Retirement village contracts are set for a shakeup this year, thanks to new legislation passed in response to the Final Report of the 2017 Inquiry Into the NSW Retirement Village Sector, led by Kathryn Greiner AO (‘the Greiner Inquiry’). The changes are set out in the Retirement Villages Amendment Act 2020 (‘the Act’) (which commenced on 1 January 2021) and in the Retirement Villages Amendment (Exit Entitlement) Regulation 2021 (‘Regulations’), which commenced on 4 February 2021. The changes include:
- a set timeframe for paying a former resident’s exit entitlements
- aged care facility payments
- a limit on how long a former resident will be required to continue to pay recurrent charges after they have left the village
These changes only apply to registered interest holders – residents of long-term registered leases who are entitled to at least 50% of any capital gain; they do not apply to non-registered interest holders or residents of a strata scheme or community scheme.
Exit Entitlements
The Retirement Villages Amendment (Exit Entitlement) Regulation 2021 (NSW) commenced on 4 February 2021 and introduced new provisions to deter village operators from unreasonably delaying the sale of a retirement village unit and to create a mechanism for residents to get their refund within a certain time where this has occurred. These provisions apply to existing retirement village contracts.
Previously, registered interest holders had to wait until a new person moved into or leased their old unit before they got payment of their share of the sale proceeds (exit entitlements). Once the operator received payment from the new resident, or the new resident moved into the unit, the exit entitlement had to be paid with 14 days. This meant that if the retirement village unit wasn’t re-occupied for two years, the former resident didn’t get their exit payment for two years. Some village operators set a cap, for instance, the village contract might specify that if the unit was not “resold” within 5 years, the village would pay the former resident their exit entitlement at 5 years. This was quite a daunting risk for prospective residents, but it needs to be kept in mind that the same risk comes with home ownership – if you are selling your home, you don’t get paid until the property sells.
With the changes made by the Act, a registered interest holder can apply to the Secretary of the Department of Finance, Services and Innovation (the Secretary) for an exit entitlement order (EEO) directing the operator to pay the former resident the exit entitlement even though the residence has not sold (s 182AB).
The Secretary can order the operator to pay the exit entitlement to the former resident after 6 months for residences in the Sydney metropolitan area including Wollongong and the Blue Mountains. The period is 1 year for residences anywhere else in NSW including the Central Coast. Where a resident has moved into residential aged care, the corresponding period is 2 years.
The prescribed period commences 40 days after the unit has been vacated or was first advertised for sale. The village operator and the resident can either agree on the value of the unit at that time or an independent property valuer can determine the value (agreed valuation). The resident can apply for the order at any time after 40 days from permanent vacation, 30 days from the determination of the agreed value, via agreement or independent valuation and after the expiration of the relevant prescribed period. The exit entitlement to the resident will be calculated based on the agreed valuation.
An important caveat to note is that the Secretary will only make an exit entitlement order if the operator has unreasonably delayed the sale of the premises. When determining whether an operator has unreasonably delayed the sale, the Secretary must consider the following factors pursuant to Regulations, reg 33D:
- the time it took the operator to inspect and refurbish the unit;
- if the operator is also the selling agent, whether they performed all their duties within a reasonable time;
- whether the actions of the operator delayed or prevented a legal practitioner, licensed conveyancer or selling agent to act on the sale; or
- whether the operator has complied with its other obligations under the Retirement Villages Act 1999 (NSW) or the Retirement Villages Regulation 2017 (NSW).
Registered interest holders can set the sale price for the unit and appoint an agent of their choice. A resident will not be entitled to an EEO if the reason the unit has not sold is if the set sale price is too high or the appointed sales agent has hindered the sale. Further, only a former resident can apply for an exit entitlement order, not their estates. So if the retirement village unit forms part of a deceased estate, the normal provisions will apply. The legal personal representative of the estate can pursue the EEO only if the resident applied for it when they were alive.
