formal standardised process for dealing with day-to-day issues that arise in villages.

But while the new legislation will give consumers more protection across the whole industry and spell out the costs of living in a village, there's still plenty of "extras" when you buy into a retirement village. It's a case of buyer beware.

Our investigation found that:

  • Retirement-village contracts are extremely complex and generally one-sided financially, benefiting village operators not residents. There is usually little opportunity to alter the contract before you join a village. See Contract complexity for more.
  • Often residents receive no capital gain on their retirement-village property, nor on any improvements they've made to that property while living there. See Capital gain for more.
  • There can be multiple charges for maintenance and administration - which can be confusing. See Fees and charges for more.
  • Residents often have no control over the sales process. See Leaving the village for more.
  • The village operator is in a position to set the costs of refurbishment of a unit when a resident leaves - this may be more than residents expect or may not be fully spent on refurbishment. See Refurbishment rorts for more.

Village life

A Retirement Commission survey found that of the residents of retirement villages:

  • 70 percent of residents live alone.
  • 70 percent are women.
  • The average age of entry is around 78.
  • 73 percent are aged 80 years or over. Only 7 percent are under 70 years and 12 percent are over 90 years of age.
  • 99 percent of those surveyed said they were either satisfied or very satisifed with their village.
  • About half (54 percent) of the 13 percent of residents who had made a complaint in the last year were not satisfied that it had been resolved promptly and to their satisfaction.

Contract complexity

In 1999 the Law Commission released a report on retirement villages calling for "special protections" of residents. It noted that "the complexity of such contracts is probably unmatched by that of any other contract that a consumer may be called upon to adhere to."

The new Act, which has been welcomed by the Retirement Villages Association, aims to make retirement villages more consistent in the terms and conditions they offer.

All villages are required to provide residents or intending residents with a disclosure statement, an occupation-right agreement, code of residents' rights, and a copy of the code of practice (which comes into effect from September 2007). There's also a mandatory 15-day "cooling off" period, and all intending residents must get independent legal advice before signing a contract.

The importance of the new protections can be seen from a recent Retirement Commission survey of retirement villages.

The survey involved interviews with 52 operators and 173 residents. But not all villages that were approached agreed to take part. Of the residents in the villages who did participate, 97 percent of respondents said they understood the financial implications when they chose their village. But 11 percent didn't know what they would get back when they left their unit, and 31 percent didn't know if they could keep their capital gain. These findings were despite 60 percent of residents receiving legal advice before they entered the village.

Quality of legal advice

Barry Owen (pictured right), chairman of the Summerset Village Trentham Residents Committee, welcomes the idea of legal protection but questions how effective it will be. The 124 residents in his village are represented by 90 lawyers, some of whom he considers give out "shocking" legal advice.

John Greenwood, who represents the New Zealand Law Society on retirement village issues, echoes Barry Owen's views. Greenwood described his profession's knowledge of the Act as "very poor". "We're going to need a lot of publicity," he says.

The Retirement Villages Association and the New Zealand Law Society have organised seminars around the country to help get the sector up to speed.

Another problem identified by Barry is that operators lock residents into contracts they can't afford to get out of. "People in retirement villages have burnt their bridges. They've sold their houses, all they are left with is a licence to occupy ... they really can't afford to go to another village or go back into the community."

The Retirement Villages Association argues that residents have freely entered into a contract - and in many cases have taken legal advice before doing so. Residents are buying a lifestyle and a bundle of benefits including 24-hour care, emergency systems and community connection.

But that doesn't address the fact that contracts are weighted in an operator's favour: the residents, who are on individual contracts, have little bargaining power. Nor do they have a political lobby group to look after their interests.

Types of ownership

Retirement villages usually offer new residents either a licence to occupy or a unit title. There appears to be very little difference in price between the two contracts.

