“Licence to Occupy” for living in a retirement village: Are the terms too demanding?

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frednz

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#198420 8-Jul-2016 12:37

A contract for a “licence to occupy” a villa or apartment in a retirement village often does not give the buyer the right to any capital gain when the contract is terminated (but usually no risk of capital loss either).

And when the contract is terminated, a deduction is made from the original purchase price (OPP) that is usually at least 20% and sometimes as high as 30% of the OPP (after a specified number of years of occupation).

For example, if this deduction, referred to here as the “deferred management fee” (DMF), is a maximum of 25% of the OPP after 4 years of occupation, then a deduction from the OPP of 6.25% is made for each of the first 4 years of occupation.

In addition to the DMF, the retirement village also charges a weekly fee (of say $125 per week) which is sometimes fixed for the entire stay at the village, but some villages have the right to increase it every year or so.

Particularly now that house prices are increasing rapidly, do you think that it’s just too expensive to purchase a “licence to occupy” a villa or an apartment in a retirement village and that the terms are too demanding?

And if you were to look at the cost of living in a retirement village as a rental agreement, do you think this might be a lot more expensive than renting a property of equivalent value, after taking into account the DMF and the weekly fee etc?

Thanks for your thoughts on this.

Fred

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#1588121 8-Jul-2016 12:44

I'm looking at these too. Is it cheaper to have a live in carer at their own home? I'm looking for my mother who's getting to be a pita living with us..

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Dairyxox

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#1588160 8-Jul-2016 13:12

This is a part of 'the housing crisis' that is neglected in the mainstream.

The increased use of retirement villages with terms like this has an effect on housing affordability.

It drains the legacy wealth of a family, leaving very little after the loved one has passed on.

frednz

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#1588196 8-Jul-2016 13:32

Dairyxox:

This is a part of 'the housing crisis' that is neglected in the mainstream.

The increased use of retirement villages with terms like this has an effect on housing affordability.

It drains the legacy wealth of a family, leaving very little after the loved one has passed on.

Well I suppose you could look at it like that! This comes under the "SKIN" the kids theory, in which SKIN stands for "spend the kids' inheritance now!

After all, why should the kids rely on parents' / family money to keep them afloat? Why shouldn't the elderly spend all their money provided that they are not being ripped off?

But the loss of capital gain associated with a "Licence to Occupy" (LTO) can be significant after a few years. For example, if the purchase price of a LTO is $500,000 and the deferred management fee (DMF) is 25% after 4 years, then the proceeds on termination of the contract are $375,000.

If you compare this with the capital gain you might expect on owning a property worth $500,000 (let's assume a very modest 15% gain for each of the 4 years) then the property would be worth $874,503 after 4 years.

So, the difference between $375,000 and $874,503 is a hefty $499,503!

Well, don't the elderly deserve to live in comfort, now come on, don't be mean! After all, retirement villages have a lot of facilities that the retired can take advantage of. These include swimming pools, bowling greens, restaurants, pianos, table tennis tables, billiard tables, games rooms, and men's caves with lots of equipment for making things, sewing rooms, arts and crafts facilities, gymnasiums and exercise facilities, and village buses for trips to shops and elsewhere! Not to mention nursing care, the company of dozens of other people and medical buttons in rooms to summon immediate health help when needed!

Fred

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#1588280 8-Jul-2016 14:36

I did a bit of work around LtO agreements a few years ago, and based on what I read then I'd do what I could to avoid purchasing such a unit. For a while there seemed to be a small but growing number of retirement villages with true ownership based on unit title; my bet is these may be more likely to be run by the not-for-profit sector, given LtOs are an excellent cash cow for those with money invested in old-age care...

mattwnz

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#1588310 8-Jul-2016 15:15

But when you go into these places, you are not buying a house. You are only purchasing the right to use a house while you live in it. People need to understand that. Nobody is forcing people to go into these places either. There are retirement villages that aren't license to occupy, and you can get a capital gain on them. Although they there aren't as many. They do suit many, especially those whose children don't need the inheritance, and who don't want to look after their parents ongoing care.

