The hidden costs of retirement village contracts


Don't sign on the dotted line until you understand the deal.

Locked in


Entering into a retirement village contract in Australia can be a risky financial move unless you understand what's in the contract – and chances are you won't.

In this investigation we take a look at: 

The lease agreements CHOICE reviewed from major village developers such as Australian Unity and Lend Lease were long, complicated, and confusing, and appeared to contain terms that weighed heavily in favour of the village operators.

It doesn't help that every state has different retirement village regulations, with different rules about disclosing the true costs of living in, or trying to leave, the village.

And it's not just retirees who stand to lose out. Depending on how long you stay, the ongoing management fees and exit costs allowed by the contracts can do as much damage to your children's (or other beneficiaries') financial future as your own – especially if you move out within the first five years. A big chunk of whatever inheritance might have come their way could end up in the village operator's pocket.

It's complicated...

Why can't you know the full costs beforehand? Well, in Victoria especially, that's the whole issue. The Victorian Retirement Villages Act 1986 has allowed village contracts to have complicated and confusing fee rates and payment schedules, making cost comparisons between villages all but impossible.

Despite a number of inquiries and strident criticism from consumer advocates over the years, these types of contracts are allowed by retirement village regulations nationwide, affecting about 80% of Australia's nearly 200,000 village residents.

The model stands in stark contrast to retirement village arrangements in markets like Europe and the US, where simple, pay-as-you-go lease contracts are the norm and price comparisons between village units are consequently much easier.

... and it's costly

The upshot is that it's very hard to know how bad the deal is until you decide to leave the village, whether because the operator exaggerated its charms or because you just need to move out.

At that point you might find out the undisclosed and unexpected exit costs have made your village unit a very poor investment indeed. And to rub salt in the wound, the village operators often don't have to pay you back what's left of your loan until months after you've left, and sometimes even longer.

Even worse, village residents (or their children) generally have to keep paying for the units after they're vacated, until the operator finds a new tenant. And in Victoria some residents have to pay extra every time an agent shows the unit, even if the prospective tenants don't move in.

Trapped in the contract

Colin (not his real name) is a longtime CHOICE member and an advocate for reform in the retirement village industry. As he tells it, many retirees find they can't afford to leave in the early years of the contract. After the high early management fees and other exit costs and commissions are deducted, retirees may not have enough money left to pay for other comparable living arrangements.

"Once you're in the contract, there's nothing you can do. I know of quite a number of cases where people trying to leave have been very disappointed," Colin told us. "And I've heard children of residents say, 'Why did you sign this contract? It's a rip-off'."

Colin and his wife moved to a retirement village in the suburbs of Melbourne 15 years ago. "The service fees in the village we ended up choosing were towards the high end, but the village suited our needs and the locality suited."

Unexpected developments

"However, the village was only half finished, and it was clear that if we did not find it suitable down the road, the scheduling of the management fees – 8% the first year and 3% per year for the next eight years – was a rip-off that would make it prohibitively expensive if we wanted to terminate." 

In a move that's not uncommon in the industry, the village operator ended up raising the management fees significantly to balance the operating budget "with the implied threat that if we did not agree services would be cut", Colin said.

He's convinced that moving into the village was a "bad financial decision" due to the nature of the contract and because it would have been much cheaper to rent a non-retirement village residence. But Colin acknowledges that the place is "satisfactory physically and socially".

New safeguards have come into play in some states (including WA and SA) in recent years that mandate better cost disclosure for retirement village contracts, but there's still plenty of opportunity to be caught unawares.

How it works: Funding the property developers

Retirement village residents pay what's euphemistically called an 'ingoing contribution' or 'ingoing loan' (also known as a 'loan lease') – anywhere from $300,000 to $900,000 or more depending on the village location – in order to be able to sign a contract and move into a village.

In effect, it's an interest-free loan that reimburses the property developer's capital costs. While parts of retirement village regulations vary from state to state, the handing over of retirees' nest eggs in a lump sum, and the surrendering of the money's earning power, is the norm throughout Australia.

