Retirement village contracts are complex and can prove rather confusing for the uninitiated. Here, Danielle Lim outlines the three types of tenures and the key features of each.
As a solicitor, I am lucky enough to help people with the contract documents involved in moving into a retirement community almost every day.
Most of my wonderful clients have bought or sold property throughout their lives – some have done so many times. With this in mind, they think they know what to expect with their retirement village contract. But retirement village contracts are a completely different kettle of fish. The main reason for this is something lawyers describe as the underlying ‘tenure’. This article seeks to outline the main features of three of the most common types of tenures found in retirement village – freehold, leasehold and licence. The differences are far less significant than residents might first think.
Freehold tenure represents the ‘traditional’ form of tenure – it is the way that any member of the general public would typically buy or sell a home in the suburbs. In exchange for payment of a purchase price, the title to the property is registered in a person’s name and is also recorded on the Land Titles Register – which is searchable by anyone.
When a resident purchases a freehold unit in a retirement village, the documents that they sign are:
a. the contract of sale (between the seller and the buyer); and
b. a management contract (between the buyer and the retirement village operator)
While ‘freehold’ does tend to give a sense of comfort and familiarity – there are some important differences in a retirement village context including:
i. Quite often the retirement village operator will place documents on the title to the property in order to secure obligations under the management contract (e.g. the payment of an exit fee). An example of a document that an operator might lodge on title is a caveat.
ii. The retirement village unit is an asset, but it is different to other assets that you may own because it generally cannot be transferred or gifted. The exception to this is where there are two people who own the home as ‘joint tenants’, and one passes away. In this case, the property may be transferred to the remaining owner.
Leasehold property is by far the most common type of tenure in retirement villages.
From a resident’s point of view, they pay an ‘ingoing contribution’ in exchange for an exclusive ‘right to reside’ in a unit. The right to reside continues until the death of the last surviving resident, or until the lease is terminated.
Leasehold units are great for residents for many reasons, including:
- The interest in the property is to the exclusion of all others (in much the same way as freehold);
- The interest in the property is registered in the Land Titles Registry. The registration status provides an additional layer of protection;
- There is no stamp duty, which can save residents thousands of dollars;
- The transaction is simple compared to a freehold transaction as it is all documented in one lease document with the operator.
Retirement village units of ‘licence’ tenures are very similar to leasehold. The operator retains ownership, and the resident pays an ingoing contribution in exchange for a ‘right to reside’. The main difference between licence and leasehold is that the licence is not registered on title. However, additional protection is provided under the Retirement Villages Act under the relevant state.
Licences are fairly uncommon, except for South Australia where they are the dominant type of tenure offered.
What does it all mean?
In practical terms, the differences between the types of tenure are largely limited to expense and complexity. Freehold units involve a significantly more complex set of documents, which often translates to a more expensive conveyance.
If a resident was to obtain advice about each of the three types of tenure, they would see that they all have very similar rights, responsibilities and restrictions. This similarity is achieved by the introduction of contractual terms by the operator, and is supported by documents lodged on title. Importantly, in all three types of tenure, the resident has a secure right of residence and, in the case of lease and licence, a protected right to recover their ingoing contribution.
While a solid understanding of the legal and financial implications of retirement living is important, it is my firm belief that the most important reason to choose a retirement village unit goes far beyond tenure. The determining factor should be the cultural and emotional fit with you and your lifestyle.
Danielle Lim is the principal of DSL Law. She is a solicitor of the High Court of Australia and the Supreme Court of Queensland. Danielle has consulted with the government about seniors living legislation, she sits on various committees regarding seniors living and regularly works for retirement village operators and residents.
Article originally published in Chapter magazine.
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