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#1588470 8-Jul-2016 18:10

Are there no developments in NZ where you buy the ownership?

Friend of mine's MiL was recently widowed and moved into a swanky one in rural Hampshire at vast expense (about $600,000), but she owns it and can sell it for whatever the market value is when she dies/leaves etc.

mattwnz

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#1588475 8-Jul-2016 18:19

Geektastic:

Are there no developments in NZ where you buy the ownership?

Friend of mine's MiL was recently widowed and moved into a swanky one in rural Hampshire at vast expense (about $600,000), but she owns it and can sell it for whatever the market value is when she dies/leaves etc.

Yes there are. Infact many of the first ones were freehold, with a body corporate. There were a lot built in the late 90's. Not so many these days. But guessing companies can make more money by selling LTO instead.

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timmmay

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#1588476 8-Jul-2016 18:21

This is fairly common, my wife looks at quite a few of these. It's really important to have it reviewed by a lawyer who's familiar with this type of agreement, as there's a lot of details and they know what to look for. Yes it's heavily weighted in their favor, but it tends to be take it or leave it.

jim.cox

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#1588479 8-Jul-2016 18:42

You might also want to check out what has happened in Chch with the earthquakes destroying a couple of retirement villages there.

Occupiers were left right up the creek with no home, no rights and no residual value when it all came crashing down.

A rip-off? maybe or maybe not - but I would not / will not put my money into one

=mjc=
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Wheelbarrow01

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#1588480 8-Jul-2016 18:43

There are also plenty of places where you can just rent a room instead of buying a LTO. My mother chose to do this because she didn't want to lose any capital, and she was determined that she wanted to leave as much to us as possible since she had worked a lifetime to earn it. The room she rented was plenty big enough for her, pretty much like a bedsit apartment which had room for her lounge suite and sideboard full of nick nacks from home, and it had basic kitchen facilities (sink, fridge, kettle etc). It also had a ranch slider and small patio for a few plants etc. It was around $1100 a week (in Christchurch) but that included all meals and round the clock nursing care.

I guess it all comes down to how dependent your parent is - in my mother's case she hated rest homes with a vengeance (my parents actually owned and operated one when I was a little kid) but her health was such that she really didn't have a choice toward the end. We were able to rent out her house for reasonable money while she was in the home and that covered around 75% of the resthome costs, and she rode the capital gain wave while she was 'incarcerated'. Although I had the authority on her bank accounts, I left financial decisions to her as much as possible - after all, it was her money. I told her to not worry about us and spend it on whatever she wanted.

My biggest thing is people who throw their relatives in a home and forget about them - and then spend all their money. It's so awful and I saw it happening to other people at my mother's home. One lady my mother befriended was clearly being f*cked over by her son - he never visited yet he had full operational authority on her bank account. He only released funds for basic services at the home, and wouldn't even allow her to have a phone connected in her room as he said she didn't need it. In my opinion it's her money so she should have been able to have whatever she wanted. Talking with her I could tell she was compos mentis enough to make her own decisions but he'd clearly manipulated her into believing she was better off letting him have full control of her money. Unfortunately after my mum passed on 2 years ago I lost contact with the lady so I don't know what's happened since. People like that lady's son make me sick.

Wheelbarrow01

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#1588483 8-Jul-2016 18:53

jim.cox:

You might also want to check out what has happened in Chch with the earthquakes destroying a couple of retirement villages there.

Occupiers were left right up the creek with no home, no rights and no residual value when it all came crashing down.

A rip-off? maybe or maybe not - but I would not / will not put my money into one

Yes, there was some disgusting behaviour by some operators in Chch after the quakes. One retirement village operator took ALL the EQC/insurance money (as they were sole legal owners of the property) and kicked all the occupants out. The village was basically a write off so the operator collected the full rebuild/replacement cost for the buildings, but then sold all the damaged buildings off via Trademe for around $50,000 each (to be removed and transported to new sites). The w*nker has probably made millions....