  • A licence to occupy gives a person a licence to occupy a unit or villa or apartment, and to use the common areas. But you don't own your unit or villa - and you can't borrow money to buy it.
  • A unit title provides individual ownership or freehold title within a property, such as an apartment block or retirement village. It also gives access to common areas. Like other property a unit title can be bought, sold, or mortgaged. But retirement villages that offer unit titles usually have an "encumbrance" over them. This means there are restrictions on who can buy the property.

Capital gain

Retirement villages generally pay little or no capital gain if a resident sells. The few who do return some or all of the capital gain tend to be charitable organisations.

The Retirement Villages Association's quality manager Philippa Blair says that, because many villages have waiting lists, there is little or no incentive for them to share capital gain with residents.

Village operators also claim they don't share the capital gain because villages are self-funding and the money is needed to upgrade facilities. And the Association has no powers to force its members to share capital gain because they're a lobby group for the industry.

Worse still, while operators are pocketing the profits of capital gain, some still expect residents to meet the capital loss if the market value drops.

Christchurch's Cashmere Court and Auckland's Rosehill Gardens are two villages that hold residents liable for the difference if the unit sells for less than they paid for it - but both require the consent of the outgoing resident. Rosehill Gardens tells us such a clause is common in the industry.

Operators' profit

It's clear that retirement village operators are profiting from capital gain.

Take the Ryman Group, which runs a chain of retirement villages in New Zealand. Last financial year the company recorded a profit of $35.1 million, an increase of 49 percent on the previous year. Shareholders were rewarded with a dividend that rose from 11.5 cents to 17 cents per share.

Metlifecare, another chain of retirement villages, recently announced a 26 percent rise in interim profit, putting the company on target to meet an annual projected profit of around $30 million. Chief executive Richard de Haast cited strong sales of villages and apartments as the reason for the profit and said he expected the company's growth to continue as the baby boomer generation moved into retirement villages.

Fees and charges

In its code of practice, the Retirement Villages Association reminds residents that: "retirement villages are not free. Buying into a retirement village involves purchasing a bundle of day to day services to be provided on a long term basis. Residents are buying a lifestyle, not just a property or a unit."

But John Greenwood, from the New Zealand Law Society, says what people don't realise is that retirement villages are not a financial investment. "It's not really an investment, what you are buying is security. I don't think the industry has communicated that very well."

The new Act requires all charges to be clearly spelt out. As well, all deposits for maintenance must stay in the maintenance account and be used solely to pay for the maintenance stated in a village's long-term maintenance plan.

While the new Act requires villages to provide operational forecasts and actual cost reports, there's no requirement to compare the forecasts with the actual costs. Nor is there any requirement to show how capital deductions, if any, are spent within a village.

Maintenance fees

Most operators appear to collect their maintenance money through what is called a "village contribution", a "deferred management fee", or a "facility fee."

Whatever its name, it works on a "use now, pay later" basis and is deducted from the money residents receive from their unit or villa when they move out of the village. The money is used for building maintenance and upgrading the facilities. Operators tend to charge a 20 to 30 percent deferred management fee, spread over a three- to five-year period.

There's often a maintenance component in what's called the "weekly fee" or "service fee".

According to the Retirement Villages Association, "the service charge will normally include local council sewerage and water rates and external or internal maintenance of villas and apartments. This could also cover garden and lawn maintenance, building repairs and fire insurance, a village bus, management and nursing staff and the operation of an emergency call system."

Weekly fees

There's a wide range of charges for the weekly or service fee. According to a Retirement Commission survey the median fee was $300 a month. On top of that we also found some operators that charged an administration fee of one or two percent upon the sale of a unit. And residents are expected to pay for their own telephone, power and contents insurance.

Brian Ellis

Auckland lawyer Brian Ellis (pictured right) believes the scope of the weekly fees is too wide and residents are paying costs that should be met by the village operator. He questions why residents are paying an operator's auditing and legal fees, marketing costs and for the time taken to prepare the prospectus and investment statements - all of which directly benefit the operator. "When an elderly person invests in a bank or finance company the bank or finance company routinely meet these costs, not the investor," he says.

