Matters to consider before signing your residence contract

About this article

This article provides a brief look at various matters which prospective residents should consider before they sign a residence contract.  The matters covered are not exhaustive and, those that are included, must not be considered legal advice.

Seek legal and financial advice

Retirement village contracts are unfortunately long and complex documents and include details about many relevant matters.

The ARQRV recommends that prospective residents seek separate professional legal advice and financial advice from appropriately qualified persons.

You must carefully consider every aspect of the village and the conditions in the proposed residence contract, not just the financial implications, to ensure you choose the village that is right for you.

The village and lifestyle

Facilities

Villages offer a variety of facilities to enhance your enjoyment of living there.  These will be aimed at different demographics – for example, gyms, tennis courts and lap pools for fit and active persons, or an emergency call service and a 24/7 nurse station for those requiring more care-related services.

No matter what is provided as a service or facility to all residents, you must pay your share of the associated ongoing costs.

Accommodation type

Each village will offer a different level of accessibility within their accommodation units and the common facilities.  You should, at least consider the following – size of door openings, shower hobs, ramps, step heights at doors, requirement for lifts, number of steps within the common areas and gradient of hills in the grounds.

Demographics in village

When considering a village take notice of existing residents to see if you are of the appropriate age and vigour. 

Personal services

Villages may offer optional services that are offered for the benefit, care or enjoyment of a resident – for example, laundry, meals or cleaning.  These services are paid for in addition to your general services charges.

Aged care

One matter that is often overlooked is that of aged care which you may require in the future.

Aged care is funded by the Australian Government through My Aged Care.  You will be assessed to determine the appropriate level of care and funding for your needs.

Some operators are also registered Aged care Providers so find out what is offered, if you are looking for this service.

Other general matters

Is the village you are considering close to amenities that are important to you – for example, your family for ongoing help and support, friends, medical facilities (doctor, chemist, pathology, hospitals) and dental, shopping and public transport.

Also consider, the village policies on current and future pets, and visitors staying over.

How a resident holds an interest in an accommodation unit

There are various models under which a resident may hold an interest in an accommodation unit.  In general terms, there are 3 prevailing models; namely –

  1. leasehold village – each resident has an interest under a registered lease entered into with the scheme operator
  2. licence village – each resident has a licence (formal written agreement) to occupy the unit entered into with the scheme operator
  3. freehold village – each resident owns their unit by purchasing and holding a freehold interest in the unit.  The resident leases the unit to the scheme operator and the scheme operator sub-leases the unit back to the resident

1. Leasehold village

This model is very common within the industry and is quite conventional in its operation – that is, there is clear distinction of obligations for ‘who pays for what’ for operation and improvements to the village.

The interest held by the resident is well secured by the lease, registered on title in the land registry.  The interest once registered, cannot be annulled or overturned.

Maintenance to the accommodation unit (other than items excluded by the residence contract) are the responsibility of the scheme operator –for example, the exterior of the unit is repainted, or a window seal has deteriorated and needs replacing and the work is repaired by the scheme operator using monies from the maintenance reserve fund.

2. Licence village

This model is somewhat common within the industry and is quite conventional in its operation – that is, there is clear distinction of obligations for ‘who pays for what’ for operation and improvements to the village.

As the resident has only a licence in their unit rather than a registered lease this model may be considered less secure.  However, particular legal mechanisms prescribed by the RV Act provide protection for residents in these villages.

Maintenance to the accommodation unit (other than items excluded by the residence contract) are the responsibility of the scheme operator –for example, the exterior of the unit is repainted, or a window seal has deteriorated and needs replacing and the work is repaired by the scheme operator using monies from the maintenance reserve fund.

3. Freehold village

This model is not as common within the industry.  It has a more complex model for operation as there is, in addition to a scheme operator, a body corporate.  As such, there is the matter of operating the body corporate which brings a more complex apportionment of residents fees, charges and contributions to or by residents, the body corporate and the scheme operator.

In freehold villages the resident is usually responsible for all maintenance to the accommodation unit including the building.

There is also duty payable for the purchase of the accommodation unit.  There may also be additional fees and charges for the lease and sub-lease.

Time to peruse and understand documents

Unless a waiver is given by the prospective resident, the scheme operator must give to the prospective resident, at least 21 days before a contract is signed, a copy of each of the following documents –

  1. the residence contract;
  2. the village comparison document for the scheme;
  3. a prospective costs document for the residence contract;
  4. any by-laws for the village in force under section 130;
  5. any other document prescribed by regulation.

A prospective resident may also request access to certain village operational documents held by the scheme operator.

Get it in writing

Anything promised or agreed verbally by sales staff, not already written in your residence contract, should be attached to or added as a variation to the contract.

Any answers to questions raised by the prospective resident and/or their solicitor, should be substantiated by signed letters from the scheme operator or their solicitor.

The last thing needed by a prospective resident, is a future dispute with the scheme operator about what was promised or agreed.

Verbal agreements, if relied on by a prospective resident, would have little or no bearing at a tribunal hearing.

Terminology

Who is a scheme operator?

The scheme operator is the person who, alone or with someone else, controls the village’s operation. The scheme operator may be an individual or a company.

What is a residence contract?

