On 4 December 2008, the two Houses of Parliament in New South Wales finally passed the long awaited Retirement Village Amendment Bill NSW (the Bill). The Bill was assented to on 10 December 2008 and is awaiting proclamation for the provisions to commence. Given the nature of the Bill, it is anticipated that proclamation may await promulgation of supporting Regulations, but the Bill could work now, even without those Regulations being finalised.
The final form of the Bill contains provisions that differ from the Bill originally presented to Parliament in June (the June Bill ), and these more recent changes are important for operators to understand.
As we mentioned in our June 2008 update , when the June Bill was first tabled, many provisions of the Bill were similar to the exposure draft released in November 2006, and the Bill contains a number of refinements that operators need to be aware of and consider. The changes will affect financiers lending to the sector, as the reforms remove any real ability to have 'pre sales' and introduce a statutory charge.
Critically, the reforms affect all contracts and to that extent act retrospectively.
The reforms show that legislation in the Retirement Village area can change over time and that operators who merely repeat the provisions of the current Act in their contracts, may find themselves contractually locked out from using the flexibility that these and subsequent reforms present.
When considering reforms, operators should recognise the importance of preparing a contract that achieves their commercial objective rather than simply repeating what is stated in the Act.
Set out below are summaries of the reforms and a brief commentary on each.
Changes from the June version of the Bill
In November 2008 and early December there was a flurry of activity as interest groups and industry associations lobbied Government for change to the June Bill. This activity gave rise to amendments presented by both the Government and the Opposition that were finally debated during the early hours of 3 and 4 December 2008. It was not until 8 December that a final form of the Bill (as passed) was available for commentators to review.
In that final form, the more important changes to the June Bill which the industry came to understand, are:
- Removal of capital works fund funded by residents and operators.
In the June Bill, it was proposed that there be a capital works fund to be used to fund all capital maintenance and replacement. This function of the fund has been removed.
In its place, the capital works fund will still exist and will be funded from recurrent charges however, the capital works fund will only fund capital maintenance.
- Definition for capital maintenance and capital replacement
These concepts are now specifically defined. Capital maintenance means work carried out for the purposes of maintaining an item of capital and includes work prescribed by the Regulations.
This means the Regulations can prescribe what is and what is not, capital maintenance.
Capital replacement is defined to mean work carried out for the purposes of replacing an item of capital but does not include capital maintenance.
- Capital replacement fund now belongs to operator
The capital replacement fund will not pass to the capital works fund but will now be passed to the operator.
- Capital replacement not funded from recurrent charges
Under the current Act and the June Bill, it was envisaged that recurrent charges could be applied to the cost of replacement of capital items. Currently under the Act, recurrent charges can be used to fund the replacement of non fixed items of capital. The final version of the Bill now makes it clear that the operator is responsible for the cost of replacing items of capital for which the operator is responsible (i.e. other than capital items owned by the resident) and can fund capital maintenance from the capital works fund.
- Registered interest holders to fund repairs
The June Bill allowed for residents who are registered interest holders and operators to be able to share the cost of capital for items within units in the same proportion as they share capital gains. This aspect has been removed.
- Settling in period – refunds to registered lease holders.
The final Bill provides that refunds of ingoing contributions to registered interest holders (ie long term registered leases with at least 50% of capital gain) are to be made when the premises are re-let. that is, a new lease price is paid. Any recurrent charges or departure fees paid during the settling in period must be repaid following vacation. This is instead of the original anticipated effect under the June Bill of paying refunds within 14 days of termination. Operators can agree to refund these amounts in a shorter period.
- Transitional arrangements for recurrent charges – registered lease holders
The June Bill requires registered interest holders to pay the full amount of recurrent charges for 42 days and then in the same proportions as they share capital gains with the operator. From the commencement of the Bill, operators can charge registered interest holders the full amount for 42 days (and not 6 months as proposed in the June Bill) and then in the proportion of capital gains.
Recap of June Bill
It is useful to recap the other changes to the Bill that have remained from the June Bill and which were dealt with in our previous update:
- 'owner' replaced
The concept of 'owner' is replaced with the term 'registered interest holder'. There is no real change in the concept, as a 'registered interest holder' includes a person who holds a long-term lease (50 years or more) that is registered on the title and includes a provision that entitles the person to at least 50% of any capital gains in respect of premises.
