This article was first published in the fourth-quarter 2012 edition of Personal Finance magazine.
Advertisements and brochures for retirement villages show elderly people walking on beaches, playing bowls, chatting to nurses, reading in well-appointed lounges and always smiling, smiling, smiling.
The truth can be quite different for some. “We are financial prisoners,” a resident of a retirement village has gone as far as to say.
Another wrote to Personal Finance to say he and his fellow residents had discovered that they had signed agreements with what they felt were “very onerous conditions”.
You, as a retiree, may feel like a financial prisoner of a retirement village because:
For sectional title properties, you usually have to give up part of the resale price of your unit when you sell, which limits your ability to relocate, to downscale in the same establishment or to move into an assisted-living facility.
Life rights schemes are usually based on your lending money to the developer for the right to live in a unit. You do not own property in the scheme.
Your specific arrangement will determine how much of the original loan you will receive back if you were to sell your right. You could get back all, some or none of your capital contribution – or you could get back all of your capital plus a portion of the profit derived from the sale. Even if you get back your full loan, there is still an opportunity cost, because your capital has not been growing while prices for accommodation have probably been increasing.
The bottom line is that – in either a sectional title or a life rights structure – if you want to relocate, you will have to find extra capital to move to equivalent accommodation, or you will have to settle for accommodation that costs less.
“Life rights are much cheaper than sectional title or share block schemes,” Paul Wisenberg, conveyancer at Cape Town law firm Maurice Phillips Wisenberg, says. “Life right represents easy access to a retirement village, but you can’t get out easily.
“I have a difficulty with life rights. In all the agreements I have seen, you get your money back (or a portion of your money back) only when the life right is resold. You may have a long wait to find a buyer, and then the deal can fall through.
“Sales have been very difficult in recent times, so winding up an estate or an attempt to move can be very delayed, sometimes by years,” he says.
Wisenberg can’t find any provision in either the Housing Development Schemes for Retired Persons Act (HDSRPA) or the regulations under the Act that makes the repayment of a life right dependent on the resale of the right. The stipulation appears simply to be written into the contracts of most schemes.
Raymond Schuller is the marketing and public relations manager of Cape Retirement Lifestyles, the developer of life rights village Rosehaven in the Western Cape. He says life rights is a complex business model “because one is selling the right to live in a unit for an unknown period, usually over the span of two people’s lives.
“The resale is, of course, also influenced by the movements in the property market. Under ‘normal’ market conditions, though, the turnaround time could be as soon as three to four months.
“Because profits under the life rights scheme are only realised over the long term, very few developers can afford to repay before a unit has been resold into the market.”
An Ombud for Community Schemes has been in the pipeline for years, but, as at the time of writing in September, the Community Schemes Ombud Services Act of 2011 had not yet been promulgated. Once the office does come into being, Wisenberg says, it will cover schemes governed by the Sectional Titles Act, the Share Blocks Control Act and the HDSRPA.
Strife over the governance structure in a retirement village can even become a matter of human rights. Piet Jacobs and other residents of Thornhill Manor Retirement Village in Modderfontein, Gauteng, felt so strongly that residents had been sidelined in the running of their village that they complained to the South African Human Rights Commission in 2010.
The aggrieved residents alleged that their constitutional right to just administrative action had been violated and that their rights of protection under the HDSRPA had been “waived or abandoned” (see “Thornhill Manor/Rand Aid”, below).
This article will look at how property ownership operates and the implications for your pocket and for the governance of retirement villages. It does not look at service levels, because grievances and success stories differ from village to village. But Personal Finance can provide you with tips on the questions to ask before you sign on the dotted line. If you properly investigate the governance, costs and services of a village before you commit yourself, you will reduce the chances of disappointment later on, when it may be too late to relocate.
We have used information from three different villages – Thornhill Manor, Noordhoek Manor and Rosehaven Gardens – to provide you with a cross-section of real examples. We do not mean to imply that these villages are any worse or any better than others; they are simply villages that have come to the attention of Personal Finance because residents have contacted this publication in connection with service and governance at their schemes. The developer of Evergreen Lifestyle retirement villages has also contributed.