A residence contract is one or more documents about your residence in the village entered into between you and the scheme operator.  The residence contract provides the full details of the rights and obligations of the resident when residing in the village.

What is a village comparison document?

This is a document that gives a vast range of general information about a particular village, to potential residents.  It must be available on the website for the village.  It is the ‘go to’ document for prospective buyers so they can see what is available at a village and generally how much it costs.

What is a prospective costs document?

A prospective costs document gives to a prospective resident of a village a summary of the estimated costs of moving into, living in and leaving the village.

What is an ingoing contribution?

This is the amount you have to pay to secure your right to reside in the retirement village.  It does not include recurring payment for rent, fees or charges.  It is paid to the scheme operator and is usually an interest free loan to the scheme operator.

Make sure you know how much it is and when it is payable.  Some operators let you move in now and pay later so you don’t have to wait to sell the family home.  If this is the case for you, find out when you are obligated to make the full payment.

What is an exit fee?

This is the amount that the resident is liable to pay to the scheme operator when a resident terminates their right to reside in their accommodation unit.  The exit fee is usually a percentage of either the ingoing contribution or the selling value, and is calculated for the period of residency. The exit fee is retained by the scheme operator as revenue under the residence contract.  The exit fee is credited to the account of the scheme operator when an exit entitlement is being calculated.

What is an exit entitlement?

This is the amount due to the former resident after their right to reside is terminated.  A simplified example is shown below –

[ingoing contribution + capital gain/loss]

deduct

[exit fee + reinstatement costs + renovation costs + selling costs (valuer, if engaged) + ongoing GSC charges]

equals

exit entitlement

Note – as mentioned in other paragraphs, some items in the above calculation will be included only where they are provided for in the residence contract.

The exit entitlement is paid to the former resident or their estate on the earliest of the following days –

  • the day stated in the contract
  • the day 14 days after settlement of the resalet
  • the day that is 18 months after termination.

If the unit is a freehold unit and is not sold within 18 months, the scheme operator must buy the unit from the former resident.

What is reinstatement work?

When a resident terminates their right to reside, they must leave the unit in the same condition as it was when they started occupation apart from fair wear and tear, and renovation work and other changes made by the resident during their occupancy with agreement from the scheme operator – for example, installing plantation shutters to the window of the unit.

Reinstatement work is the maintenance or repairs reasonably necessary where the unit has more than fair wear and tear.

Reinstatement work may be paid for by the resident.

What is renovation work?

Renovation work is work proposed by the scheme operator after termination of the resident’s right to reside.  It is work that is other than reinstatement work.

Renovation work is usually paid for by the resident and the scheme operator n the same proportion that they share capital gains.  The scheme operator must pay for renovation work where capital gains are not shared with the resident.

What are the costs?

To enter the village

Ingoing contribution – see above

Scheme operator lawyer’s fee – these fees are paid by the resident to the lawyer of the scheme operator. The fees are for preparation of the various documents associated with your residence contract.

Surveyor’s fee – this fee may be payable to the scheme operator’s surveyor to properly identify the boundaries of your leased area and usually paid only when the unit is first leased

Resident’s legal fee – these are the fees paid to your lawyer, where you use one

Government charges – these charges are for the registration of any plan of survey and lease associated with your residence contract

Additional fees for freehold unit – there may be additional legal fees and government charges relating to the legal transfer of a freehold unit and possibly also for any sub-lease required.

Connection fees – You may be required to pay charges to have utilities connected when you move in.

Adjustment of ongoing charges – there is a possibility you will need to pay some ongoing charges or fees in advance.

Ongoing fees for residents

General services charges – these are regular charges levied for supply of services made available to all residents – for example, management and administration, gardening and general maintenance, shop or restaurant, service or facility for recreation or entertainment of residents.  These charges usually vary from year-to-year but there are legislative restrictions on how much they can increase each year. To clarify, residents pay for only what is provided and do not pay rent.

Maintenance reserve fund contribution – the regular payment into the maintenance reserve fund for maintaining and repairing capital items of the village – for example, paying to repair the heater for the village pool.

Body corporate fees – the ongoing fees paid to the body corporate only where the unit is within a freehold village.

Personal services fees – charges for optional services that you choose.  You may usually start or stop the service and payment at any time.

Possible other costs or expenses – charges for, telephone and internet, contents insurance and electricity.

Maintenance of accomodation unit

There are various models under which residents may be required to pay for maintenance of and repairs to fixtures, fittings and appliances in their unit, during their occupancy.

Capital gains

The residence contract provides details of how capital gains or losses are dealt with on resale. There are various models and they range from – the resident retaining 100% of capital gains to the resident not benefiting at all from any gains.  This aspect must be considered carefully as there are usually conditions that attach to each model and the model may therefore, not be as beneficial as first appears – for example, the resident may receive 100% of the capital gains but will be liable for 100% of renovation works proposed by the scheme operator.

What might be the selling costs?

The RV Act prohibits the scheme operator from charging a fee for reselling the right to reside in your accommodation unit.

The resident may have to pay a proportion of the costs of a registered valuer engaged by the scheme operator where agreement cannot be reached about various selling issues.

There will be various professional legal cost and Government fees relating to preparation and registration of the relevant documentation.