Retirement village contracts

There is something downright misleading with the way retirement village contracts work in Australia. 

For far too long, contract terms have weighed heavily in favour of the operators, and many residents discover they’re liable for higher costs than they anticipated when it’s too late to do anything about them. It means some senior Australians can get locked in to places they’d rather not be. Because of inadequate cost disclosure, few retirees are in a position to understand what they’re getting into.

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.

The requirement for retirees to provide an “interest-free” loan to operators that’s roughly equivalent to the value of the unit ($400,000 to $500,000 in the suburbs) as a condition for entry is the crux of the problem. The loan can end up amounting to as much as 95% of the village owner’s capital outlay over time and allows returns on investment of 22% to 47%, according to industry reps at a recent Retirement Villages Australia conference. By providing the loan, the residents forgo the opportunity to earn interest on their savings.

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. At this point operators typically offer to make a token contribution toward reducing fees, if residents agree to sign a confidentiality agreement regarding the arrangement. The practice, known as “bait fee setting”, has been widely employed, but operators have avoided negative publicity by the confidentiality agreements. The bait fee may either be a ploy to bring in more business or a necessary step due to operators underestimating costs. In any case, it serves to raise costs to the residents after the contract is signed.

If the resident wants to move out within the first few years because the village hasn’t lived up to its promise, they will find the value of the refund of the loan has been greatly reduced by accrued management fees, refurbishment costs and inflation (since, for the resident, it hasn’t been earning interest). After the accrued fees and other exit costs are applied, the resident may not be able to afford to relocate to a comparable alternative or pay for assisted care. Financially, the resident ends up worse off than when they arrived, while the operator enjoys a high return over the long term on a minimal investment.

The fact that current retirement village legislation contracts give operators 100% control once the village is finished and occupied for as little as a five per cent investment speaks for itself. It is a very attractive investment opportunity for some less-than-scrupulous operators and gives the retirement village system in Australia a questionable reputation.

Authors note: Charles Adams is a founding member and past vice-president of Residents of Retirement Villages Victoria and an advocate for fair retirement village contracts for Australians.