Most accommodation schemes for retirees are developed along the lines of sectional title, life rights or share block or combinations of these. The HDSRPA, which was designed to protect the interests of retirees, covers these three forms of property holding.
The Act operates concurrently with other Acts that govern property ownership. So, for example, people who live in a sectional title village for retired people would be covered by both the Sectional Titles Act and the HDSRPA.
Professor Gerrit Pienaar says in his book Sectional Titles and Other Fragmented Property Schemes that group housing schemes for retirees characterised by indivi-dual ownership of stands but with the common pro-perty owned by a homeowners’ association, of which the individual owners are members, also fall within the scope of the HDSRPA. But Pienaar says these schemes are rarely aimed only at retired people. As a result, this article does not deal with homeowners’ association arrangements.
Below is our checklist to help you look beyond the glossy brochures. But the best action you can take is to have any agreement checked by an attorney to make sure you fully understand its implications.
“There are legal practitioners who specialise in this,” Wisenberg says. “Conveyancers in general have more experience, but you can’t exclude good commercial lawyers.”
“The size of the operator and length of time it has been operating are a guide but are not a guarantee it won’t fail,” he says.
You need to turn to a person or a company that has the professional skills to figure out whether or not a village is financially sound.
“Have the financial statements [of a life rights development] checked by an accountant to assess the strength of the developer,” Wisenberg says.
For a sectional title scheme, have an accountant check the financials and the annual report for, among other things, the level of unrecovered debt, whether any loans have been taken out, and, if so, under what conditions, and the level of reserves.
“Levy”, in the words of the HDSRPA, means the amount payable as a contribution to the costs of the control, management and administration of a housing development scheme.
Wisenberg says you can expect to forfeit between 20 percent and 40 percent of the profit you realise on the resale of your unit (your section plus your undivided share of the common property). His advice, though, is to check on how “profit” is defined in the purchase agreement.
“Ideally, it should be true profit, with all your costs taken into account. Usually, the scheme defines profit as the price you realise on resale minus the price you originally paid.
“But profit should take into account all your costs: transfer costs of buying the property initially, any improvements you have effected, any commission you have to pay when you sell,” Wisenberg says.
At Noordhoek Manor, a sectional title village near Cape Town (see “Noordhoek Manor/Faircare”, below), the seller surrenders to the management 40 percent of the enhancement value, which is defined as the selling price minus the original purchase price plus the cost of any improvements.
For example, if a resident bought a unit for R425 000 and has effected improvements of R100 000, and sells for R2 million, the enhancement value of the property would be R1.475 million. Forty percent of that, or R590 000, is given over to the stabilisation fund. The seller will retain R1.41 million.
There is no commission to be paid if the seller uses Noordhoek Manor’s approved estate agents.
The fine print is that the improvements have to be approved by the body corporate and reported to the operator within three months of completion.
In a life rights structure, a portion of your resale profit or your original capital may go towards stabilising levies or into a similar fund, and a portion may go to the developer as profit.
If the developer is a non-profit organisation, the money may be used for social upliftment projects.
At Rosehaven, residents who signed life rights agreements since March 2004 agreed to the following: if a resident wants to leave the village within five years of taking up a life right, Cape Retirement Lifestyles will refund the capital loan minus a brokerage fee of five percent plus VAT. The brokerage is levied on the capital loan plus any growth in the value of the accommodation.
If the agreement is terminated after five years, the first five years are not counted for capital growth. The refund is the capital loan “plus an amount equal to the Rode house price index, Cape Town, as recorded for the year preceding the said termination per completed year for each additional year after the initial five years, subject to a maximum of 10 percent per annum”. Brokerage is paid on the amount refunded.
Residents who signed life rights agreements before March 2004 receive their capital plus half of the net profit. Residents pay a brokerage fee.
For couples living in the cottages or apartments at non-profit organisation Rand Aid’s life rights villages, including Thornhill Manor, no money goes to the estate of the first-dying person, according to the Rand Aid website (www.randaid.co.za). When the second of the couple dies, 80 percent of the original purchase price goes into that person’s estate.
“Your money is as safe as the guarantee. No operator is able to guarantee the stabilisation fund unless it is in control of the funds. This is a sticking point, because the board of trustees of the body corporate, in terms of the [Sectional Titles] Act, is required to be in control of funds.”
