Reinstatement / Refurbishment costs
Responsibility for Reinstatement Costs in Leasehold & Licence Villages
How do reinstatement or refurbishment costs effect you or your estate
What is meant by reinstatement or refurbishment of the unit? Are they synonymous?
Firstly, these terms are NOT synonymous.
Reinstatement refers to the unit being restored to the same condition when the resident first entered the unit.
Refurbishment, on the other hand, is upgrading, improving, and modernising the unit before the new resident purchases or accepts the licence to reside in the unit. Older units are expensive to upgrade, and the operator may incorrectly seek to pass this expense on to the outgoing resident or the estate.
Many disputes occur in this situation, because the RV Act is ambiguous in this area allowing the resident to be easily intimidated by the operator. The financial outlays asked of the resident can be substantial so laying the grounds for a dispute. Agreement between both parties on what requires to be done, and how it will be paid for would reduce the number of disputes in this area.
Reinstatement vs refurbishment when leaving your village
Division 5 of the Retirement Villages Act 1999 (the Act) sets out the procedure to be followed when a resident leaves their accommodation unit and the “Right to Reside” is to be offered to the market.
The number of alternatives created by differing contracts to reside makes a “one size fits all” statement impossible to write when the objective is to optimise the outgoing resident’s financial recovery. Therefore the following is rather a route map by which this may be calculated.
Division 5 Section 58 sets out that “necessary reinstatement work” is to be carried out prior to the unit being placed on the market. Note that the Act only refers to reinstatement which in layman’s terms means that, if the outgoing resident’s contract so specifies, the accommodation unit must be returned to the condition it was in when the resident moved in.
If the unit was new with all new capital items fitted (cooker, hob, air conditioning equipment, dishwasher etc.) some operators will insist that the existing ones must be new complete with the manufacturer’s warranty (at the departing resident’s expense) while others will accept a previously used item in first class “as new” condition. The same applies to the unit itself where some operators have been known to rip out everything down to the bare shell and fit new “everything” from tiles, to carpets and even light fittings. This has led to several disputes between former residents and scheme operators.
If the unit was not new and the reinstatement carried out prior to the outgoing resident having moved in rendered it in “acceptable and good habitable condition” then a case can be made to return the unit to that condition.
Section 58 (1) of the Act requires the former resident and the operator to “agree in writing on any reinstatement work to be done”. From the above it can be seen that this is likely to create contentious issues in some instances.
The fact remains that the outgoing resident is responsible for “reinstatement “only.
When a unit has been occupied for some years and comes onto the market it may not be, despite the obligatory “reinstatement” as above having been carried out, be to the standard that would make the unit attractive to current buyers. In this instance the operator may want (or suggest) a refurbishment of the unit to bring it up to the expectation of those potential residents in the market.
It is at this point that things get messy because of the “who pays” and to “what standard” does the unit get raised to. As in the case of an ordinary family home it is easy to “over capitalise” by which is meant to spend more that will be added to the reinstated value of the unit.
The simplest way to deal with this is for the former resident and the scheme operator to agree a “hypothetical value” of the reinstated unit where the former resident has paid the reinstatement figure for which he is obliged under his contract (and have his exit entitlement calculated on that figure) and the operator takes over with the refurbishment as he wishes at his cost but retains all the added value generated. The benefit of this is that the unit should sell in less time and the operator should make an additional profit on the refurbishment cost and (as in some instances where the refurbishing company is either an “in house” operation or a separate company that just happens to have the same directors as the scheme operator) make a second profit from the refurbishment work.
Some operators will try to get the departing resident to finance the refurbishment on the promise of enhancing their exit entitlement. A careful “Cost Benefit Analysis’ needs to be done and each will be different so no “one size fits all rule is possible as stated above.
As an example of the above, if the former resident agrees to pay $10,000.00 for the unit to be refurbished and gets another $10,000.00 on the sale price this would be a poor deal because that $10,000.00 would be subject to the deferred management fee (of say 30%) meaning that the former resident would only be $7,000.00 better off. A net loss of $3,000.00. But if the resident put in the same $10,000.00 and got an extra $20,000.00 for the unit then the $20,000.00, once subjected to the 30% DFM, would become $14,000.00 leaving the former resident with an additional $4,000.00, and most likely a quicker sale.
A sound understanding of the figures involved with each proposition is needed to make the correct decision possible. To be kept in mind too, is that if the unit sells for less that the figure that the operator forecasts then the total of the shortfall (less the exit fee payable on that amount) will accrue to the departing resident.