A main area of confusion in the retirement living industry is the terminology. Here we explain what some of the key terms really mean.
Much of the misunderstandings about the retirement villages model surround the idea of leasehold. While there are several ways a resident can take occupancy of a retirement living apartment, leasehold is the most common. While people talk about ‘buying in’ to a retirement village, what they are really paying for is a 99-year lease, with a right to reside.
A lease is an agreement to take possession of a property. Ownership of the property being leased does not transfer with possession. You are not purchasing the property. A lease is a rental arrangement. At the end of the lease period, possession is returned to the owner.
It is common practice for the owner to require a surety over the property. Commonly, in the commercial world, this surety takes the form of a bank guarantee.
Upon termination of a property lease, the person who has leased the property may be required to reinstate the property to its original state. Importantly, this does not mean paying to fit-out the property to the current day standard to meet new market expectations. The owner has no obligation to share any increase in capital growth they may receive from the next person who leases the property.
Assuming the lease term has run its course and the person who had leased the property has vacated, they have no obligation to continue to pay any ongoing costs to the owner while the property is vacant and the owner is looking for another person to lease it.
Any money or surety held by the owner must be released to the person who had leased the property. They don’t have to wait until the next lease agreement is in place.
The ingoing contribution is not a contribution to anything and it isn’t a purchase payment either. What is referred to in the Retirement Villages Act as an ingoing contribution is the lease surety we talked about above, more accurately termed as a bond.
The ingoing contribution is important as it reassures the owner that the person leasing the property has the capacity to pay for the lease. They are not required to do so until they leave.
Deferred Management Fees
The term deferred management fee, or DMF, is a confusing term because it has nothing to do with management fees. The DMF is the deferred payment of the lease.
Retirement Village residents make zero payments for their accommodation the entire time they live in the village. So, the DMF represents the cost of accommodation, otherwise termed as the lease and it is accrued daily to a maximum defined amount.
It is deducted from the ingoing contribution when the resident vacates the property and the lease is terminated.
The exit entitlement is the amount of the ingoing contribution the person gets back after the DMF has been deducted.
General Service Charges
The weekly general service charge covers the costs of managing, operating and maintaining the village and its common facilities, in effect a body corporate charge.
The village operator is accountable to the village residents for these fees and how they are spent. The village operator is prohibited by legislation from making a profit on these fees. Every dollar budgeted is required to be spent on the village and its residents.
The only income the village operator makes is derived from the lease payment, the DMF, which they only get to collect after the lease terminates.
Many people find retirement village contracts confusing and hard to read. It’s important to always seek the advice of a reputable solicitor and make sure all your questions are answered before you sign on the dotted line.
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