We found several villages, who expect the buyer to pay the operator's fees (anywhere from $350 and more) for preparing the documents - something that's virtually unheard of in other types of conveyancing. Even in commercial leases parties usually pay their own legal costs.

One-off charges

Then there's also the issue of one-off charges that operators try to levy on residents.

Take the case of Summerset Retirement Village in Trentham. The village operator recently tried to charge residents 30 cents a day for electricity, generating an extra $16,000 a year. Management eventually reconsidered, but only after opposition from residents.

Summerset confirms that it did attempt to raise the electricity fee but dropped the proposal because it did not consult properly with residents. They say they were simply passing on the power company's charge. This illustrates just how vulnerable residents can be.

Refurbishment rorts

What happens to a unit or apartment once the resident has left is one of the most contentious issues in a retirement village. The government's new national code of practice says units should be refurbished to a standard equivalent to when the person first moved in, less wear and tear.

But it seems village operators have got some work to do.

Gisborne's Betham Lifestyle Village charges a flat 6 percent fee for refurbishment costs, and Christchurch's Cashmere Court charges 1 percent a year. Other villages require units to be at a "marketable standard" or "as new" condition.

It will be interesting to see what changes these villages' operators make after the code of practice comes into force in September. But the Retirement Villages Association fears the refurbishment provisions will cost large operators several million dollars.

The key issue is that there's often a wide gap between the actual amount spent on refurbishment and the amount that is deducted for it as part of these contracts. The Retirement Commission is currently investigating a number of complaints from residents about what they've been charged for the costs of refurbishment.

Leaving the village

The new Act requires village operators to state in writing their terms and conditions when a resident wants out.

Residents are usually up for a village contribution, plus the costs of refurbishing the dwelling, plus selling fees or an administration charge. This is deducted from the original purchase cost, with the resident getting the difference (and often no capital gain, even if the operator resells at a higher price).

That's in a "rising" market. What if the value of the unit or villa falls? The two examples below show the maths. In each case, the resident bought at $300,000 and then left after six years.


Auckland lawyer Brian Ellis says the problem of capital losses is made worse because licences to occupy often require residents to continue to pay the weekly fee months after they've left the village. This gives the operator little incentive to sell the unit, particularly if it has new units for sale.

The new Act requires an operator to reduce the weekly fee charged to the former resident by at least 50 percent if a new occupation-right agreement hasn't been signed within six months. Operators also have to provide a former resident with monthly updates if a new occupation right agreement has not been issued three months after the resident departed.

If the property is still vacant nine months after their departure, the former resident can lodge a dispute notice against the operator.

Our view

  • The new Act is a step in the right direction, but it doesn't deal with some of the fundamental issues. Agreements are too one-sided in favour of village operators, and residents lack the bargaining power to get these changed.

  • While the Retirement Villages Association represents village operators, there is no equivalent residents' body. This needs to be addressed. An independent complaints body (similar to the Health and Disability Commissioner or the Insurance and Savings Ombudsman) would provide more independent protection for residents.

  • If you're thinking of moving into a retirement village, arrange to meet the Residents Committee and talk to the residents on a one-on-one basis.

  • If the village operator gives you verbal assurances, make sure you receive those in writing before you sign the contract.

  • Make sure you read the contract and understand the implications of the terms and conditions. Get it checked by a lawyer who's experienced in these types of contracts.

  • Operators shouldn't be able to make residents liable for capital losses if they're not willing to share capital gain with them.

  • Try to do some bargaining with the operator over the refurbishment, maintenance, and capital-gains provisions of the contract. The more pressure that's put on village operators, the more likelihood that the industry will eventually offer a better deal on these issues.

More information

Report by Catherine Hutton

Checklist

Use our checklist to assess prospective villages.

We're not suggesting you should only go into a village where the answer to every question is "yes". Rather, be aware of the issues raised by our checklist and decide what's best for you.

Click below to download and display the checklist.

The checklist is presented as a PDF document. To view this document you will need Adobe Acrobat Reader software installed on your computer. This is available free from Adobe.