The Bill provides a definition of 'capital gains' which has previously been missing. In summary, it is the increase between the amount the outgoing resident paid for their right to reside in the village and the amount paid by the new incoming resident. This definition seeks to apply the decision of the Consumer, Trader and Tenancy Tribunal in Hayes v Fernbank Developments Pty Ltd .
- budgets not SOPEs
The concept of Statements of Proposed Expenditure (SOPEs) and Statements of Approved Expenditure (SOAEs) is to be replaced with 'proposed annual budgets' and 'approved annual budgets', respectively.
The legislation is making it clear it is an allocation of funds.
- recurrent charges, budgets and deficits
Recurrent charges that are varied other than by fixed formula can be increased by the rate of CPI without requiring resident consent. If the increase is beyond CPI, 60 days notice is required and the current system will essentially remain. The notice obligations remain the same.
In relation to the obligation to pay recurrent charges for general services, the reforms propose that both non-owners and registered interest holders remain liable for such charges for a maximum of 42 days (down from six months) and thereafter, registered interest holders are liable for such charges in the same proportions they share capital gains.
There will be provision for residents to opt out of the approval process for the annual budget and leave it merely to the operator to expend the funds. Other refinements to the annual budget process include:
- deeming the approval of a budget where recurrent charges increase by a fixed formula or by CPI
- allowing variations to line items in the approved budget without further consent
- removing the obligation to provide audited accounts in certain circumstances relating to size of villages or if the residents resolve
- removing the obligation for audited accounts for villages of certain sizes, namely recurrent charges of less than $50,000 or if the residents resolve
- allowing a component for 'contingencies' within an annual budget. However, such an item will depend upon the terms of the village contract and the amount that a proposed budget may allocate to contingencies may be limited by the regulations
- operators will no longer need to seek the consent of residents to the continual appointment of the same village auditor from year to year.
The The right of operators to recover budget shortfalls has been removed completely.
This means operators will need to be more vigilant in relation to their costs during the year. The ability to make provisions for budget shortfalls that existed at the time of these reforms is extended until 2011, that is, operators have five years to make up the shortfall through negotiation with residents or orders of the CTTT.
While a deficit cannot be carried forward, any surplus in the annual accounts is to be carried forward into the next financial year unless the residents consent to a proposal for the expenditure of the surplus or the residents consent to part or the whole of the surplus being distributed to residents.
- new form of 'inquiry document' and resident information
There is a new 'general inquiry' document that is to be issued before a more comprehensive disclosure statement. The general inquiry document is to give a basic explanation of the village, including the services and facilities. Operators will have to provide a general inquiry document "within 14 days of becoming aware" that a person is a prospective resident. This will require operators to consider the subjective intention of the person making the enquiry to decide whether the general enquiry document should be provided.
Also, operators will have to provide prospective residents with a disclosure statement. The disclosure statement must be provided upon request or when a person expresses interest in particular premises in the village.
The difference between the two, and a practical way of dealing with the two forms, is that the inquiry document appears to relate to someone asking generally about the village and the disclosure document is when they are looking at particular premises.
The form of the general enquiry document and the disclosure statement will be prescribed by the Regulations. The Regulations are not yet available and it is unclear whether the current form of the disclosure statement will change although this seems likely.
- cooling-off and settling-in periods and refunds to prospective residents.
The existing 7 business day cooling-off period has been retained. A new settling-in period is introduced which runs for 90 days from the date the resident occupies, or is entitled to occupy, their premises. To the extent a resident departs before the end of the 90 day period, the operator will be entitled to fair rent (where the resident has occupied premises in the village), the cost of repairs beyond fair wear and tear and a "reasonable" administration fee. Operators may consider incorporating agreed rates in relation to these matters into their contracts to avoid arguments in the future.
The provisions also incorporate time limits for refunds and limitations on departure fees. Except where the resident is a registered interest holder, registered proprietor, strata scheme title holder, community title holder or company title holder, the refund of the resident's ingoing contribution must be made within 14 days of the resident departing the village.