“Check out the fine print. Check out the guarantees,” Wisenberg says.
No less than half of the retained portion, and a maximum of 80 percent, goes to Cape Retirement Lifestyles to use at its discretion.
At Thornhill Manor, the 20 percent of the purchase price that is retained is used by Rand Aid “for the continuous provision of services to the less advantaged”, according to its website.
At Noordhoek Manor, frailcare operator Faircare underwrites the levy system. Because of this, it “wishes to retain exclusive control over the formulation of the annual budget and the disbursement of our levies in the running of the village”, the Noordhoek Manor newsletter for June/July 2012 reported. But the Sectional Titles Act says the body corporate must decide and vote on the budget.
A village may apply to the Department of Trade and Industry for an exemption from sections of the HDSRPA. Your investigation should take account of whether an exception to sections of the Act has been granted and, if so, what it will cover.
Pienaar mentions in his book that the HDSRPA has to balance the needs of retirees with the fact that private developers with a profit motive are involved in many schemes. The Act has to provide protection “without discouraging responsible developers from investing their money and entrepreneurial skills”, he writes.
The ultimate beneficiaries may not be shareholders. A non-profit organisation may use revenue generated by the retirement villages it runs to fund other initiatives. For example, 30 percent of the income from Cape Retirement Lifestyles goes to what Schuller calls “the mother brand”, Communicare, which provides affordable rental accommodation.
Rosehaven residents who moved in before March 2004 are governed by a different loan repayment structure – one that leaves them better off than residents who joined after March 2004.
At Noordhoek Manor, residents who joined in the early years of the scheme have a levy that does not escalate, and they are not required to pay a food levy.
Timothy Irvine, a partner in the Faircape Group, says later joiners have a “levy indemnity amount” that is based on actual costs at the time they join and escalates in line with the consumer price index. They also pay a food levy of R570, which is spent on food at the village’s dining facilities.
All the residents would pay a special levy if the residents voted to impose one, Irvine says.
Although there is nothing a potential villager can do about disparities, he or she should be aware if a two-tier (or more) structure is in place, and he or she should accept the implications before joining.
The Act is silent on levy escalations, so you should make sure there is a reasonable levy escalation clause in the purchase agreement before you sign, he says.
Case says that in a life rights village, the occupants cannot be asked to make a financial contribution to any operating costs beyond their monthly levy. He says the only cost life rights holders in Evergreen villages are required to cover in addition to their levy is for their own consumption of water and electricity.
Your investigation should also determine the quality of the services. The glossy brochure may say there is 24-hour security, but is it confined to a perimeter fence and gate control, or is it more sophisticated than that? Does the security system need to be upgraded soon, and, if so, who will carry the cost?
Nursing services may be advertised, but that does not mean they are free of charge. If you are not moving into frailcare, find out whether you have to pay for a nurse to bring you tablets or to check up on you.
A Personal Finance reader who approached the magazine because she is unhappy with the level of care and service she receives at her village provided a checklist of what questions she would ask if she were given another chance to select a village:
– Does the organisation offer a caring environment where your health and well-being are important to management?
– Would a nurse call on each resident at least once a week?
– Would carers be available to stay in homes, if required, at a basic cost?
– Is an emergency system available and regularly checked? This would include panic buttons in all homes and for all residents and a generator that could be relied on if the electricity failed.
– Is a handyman service available?
– Are the grounds taken care of regularly?
– Are meals available and are they delivered, if required? Are special dietary needs catered for?
– Is there a laundry and house-cleaning service?
– Is there a driver available – for example, for shopping trips and doctors’ appointments – at no or minimal cost?
– Are there a variety of exercise facilities?
– Is the security of individual residences and the surroundings top class, and will the security measures be continuously upgraded without special levies being imposed?
But two years after having moved in, residents were still waiting for “Phase 2”, with the promised facilities, Noseweek reported in issue 131.
Other facilities were delivered, including a gym, bar, library and leisure centre.
But the residents had no way to enforce delivery of all the facilities. Noseweek reported that the agreements they signed contained a clause to the effect that if the facilities they receive differ from what the marketing materials promised, the agreement would take precedence.