On an application being made for an EEO, the operator may seek an extension of the prescribed period to allow further time in which to sell the unit. The extension may be granted if the former resident was given 7 days’ notice and the Secretary is satisfied that the operator has not unreasonably delayed the sale. An operator cannot seek an extension for the same unit more than once in a 12 month period (s 182AE).
If an EEO is made, the operator is given notice and must pay the exit entitlement to the former resident within 30 days. The penalty for failing to comply with an exit entitlement order is currently 100 penalty units ($11,000) for a corporation or 50 penalty units ($5,500) for an individual (s 182AC). If the former resident or the operator is not happy with the decision of the Secretary, they can apply to NSW Civil & Administrative Tribunal to review the decision.
Aged Care Facility Payments
If a registered interest holder moves out of the retirement village into a residential aged care facility (RACF) and has not received their exit entitlement, the resident may request that the operator make one or more daily accommodation payments (DAPs) to the facility on behalf of the resident (s 182AF). This only applies if the former resident moved out after 1 January 2021.
The daily payment is equivalent to 4.02% p.a. of that part of the accommodation payment due that is not paid as a lump sum – commonly referred to as the ‘RAD’ (refundable accommodation payment’).
The operator must begin making the payments at least 28 days before the date on which the former resident proposed to enter the facility; or if the former resident has already moved into the facility, within 28 days of the former resident’s request (s 182AG). The payments are deducted from the former resident’s exit entitlement amount when paid to the resident.
Under s 182AG(3) of the Act, the operator will not be required to make the payment to the RACF if:
- the unit is sold and the resident becomes entitled to receive payment of their exit entitlement,
- the former resident dies, or
- the operator has already paid 85% of the former resident’s exit entitlement (not including capital gain or loss) in DAP payments.
The operator can apply to the NSW Civil and Administrative Tribunal (NCAT) to extend the time in which they must make a payment to an aged care facility or to exempt them from having to make the payment. They will need to demonstrate that making the payment will impose a significant financial burden on the operator (s 182AH).
This is an important amendment to help support the transition from retirement village into aged care. According to Minister for Better Regulation and Innovation, Kevin Anderson, there are 66,000 residents living in retirement villages in NSW and more than 60 per cent of residents move directly into aged care. This move could be delayed or made difficult if the resident does not have access to funds to pay the DAP to the facility and the unit does not sell quickly. The amendments aim to provide a seamless transfer that will alleviate concerns of residents and their family members.
Recurrent Charges Cap
Recurrent charges are ongoing charges for general services such as village administration, gardening and maintenance. Previously, a registered interest holder was required to pay recurrent charges until the unit was re-occupied in the same percentage of their capital gain entitlement. If the former resident was entitled to 50% of the capital gains and a new resident didn’t move into the unit for 1 year after the former resident had vacated it, the former resident would be paying 50% of the recurrent charges for that 1 year. Again, similar to home ownership, you must continue to pay the rates, insurance and upkeep of the property until it is sold.
The Act has been amended to provide that a registered interest holder will be required to pay recurrent charges for 42 days after vacating the unit, and nothing further after those 42 days (s 152).
Other changes (identify Amendment and Reg creating the asset management regime)
The Retirement Villages Amendment (Asset Management Plans) Regulations 2021 (NSW) contains further amendments to retirement village laws. This includes a requirement for operators to have an asset management plan (AMP), to be renewed every 10 years, which is to be made available to residents (Regulations, cl 26B).
The AMP must include an asset register, plans for capital maintenance and financing capital maintenance, the timeline and costs of proposed works and a capital replacement schedule.
The Greiner Inquiry made other recommendations for bringing the legislation in line with modern day business practices. Practitioners working in this area will be waiting to see how these latest amendments play out and whether further changes are to come.
This article, ‘Time to dust off the contracts: NSW retirement village laws are changing,’ appeared on LSJ Online on Thursday 1 April 2021.
If you need help with a retirement village contract, talk to one of Catherine Henry Lawyer’s, caring, elder law and aged care law experts. To confidentially discuss your needs call us on 1800 874 949 or fill in the form below, and we will be in touch.