- payment by instalment
A village contract may provide for a resident's ingoing contribution to be paid by way of instalments and for the interest to be calculated in respect of the unpaid portion at the rate prescribed by the regulations.
- register of villages
The reforms introduce a new regime for creating a register of retirement villages. Much of the detail of the information to be included in the register is left for the Regulations. The register will apply to new villages as well as established villages. Any land that was used as a retirement village 'immediately before the commencement of this section' must be notified and registered within three months of the section taking effect. The reforms do not deal with the form to be used or information to be provided though it is likely to reflect the location plans that are currently prepared for new leasehold villages.
The costs of registering a village are borne by the operator.
- capital maintenance and replacement
There is a specific prohibition on the selling of capital items to residents except as permitted under the Regulations. This is designed to stop the practice that had developed in the industry of making residents 'owners' of capital items in their units. Operators who have contracts with such provisions will lose their right to sell these items of capital to new residents.
- village safety
Operators will be required to prepare written safety and emergency procedures and to undertake a minimum of one safety inspection of the village annually. A report as to the findings of the inspection must be provided to residents.
- resident committees and participation in management
A three year cap will be place on the tenure of residents holding office on a residents committee
The maximum number of proxies a resident may hold for the purposes of casting votes at residents meetings is reduced from five to two.
Operators will be required to hold an annual management meeting with residents within four months of the end of financial year. Residents will be able to submit written questions for the operator prior to the meeting. The operator must provide reasonably detailed answers to questions at the meeting or as soon as practicable afterwards.
- changes to village premises
Residents will gain the ability to add, remove or alter fixtures and fittings to their premises with the Operator's consent, which should not be reasonably refused. Changes to a village unit by a resident must be done with the operator's written consent and subject to the operator's conditions. Consent of the operator is not required to remove or alter fixtures and fittings that were added by the resident unless the removal would cause significant damage to the premises; or for additions, removal or alteration of fixtures and fittings as prescribed by the regulations. Presumably, operators will need to incorporate this obligation and their conditions into their contract they have not already.
- statutory charge on village land
The reforms include the introduction of a statutory charge over village land to protect outgoing residents. The provisions relate only to 'non-owner' type villages. The charge is created on the date a resident enters into a village contract.
The statutory charge secures an entitlement to a refund under a contract relating to those premises. The charge is enforceable only by the resident and only if the operator has become insolvent or an administrator has been appointed and in the opinion of the resident, the operator is unlikely to be able to pay a refund. Obviously if an operator is insolvent, this last criteria will always be met.
Where an application to enforce the charge is made, the Court may order that the retirement village land subject to the charge be sold and may appoint a person to act as an agent for the sale. The Court may also determine the amount of each resident's refund entitlement and make orders for the distribution of the proceeds from the sale of the village.
- control on deferred management fees and refunds to residents
In the first step to overcome the sometimes difficult formulas and marketing controls inserted into village contracts, the reforms introduce the right of registered and non-registered interest holders to approach the CTTT for a recalculation of a payment made to the former occupant following their departure if the resident considers:
- 'the conduct of the operator has unfairly had a negative financial impact on the former occupant'.
This means residents could potentially claim a loss because of an operator's manner of marketing based on the resident's perceived loss. The operator may also be liable to pay interest on the specified amount.
What is clear is that operators must appreciate laws in this area can change, sometimes in favour of operators, and that their contracts must be drafted in a sufficiently flexible manner to take advantage of change.
|Arthur Koumoukelis||t (02) 9931 4873||e email@example.com|
|John Fairgray||t (02) 9931 4817||e firstname.lastname@example.org|
|Matthew Mallos||t (02) 9931 4898||e email@example.com|
|Julia Sweeney||t (08) 8233 0630||e firstname.lastname@example.org|
|Judd Last||t (07) 3231 1606||e email@example.com|
|Paul Spiro||t (07) 3231 1502||e firstname.lastname@example.org|
|Malcolm Watson||t (03) 9612 8218||e email@example.com|
|Andrew Denehy||t (03) 9612 8217||e firstname.lastname@example.org|
|Doug Scobie||t (03) 9252 7760||e email@example.com|
|Ian Compton||t (08) 9223 9215||e firstname.lastname@example.org|
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.