Case did not want to comment on the Noseweek article. The Evergreen Muizenberg Phase 2 apartment block will be completed by July 2013, he says.
Evergreen’s policy is not to make a profit out of levies, and “we underwrite operating losses until a village is complete and fully occupied”, he adds.
Sectional title holders will probably be liable for special levies that arise as a result of unexpected expenses. The minutes of the past few annual general meetings (AGMs) and any special meetings will give you an idea of any extraordinary expenses looming on the horizon and the potential size of the knock.
Life rights villagers cannot be asked to pay special levies, Case says. This “can be a major advantage over sectional title schemes when villages age and require more maintenance”, he says.
It defines a “retired person” as someone who is 50 years of age or older. However, the particular village in which you want to live may have its own rules about the age of the people who live there – for example, it can restrict occupancy to those over the age of 60.
The HDSRPA also says no one other than a retired person or his or her spouse may live in accommodation set up under the HDSRPA “except with the written consent of all the holders of housing interests in the housing development scheme concerned”.
The sales agreement of the establishment concerned will spell out the particulars, but you will probably be constrained in some way with regard to having family members or friends stay with you and getting a house-sitter if you are away for any significant length of time.
You should also find out whether you would be allowed to have a nurse or carer of your own choice living with you full time if you were to need one.
Health care/frail care
At the life rights villages run by Rand Aid, residents have to pay for frail care, but a percentage of the original loan (or purchase price) to the developer is available to subsidise the costs, the Rand Aid website says.
When the first person of a couple goes into frail care, 35 percent of the original purchase price is put into an interest-bearing account, and the interest is credited to the frailcare account. If or when the second person of the couple goes into frail care, 45 percent of the original purchase price goes into the interest-bearing account, it says.
For single people, interest on 80 percent of the original loan is used to help pay for frailcare costs.
(The article was sent to Rand Aid for fact checking, but they declined to comment or verify the facts.)
For example, in the agreement of sale for Noordhoek Manor, Faircare makes it clear it has the sole discretion whether to house a person in the healthcare centre or to refuse admission (but it undertakes to consult about the matter with the general practitioner of the purchaser or occupier). The healthcare centre, which is operated commercially and for the profit of Faircare, is open to all qualifying people, but the inhabitants of Noordhoek Manor receive preference for beds and pay 20 percent less.
For example, Schuller says that Cape Retirement Lifestyles has an independent, whistleblowing hotline managed by Deloitte called Tip-offs Anonymous. “This service is available to all residents who want to lodge a complaint.”
If you are able to resort to a third party, find out whether it has the power to hold anyone accountable or the teeth to resolve issues.
After all, as Wisenberg says: “People go to a village to retire; the last thing they want to do is litigate.”
You will find sales agreements, financial statements and the minutes of AGMs invaluable as you look beyond the brochures of retirement villages. As you check up to see what you will actually be getting, remember also to speak to the residents of the villages on your shortlist – they will be able to give you the human story behind the neatly manicured hedges.
LIFE RIGHTS: OCCUPANCY WITHOUT OWNERSHIP
The money you pay to a life rights scheme does not entitle you to own any property. Instead, you receive the right to live in the scheme until you sell your right or until you die. If you have a spouse or a partner, the life right will remain in effect until both of you have died.
Your right to occupy accommodation is based on an agreement between you (the beneficiary) and the owner or management (grantor) of the scheme, or on your membership of a club or association.
Professor Gerrit Pienaar writes in his book Sectional Titles and Other Fragmented Property Schemes: “It is usually agreed that the beneficiary makes an interest-free loan to the grantor, repayable in full or partly at the termination of the agreement after the grantor has obtained a new beneficiary with a housing interest in the specific section or part of the accommodation.”
The loan is not taxable as a donation but is constructed in such a way that you are allowed the use of the property in lieu of interest on your loan, Pienaar says. Other features of a life right are that you cannot bequeath it or borrow money against it.
Life right holders, by their participation in the scheme, are automatically part of the management association.
The duties and powers of managing associations are described by the Housing Development Schemes for Retired Persons Act (HDSRPA), but, Pienaar says, a managing association can vote to expand its range of duties. Pienaar says the duties described by the regulations under the Act include:
The duties of the association can be restricted by a vote of members at a general meeting. And the association can appoint a management committee that, subject to the rules of the association, can “exercise all the powers and perform all the functions conferred upon it by the association”.
The regulations under the HDSRPA give managing associations the power, among other things, to:
Arthur Case, general manager of Evergreen Lifestyles, says a life rights village and all its facilities remain the responsibility of the developer. This is a fundamental difference between life rights on one hand and sectional title and freehold developments on the other, he says.
“When a developer sells a life right, he takes on a number of long-term legal and moral responsibilities relating to the life right holder, including financial, healthcare and estate management duties.
“The developer can never dismantle the life right. In terms of the HDSRPA, only the life right holders themselves can do this, provided that more that 75 percent agree to do so at an annual general meeting or a special meeting.”
Case believes that developers of sectional title and freehold schemes have little incentive to build cost-efficiency and affordability of levies into their developments, because maintenance of the development remains the responsibility of the residents. “Life right scheme developers, however, are keenly aware that the ongoing desirability and performance of their asset will depend on the quality, condition and affordability of the village, and this naturally incentivises them to ensure that all three aspects are carefully managed,” he says.
SHARE OWNERSHIP FOR RESIDENCY
You do not own fixed property in a share block scheme. Instead, you are a shareholder in a company that owns or has a registered long lease over a property. The company, via a use agreement, gives you the right to live in part of the property.
Your usage rights will be determined by the use agreement, the management rules and the articles of the company, Gerrit Pienaar, professor in the law faculty at North-West University, writes in his book Sectional Titles and Other Fragmented Property Schemes.
You can bequeath or sell your shareholding. However, the use agreement, rules or the articles may stipulate who can occupy or buy your interest, in addition to the occupation rules laid down in the Housing Development Schemes for Retired Persons Act (HDSRPA).
Arthur Case, general manager of Evergreen Lifestyles, says: “Because the buyer doesn’t obtain a title to the share block unit, financial institutions do not obtain sufficient security if they choose to offer bond finance for the purchase of the unit. Due to this, the majority of financial institutions do not offer such finance.”
There are obvious dangers to owning a share in a company rather than the title deeds to a unit.
Conveyancer Paul Wisenberg points out that, on the insolvency of a share block company, the underlying property may be sold in execution, which would leave the share block owners as concurrent creditors. This means they would be last in line – after secured creditors and preferent creditors – for their share of the assets to be distributed.
The protection you do have lies in the Companies Act, the Share Blocks Control Act and the HDSRPA.
Case says the Share Blocks Control Act gives prospective investors the opportunity to obtain full disclosure when deciding whether or not to buy shares in a share block company. “It also regulates the procedure for the conversion of the share block to sectional title, which is fairly common practice.”
You, as a shareholder, will play a role in the management of the scheme through a general meeting of shareholders, Case says.
“There also exists a set of management rules, similar to the rules in a sectional title scheme, which regulate the manner in which an owner or tenant occupies a unit.
“A share block company does not have regular income, and in order to maintain the property, the directors of a share block company establish a levy fund to which the shareholders contribute in order for the company to meet its running expenses. Shareholders are never liable for the debts of the company, though.”
OCCUPANCY BASED ON TITLE DEEDS
Your right to occupy sectional title property is based on your ownership of a section plus an undivided share of the common property.
You may also have exclusive use of part of the common property, such as an exclusive-use parking bay. It may be designated yours because it is registered as such in the Deeds Office or because the rules of the scheme determine it is yours. You can sell and bequeath your section, and borrow against it if necessary.
Your ownership of a section means you are automatically part of the body corporate, which manages the scheme – often with the help of a managing agent.
The governance of a sectional title development is determined by the Sectional Titles Act and its Prescribed Management Rules. The body corporate may add its own management and conduct rules by unanimous or special resolutions, as may be applicable.
The body corporate, represented by an elected board of trustees, manages and controls all the common property, including the land, the gardens, roads, foundations and roofs, lifts and foyers.
The powers of the body corporate include approving the budget. The trustees raise general levies, which have to be approved by the body corporate, and special levies, which in most cases have to be approved by the body corporate.
THORNHILL MANOR/RAND AID
What happens if residents feel that the contract they signed when they moved into a retirement village has denied them their rights to representation?
One option is to go to the South African Human Rights Commission. This is what Piet Jacobs and other residents of Thornhill Manor Retirement Village in Modderfontein, Gauteng, did after they were unable to resolve their dispute with Rand Aid Association, which manages Thornhill, and Rand Aid Welfare Development Trust (RA Trust), which developed the village.
The Housing Development Schemes for Retired Persons Act (HDSRPA) says the management association of a life rights scheme is made up of the developer and everyone who buys into the scheme. However, the association is allowed to appoint a committee to exercise all its powers and to perform all its duties.
The residents said the association did not include real participation by the residents, the Human Rights Commission says in its final report on the complaint. This state of affairs was achieved through the Thornhill Manor purchase and sale contract, which:
Residents’ views were represented via a series of other committees, which the complainants said gave them little more than a consultative voice.
Rand Aid, according to its website, is a non-profit welfare organisation that began in 1903. RA Trust (its property-holding arm) and Rand Aid Association (its operational arm) told the commission they tried to obtain an exemption to parts of the HDSRPA, which, the report says, “does not adequately provide for the type of care and services offered under its model at Thornhill Manor”.
The exemption was denied by the Department of Trade and Industry, which is responsible for the Act.
The Human Rights Commission notes Rand Aid’s operations “would be practically impossible to run if it were to follow the letter” of the Act. The commission says Rand Aid’s model may even be better than the structure contained in the Act and its regulations, but it found the Act could not be ignored and it agreed with the residents that they had been deprived of their rights to representation by the purchase and sale contract.
The case is on appeal at the Human Rights Commission, and the appeal had not been finalised when this article went to print.
Rand Aid responds
When approached for comment for this article, Rand Aid sent a letter via its lawyers, Cliffe Dekker Hofmeyr, part of which said: “This matter is on appeal before the chairman of the South African Human Rights Commission. It is, therefore, sub judice. In the circumstances, we are of the view that it would be unwise to comment on the allegations made by Mr Jacobs at this stage. We must decline your offer to comment. ... [W]e believe that it would be prejudicial to the appeal and most certainly our clients’ rights for there to be a parallel ‘trial-by-media’ process. This is a sensitive issue that will have an impact on a great many retirement homes. Both the Rand Aid Association and the Rand Aid Welfare Development Trust have a proud, century-long record of assisting people in distress and supporting the community where needed. It would be most disappointing if allegations are presented as stated, the truth of which still needs to be tested in the appeal.”
Faircare Trust, the frailcare operator at Noordhoek Manor, underwrites the levy stabilisation system and so has a financial stake in the village beyond owning what is by far the largest section in the shape of the healthcare centre.
As a result, it will not agree to vote in favour of changing the scheme’s management rules that some of Noordhoek Manor’s trustees contend conflict with the Prescribed Management Rules and certain provisions of the Sectional Titles Act.
“Faircare has a levy indemnity agreement with every resident, which influences the impact of levy increases for every resident,” Timothy Irvine, partner of the Faircape Group, says. The management rules were drafted and adopted when the scheme was created 13 years ago, “allowing for the levy indemnity and other rights and obligations that flow from this”, Irvine says.
The main points of contention with trustees are:
Under the management rules that were drawn up by the developer, Faircare can impose conditions in the deed of sale when an owner sells his or her section.
The trustees want the rules to be amended so that they also have a say about who lives in the village and under what conditions.
Two points to note on corporate governance and possible conflicts of interest are:
Faircare contends that in return for some loss of financial control, residents are protected from fluctuating costs. For example, Faircare takes responsibility for “certain unexpected costs”, such as providing R600 000 upfront for the installation of a security system, only a small percentage of the cost of which will be recovered as new residents buy into the village, Irvine says.
Faircare says that to do away with the controls on spending but to make no change to the financial liabilities and risks would place the financial well-being of the village at risk.
The beneficiary of Faircare Trust (formerly Manor Group) is Faircape Group, a property investment and development group.