The poor residents lost ALL the money they had paid, and were then kicked out with seemingly no rights. And it appears to have been legal because the LTO contract was written with no thought given to what might happen in natural disasters.

frednz

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#1588494 8-Jul-2016 19:46

Wheelbarrow01:

jim.cox:

You might also want to check out what has happened in Chch with the earthquakes destroying a couple of retirement villages there.

Occupiers were left right up the creek with no home, no rights and no residual value when it all came crashing down.

A rip-off? maybe or maybe not - but I would not / will not put my money into one

Yes, there was some disgusting behaviour by some operators in Chch after the quakes. One retirement village operator took ALL the EQC/insurance money (as they were sole legal owners of the property) and kicked all the occupants out. The village was basically a write off so the operator collected the full rebuild/replacement cost for the buildings, but then sold all the damaged buildings off via Trademe for around $50,000 each (to be removed and transported to new sites). The w*nker has probably made millions....

The poor residents lost ALL the money they had paid, and were then kicked out with seemingly no rights. And it appears to have been legal because the LTO contract was written with no thought given to what might happen in natural disasters.

Thanks for bringing up the topic of the policy of retirement villages with regard to natural disasters.

I see there is a Retirement Villages Association of NZ and that they have an accreditation policy etc that is designed to protect members of the public:

http://www.retirementvillages.org.nz/

Do you think it may pay to ensure that your proposed retirement village has been accredited by this organisation?

You say above that the "LTO contract was written with no thought given to what might happen in natural disasters", but wouldn't you think that, before they signed the LTO, a good lawyer would have alerted their clients to the fact that the LTO didn't protect them against such disasters?

Fred

Wheelbarrow01

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#1588614 9-Jul-2016 02:45

frednz:

Wheelbarrow01:

jim.cox:

You might also want to check out what has happened in Chch with the earthquakes destroying a couple of retirement villages there.

Occupiers were left right up the creek with no home, no rights and no residual value when it all came crashing down.

A rip-off? maybe or maybe not - but I would not / will not put my money into one

Yes, there was some disgusting behaviour by some operators in Chch after the quakes. One retirement village operator took ALL the EQC/insurance money (as they were sole legal owners of the property) and kicked all the occupants out. The village was basically a write off so the operator collected the full rebuild/replacement cost for the buildings, but then sold all the damaged buildings off via Trademe for around $50,000 each (to be removed and transported to new sites). The w*nker has probably made millions....

The poor residents lost ALL the money they had paid, and were then kicked out with seemingly no rights. And it appears to have been legal because the LTO contract was written with no thought given to what might happen in natural disasters.

Thanks for bringing up the topic of the policy of retirement villages with regard to natural disasters.

I see there is a Retirement Villages Association of NZ and that they have an accreditation policy etc that is designed to protect members of the public:

http://www.retirementvillages.org.nz/

Do you think it may pay to ensure that your proposed retirement village has been accredited by this organisation?

You say above that the "LTO contract was written with no thought given to what might happen in natural disasters", but wouldn't you think that, before they signed the LTO, a good lawyer would have alerted their clients to the fact that the LTO didn't protect them against such disasters?

Fred

Hi Fred,

It would appear the necessary steps have already been taken to address the issue - amendments to the Retirement Villages Code of Practice 2008 have already taken place, and these should ensure village operators can no longer take a cut of insurance proceeds where occupants are forced out by natural disasters. See the news article here. There are plenty of news articles about the issues people had - just google search "Christchurch retirement village earthquakes" and you'll find plenty of articles.