The village operator can do whatever they want with your ingoing contribution, which usually comes from selling the family home. You lose the earning power of that money, and whatever you end up getting back will be devalued by inflation (though with many contracts a portion of the capital gains is returned to the resident).

The bill for checking out

If you decide to move on, the operator puts your life savings through a complicated series of fee calculations that you're unlikely to anticipate or understand – especially the hefty 'deferred management fee' – and hands you back what's left over. (The deferred management fee is based on the per-year value of your unit. If it's calculated at 3% a year, you'll give up 15% of the sale price if you move out after five years.)

What you end up with can be a lot less than you bargained on, not least because the ongoing management fees are generally highest during the early years of your tenancy.

Government opts to inform, not reform

In May 2015 Consumer Affairs Victoria (CAV) launched a campaign "to help Victorians make informed decisions about retirement villages". In 2013–14, CAV was contacted roughly 690 times for advice on retirement villages and received 71 complaints.

The campaign includes video testimony from two retirees, Helen Vallack and Daisy Ellery, who say they suffered both financial and emotional hardship as a result of signing retirement village contracts they didn't understand. According to CAV, Vallack lost more than $30,000 of her life savings.

Then Victorian Minister for Consumer Affairs Jane Garrett said in a statement accompanying the campaign launch that Victorians "can avoid unnecessary financial and emotional hardship by doing some research, and seeking independent financial and legal advice before buying into a retirement village"; she urged consumers to "clarify specific terms and conditions" in contracts.

Is the law protecting consumers?

CHOICE asked Ms Garrett's office at the time if an overhaul of the Retirement Village Act was in order – such as moving to a simple pay-as-you-go system in line with the US and European models.

A CAV spokesperson told us the Retirement Villages Act 1986 "recognises that the ingoing contribution and deferred management fee contract model is the most popular retirement village business model in Victoria and Australia. In recognition that this model contains some problematic features, the Act sets out a range of protections for residents living in such villages."

The spokesperson also pointed out that the Act "does not prevent the pay-as-you-go retirement village payment model" and that some villages in Victoria are regulated under the Residential Tenancies Act 1997.

(About 20% of Australia's approximately 2300 retirement villages are standard residential tenancies according to the Retirement Living Council, an industry body that represents the interests of property developers and is part of the Property Council of Australia.)

CAV says there are two main ways the Victorian Retirement Villages Act protects consumers:

  • By mandating that retirement village operators provide prospective residents with a standardised fact sheet that enables them to see what sort of ingoing contribution and deferred management fees will be required for the various types of units.
  • By requiring that operators provide a disclosure statement prior to residents signing a contract that sets out the exact costs of entering, living in and leaving the village, including an estimate of their refunds after one, two, five and 10 years of residence.

Not enough protection

But consumer advocates like Colin and Melbourne's Consumer Action Law Centre (CALC) say such measures don't do much to prevent financial damage to village residents who want to move on.

CALC has called for such estimates to be provided as per-month figures so residents can get a clearer picture and make cost comparisons with other villages.

"The current system used by retirement village operators to collect fees (comprising ingoing, ongoing and exit fees) conceals the true cost of moving into a retirement village. For many, deferred management fees (or exit fees), shares of capital gains and renovation costs are particularly unclear," CALC said in a submission to CAV.

CALC has also argued that the deferred management fee structure is an unfair contract term and has pushed that point with the Victorian Civil and Administrative Tribunal on behalf of residents of a Willow Lodge – part of a chain of Victorian villages.

How the village operators see it

Former Retirement Living Council (RLC) executive director Mary Wood told us in 2015 that the ingoing contribution model was originally set up in the interest of retirees by public-minded people: "One reason it exists is so people without a lot of money can live in a higher quality, age-adaptive environment with amenities that wouldn't be affordable to them otherwise. Most people who live in retirement villages are pensioners on low incomes."

