Why Are Retirement Villages So Complicated, Confusing and Controversial?
Retirement villages are potentially a very attractive accommodation alternative for seniors in Australia because retirement living can provide a number of real benefits, by far the most important of which is community.
However, retirement villages are also complicated, they can be confusing and they are somewhat controversial, so you need to fully understand what they are and what they involve before you sign on the dotted line. Wishful thinking is not an option and is sure to lead to surprises at best and serious disappointment and financial stress at worst.
A major contributor to the complexity is the range of different legal structures that have developed over time and which now exist together. The different structures are largely the product of the slow historical commercialization of the retirement village sector from the so called “not-for-profit” or “donor funded” model towards the private sector or “resident funded” model, together with developments in property, tax, company and securities law and stamp duty.
The early providers of retirement village style accommodation were mostly “not-for-profit” organizations, particularly religious and charitable institutions. Loan/license arrangements were common at this time and they often included an element of charitable subsidy, hence the term “donor funded retirement village”.
As the private sector became increasingly involved in the sector, other legal structures such as company title, unit trust, strata title, community title and manufactured home villages also appeared, as did the loan/lease village structure, which is probably the most common retirement village legal structure today. Purpose built villages that offer purely rental accommodation have also been a feature of increased private sector involvement. Private sector retirement villages are operated on a fully commercial basis, hence the term “resident funded retirement village”. Many villages that are operated by the “not-for-profit” sector are now also operated on a fully commercial basis to generate funds for other charitable or benevolent activities.
A feature of many retirement villages that has contributed to both complexity and confusion and has created a lot of controversy is the “departure fee”, which is also sometimes called a “deferred management fee”, “DMF” or “exit fee“. Departure fees are payable when a resident permanently leaves the village. Some departure fee structures let the resident participate in future increases in the value of the home and some don’t. Although it is much maligned, there is a logical and historical rationale for having such a fee and in many cases the need to have it is actually enshrined in the relevant retirement village legislation because village operators are prevented from recovering certain expenses any other way. In some cases it can align the interests of the residents and the operator and it can also facilitate pricing flexibility. That said, it is harder to justify having a departure fee in strata title and community title villages, where there is also usually a sinking fund. Manufactured home villages also usually have the option of recovering all village expenditures through recurring charges rather than through a departure fee.
Even if having a departure fee is justified, what matters, of course, is how big it is, how it accrues and is calculated and whether it is reasonable in the circumstances, having particular regard to the purchase price or entry contribution that is required to enter the village!
Another major contributor to the complexity is the fact that each State and Territory has its own retirement village legislation and the legislation can be quite complicated because it has to contend with several different legal structures and several different departure fee structures. Each State and Territory has its own retirement village legislation because retirement villages are primarily about property and property (unlike aged care) is largely the responsibility of State and Territory governments. Depending on the legal structure, additional legislation may also apply, and in the case of purely rental villages and manufactured home villages, totally separate and specific legislation usually applies. This means that a resident’s legal rights and a village operator’s legal obligations can vary greatly depending on the legal structure of the village, the particular departure fee structure and the State or Territory in which the village is located.
Even village names and descriptions can cause confusion because so many different terms are used. A particular village may be called a retirement village, retirement home, retirement community, retirement resort, retirement estate, lifestyle village, lifestyle community, lifestyle resort, rental village, manufactured home village, over 55s village or over 50s village. Unfortunately, what it is called will not always clearly establish its true legal structure or the applicable legislation.
Please see the following pages of this Retirement Villages Guide for further information: