Is CHOICE correct when it says:
"There is something downright misleading with the way retirement village contracts work in Australia?"
[Choice - The People’s Watchdog,
The two areas that CHOICE focusses on are "departure fees" (which before 2000 were called "deferred management fees") and "recurrent charges".
A retirement village owner has to obtain funds from somewhere to enable it to refurbish the village, to carry out capital works and, in the case of for-profit owners, to give a return to the shareholders. The Retirement Villages Act prohibits the owner from passing refurbishment and capital costs on to the residents.
In the early days of the for-profit villages in the 1980s, the expression that was introduced to describe the owner’s profit was "deferred management fees". Clearly they were nothing of the kind, but the expression stuck, and many old timers in the industry still unfortunately refer to "DMFs".
CHOICE misconstrues the understanding of departure fees when it says:
The offending contract term has to do with so-called “deferred” management fees. It’s true that the calculation of fees is deferred, but what isn’t clearly disclosed is that the fees start accruing from day one, (or in some cases on the second year of the contract). Typically, the resident never quite grasps what the deferred fees clause means, and costs, until the contract is about to be terminated.
As with any contract in a specialist area, a resident is much better off if they have the retirement village contract explained to them by an experienced retirement village lawyer. Having said that, and contrary to what CHOICE says, our experience is that most residents are fully aware of the departure fee and how it is calculated. They know it is a payment to the operator based on the length of time they live in the village. Complaints mainly come from family members after the resident has died or moved into care. "How could Mum & Dad possibly have agreed to this!"
Therefore, the most important considerations are:
The costs of running a village are divided among the residents, usually on a monthly basis. The monthly payments are called "recurrent charges".
Contracts currently allow start-up villages to set low operating fees in the beginning, but when the village is fully occupied and residents are locked in to contracts, operators can continue to raise fees to balance the village operating budget. Residents are then faced with the difficult choice of accepting a substantial monthly cost increase or losing the services or maintenance offered when they signed the contract.
The CHOICE example simply does not occur in a properly operated village in NSW. To fix the amount of the recurrent charges, the operator proposes a budget for the next year. The residents are given an opportunity to vote on the proposed budget except where the budget proposes an increase which is no greater than CPI. The Retirement Villages Act specifies what can or cannot be included in the budget. If the residents do not consent to the expenditure itemised in the proposed annual budget the operator or a resident may apply to the Consumer Trader and Tenancy Tribunal for an order regarding any expenditure that is objected to. Some of the matters that have been referred to the Tribunal are: whether a particular repair is capital replacement or normal maintenance, how head office management costs and insurance premiums can be apportioned over several villages, whether painting is maintenance or capital replacement.
In NSW a village must have available for inspection at the village copies of budgets for each of the last three financial years, the current financial year and either the budget or the proposed annual budget for the next financial year. The prospective resident therefore has an opportunity to consider the items in the budget and decide whether they are reasonable for the village. It is always helpful to talk to someone from the residents’ committee to ensure that they are happy with the way the budgets are prepared by the operator. Following this procedure will minimise the risk of the CHOICE scenario occurring.
Some Villages have been established offering particular services that the operator no longer can, or wishes to, provide. In one village, residents signed a village contract which provided that there would be an after hours resident nurse on-site. The operator suggested that the nurse be replaced by an on-call medical service on the basis that a medical service had available to it better skills and equipment than the limited resources of an on-site nurse. The residents agreed to the proposal, and to delete the cost from the proposed budget. Recurrent charges were therefore reduced.
Often residents are concerned with how the amount of the approved budget is apportioned among the residents. Some retirement village contracts say that the resident is to bear a certain percentage of the approved budget. Others give the operator a wide discretion as to how the budget is to be allocated among the residents in any year. If a resident does not consent to the manner in which their recurrent charges are apportioned, Section 107 of the Retirement Villages Act requires the village to apply to the Consumer Trader and Tenancy Tribunals to resolve the matter.
[Emil Ford Lawyers are retirement village lawyers who advise
both residents and operators of retirement villages].
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