Without access to the funds upfront, most retirement villages would not be built, Wood argued. It's a view that's shared by others in the industry, who say retirement villages are generally not attractive investment prospects. "The exit fees represent the profit margins for developers," Wood said.

Around the time Wood made such statements, major retirement village developer Stockland announced the purchase of eight villages in South Australia, comprising 980 units, in what analysts saw as a further move toward the corporatisation of the industry. And some investors do see a profitable future in retirement villages.

Some contracts are better than others...

Wood acknowledged that signing on to a retirement village can be confusing. "There are a lot of misconceptions, and I can see why they arise. Like any property purchase, you need to read the contract and get independent legal advice. Some contracts are certainly better than others, and good operators have nothing to hide. Exit fees, for instance, are tremendously variable, but people who live in villages for more than a few years tend to get good value for money."

Wood said the RLC was developing a model contract "with some standardisation and simplification of terms" that it would hold up as a best-practice example for village operators, though operators won't be obligated to use it. And Wood admits qualified legal advice can be hard to come by.

The legal view

In 2015 CHOICE contacted the law firm Russell Kennedy, an RLC partner, to get a lawyer's view on retirement village contracts.

"I agree that historically there has been limited pre-contract disclosure required by retirement village operators," Rosemary Southgate, who heads up the firm's property and development team, told us. "Although many operators provide useful plain-English summaries of their village documents, this was not a legal requirement."

But Southgate said things are improving, especially in eastern states. "The operator must now complete a disclosure form which clearly sets out the financial obligations of the resident, the services they will receive, the type of accommodation they will occupy and the procedure for vacating the village when they wish to move."

Two-way street

And Southgate made the point that retirement village living entails an ongoing financial relationship with the operator. "Where the financial structure provides for the resident and the operator to receive a share in the capital gain – and for the operator this may form part of the exit fee – this ensures that the resident and the operator are equally invested in the upkeep of the village assets." She also recommended getting independent legal advice before signing a contract, and says most operators do as well.

But Southgate declined to address our question about the availability of qualified legal help. Colin, who's been researching and documenting the issue for years, says most lawyers "just don't understand all of the implications".

Thinking about signing a retirement village contract?

If you or someone you know is considering moving into a retirement village, due diligence is critical. Here's our checklist:

  • Have a lawyer who understands retirement village issues review the contract and make sure you understand all fees and how they'll be applied. In particular, ask about the deferred management fee schedule and how it will affect you if you choose to leave the village earlier than planned.
  • Instead of an upfront lump sum, is there an option to pay by the week or month?
  • If you pay a lump sum, how much will you get back when you leave and how is this calculated? Ask what the total cost would be if the village didn't meet your expectations and you left after eight months or two years, for instance.
  • What ongoing fees will you have to pay and what exactly do these fees cover?
  • Can fees increase during the term of the contract? If so, can you dispute them?The alternative to fee increases may be to cut services.
  • What are all exit fees – including a deferred management fee – and how are they calculated? This will likely require a spreadsheet and some careful calculations, since exit fees decrease the longer you're in the contract.
  • Who's responsible for selling your unit if you leave, and who receives any capital gain on the sale price? Will the village operator receive a commission if it sells the unit, and if so what is the rate? 
  • How are refurbishment or infrastructure updating costs established? 
  • Are you still liable for weekly fees after you move out – especially if the unit takes a while to sell? If so, how long will you be liable for these fees? 
  • Do you have to pay recurring fees if you leave the village for extended periods due to travel or hospitalisation?
  • Does the company that owns the village operate the village? If not, who's the operator? What is the operator's legal name in case it's needed for a tribunal or court proceeding? 
  • Always get two or three quotes for units in different villages in the same area.

Have you – or someone you know – felt the sting of a retirement village contract?

Please share your story via the comments section so CHOICE and other readers can gain further insights into this problematic issue.

Did you or a friend or relative sign a contract without fully understanding it?

Have you or someone you know had to pay unexpectedly high exit costs when leaving a retirement village?


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