The village I spoke about in my previous post was the Kate Sheppard village. It was red-zoned and the operator was paid the 2007 GV for the entire site, and then took whatever private insurance top up was available for the buildings. They then (legally) forced all the occupants onto the street, and systematically disposed of the buildings on Trademe at a profit. My original statement was incorrect - it looks as if residents did get some capital back, but the operator applied their normal exit fees, including their fees to 'renovate' the units as per the standard vacate clause in the LTO, even though there was never going to be any renovation done, nor any new occupants (due to being red zoned). The LTO was interpreted as if the occupants were vacating by choice, and all applicable exit fees were applied as a result. Very unfair on the occupants who thought they had a home for life. May were not left with enough money to buy a new place to live.

The New Zealand Listener magazine sums up the problem quite well here.

The issue of having a good lawyer look over the contract is an interesting one, as I am sure all the residents of the Kate Sheppard village did just that. But I'd hazard a bet that NO lawyer anywhere in the country (or anyone for that matter) could have anticipated that our government could/would use extraordinary powers to compulsorily acquire vast tracts of land following an earthquake, forcing people off their own properties. I'm sure it's just something that was never considered as a possibility. It's a brave new world these days though, so I hope that current occupancy agreements include clauses to protect residents' interests if there is ever a recurrence.

These earthquakes have impacted so many lives negatively. My best friend exhausted all his options and had to finally admit defeat in February this year - he handed his house over to the Crown against his will. Due to an accounting mistake on his part, he was uninsured when the Feb 2011 earthquake struck. His house was red-zoned and from that point he was living on borrowed time. In February this year he moved out and was given half the value of his land by the Crown. He got back enough to pay his mortgage back in full and was left with $9000 in the hand. He originally put down a deposit of $35,000 when he bought the property in 2001, so it's fair to say he lost everything he had worked for. Had he continued to occupy his property he faced the very real prospect of being made bankrupt when the Crown wrote down the value of his property to just $8000 (with a $130,000 mortgage). The real kicker though, is that his house and land suffered no perceptible damage in any of the earthquakes - his house had no cracks, had not subsided, his land remained level, and suffered no liquefaction. Unfortunately his house was located just on the wrong side of an arbitrary red line drawn in haste on a map by some bureaucrat in Wellington (thanks Gerry). Although he's philosophical about it all, I doubt he'll ever be able to afford to buy a property again - he's now stuck on the rental treadmill for life I think.

Sorry for digressing to a whole other topic - all I can say is check any rest home contracts carefully and ensure you have covered all bases, then make sure you are insured for any eventuality as well.

frednz

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#1588700 9-Jul-2016 11:19

Thanks very much "Wheelbarrow01" for providing this additional detail and the internet links. I can see that you need to be very careful that the licence to occupy (LTO) deals clearly with what happens in the case of a natural disaster. It may be better to select an operator which has many villages throughout NZ and which allows a resident to transfer from one village to another without having to relinquish one LTO and repurchase another one. I know of one large operator which allows this. This provides for a better outcome in the case of a natural disaster and also for situations where it’s in the best interests of a resident to transfer from one city to another. And of course, the larger the operator, the more likely it is that this operator has the ability to cope with large “financial shocks” and natural disasters.

The fact that a large proportion of LTOs in NZ do not provide a capital gain to residents when they leave a village is probably based on the fact that residents are expected to stay at that village for the remainder of their lives. But, if a resident does decide to shift out of one village and go to another one, this is when the loss of any capital gain really kicks in. For example, if an operator sold a villa several years ago to a resident for about $300,000, the resident may now receive only about $225,000 for it. But this villa might now be put on the market for say, $575,000. This means that the resident would need to find an additional $350,000 just to buy an equivalent LTO at another village! I have seen one or two cases where this scenario has actually played out.

Fred

dejadeadnz

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#1588785 9-Jul-2016 13:09

timmmay:

This is fairly common, my wife looks at quite a few of these. It's really important to have it reviewed by a lawyer who's familiar with this type of agreement, as there's a lot of details and they know what to look for. Yes it's heavily weighted in their favor, but it tends to be take it or leave it.

Yep. And avoid specialists who specialising in advising RV developers first and foremost....

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