The concept of Life Rights in real estate has become a popular retirement model across the globe. This approach to retirement, often referred to as the ‘right of occupation,’ is achieving significant acclaim in the United States, Australia, and New Zealand, and according to some local industry players, South Africa is on the same trajectory.
Generally speaking, life rights in property developments are supposed to offer a supported retirement lifestyle within a maintained and managed environment, which is what seems to be attracting the older guard. Upon the death of a life rights holder, the right to use the unit reverts back to the owner of the complex, who can then resell it. In life, it remains an inalienable right, which means it cannot be transferred to another person and is impossible to take away. But that being said, investors need to keep in mind that there are strict rules on occupancy, and only the life rights owner and their spouse may live in the unit, and it cannot be passed or endowed to someone else on the death of the unit holder.
“Unlike full title property ownership, life rights ownership entails purchasing the right to use the property for the remainder of your life, with the security of tenure forming the foundation of this type of contract,” said Sue Torr, managing director at Crue Invest. “Life rights ownership in a retirement village is an attractive and affordable option for many seeking community, security, and peace of mind, although it is important to understand the financial consequences of buying into such a scheme.”
According to John Chapman, Director at Rabie, the fundamental distinction between life rights and sectional title offerings hinges on the form of ownership. When you invest in a life right, you are securing a leasehold over a property, managed by the developer, which allows you to reside in your home for the entirety of your life or your partner’s life and you are fully protected by the Retired Persons Act.
The Rabie Property Group launched its brand, Oasis Life, in 2018, and it exclusively adopts the life rights model.
“One of the primary differences between investing in life rights rather than traditional property ownership is the management structure,” said Chapman.
“In a sectional title development, homeowners manage the scheme themselves, which can lead to challenges as residents become less inclined to invest in infrastructural improvements and property maintenance as they age, resulting in disputes among body corporate members, particularly when unforeseen special levies are tabled. In contrast, with the life right model, the developer takes responsibility for the property in terms of common area management and facilitates the process of structural maintenance and repairs needed in your home. This affords residents multifaceted benefits as the life right holder simply bears the responsibility for interior maintenance of the home. “
He added that a reputable developer adopting the life right model, should take a long-term view of profitability and take full responsibility for the success of the estate, ensuring the interests of the developer and Life Right holders are aligned. “This is different from the view in a Sectional Title scheme where the developer sells out the development and hands it over to a Body Corporate or Home Owners’ Association. You’ll find that a reputable developer takes a committed and involved approach to a Life rights-based retirement village. “
“The majority of retirees seek financial security, as unforeseen expenses become a burden. The life rights model is financially beneficial to the retiree market due to its predictability, allowing purchasers to meticulously plan for their future financial needs. As a life right holder, you should enjoy the reliability of predictable costs, including upfront fee savings with no VAT or transfer duty applicable on sale or resale, predictable levy increases of CPI or 6% (whichever is greater), as well as freedom from the financial burden of unexpected special levies,” he added.
The emphasis on reputability is key, as one reader wrote to Personal Finance recently about the development of a Retirement Village in Umkomaas in KZN. It is also about getting the right advice from a trusted financial planner. But here is his story.
A new unit was priced at R1 395 000.00, and he was obliged to pay a deposit of 25% in January 2018. This village was being built in stages, and the builders are in the process of completing phase 4, making a total of approximately 350 completed units. “There will ultimately be 6 or 7 Phases,” the reader said.
“Our unit was finally completed in June 2019, and the keys were handed over to us on 27 June, when the outstanding balance became due, but as we had not as yet sold our house we were unable to pay this amount. We finally sold it in October of that year but only received the money in February 2020 and paid the balance of R1 131 896.69, which included interest, on 12 February 2020. The interest rate which we were charged, was increased every month that this money remained outstanding. I then realised that I had not been paid any interest on the deposit, which they had held for 18 months. When I queried this, I was told that they did not pay any interest on any of the units in Phase 1, as this Phase was under construction.
By not paying interest on this deposit, it means that they dishonestly, and in my opinion, illegally increased the price. We had to draw the money for the deposit out of our investment thus losing 18 months' worth of interest, while they had the benefit of this money. I must also point out that there is nothing in the Sales Agreement saying that we would not be paid interest, and we were never advised of this fact.”
Personal Finance confirmed with industry experts that a legal obligation to pay interest on a deposit of any sort does exist and advised the reader to contact the Community Schemes Ombud Service (CSOS). He is waiting for their reply.
The crux of the matter is that no matter where your funds are vested when it comes to lump payments in any form, it is best to contact your financial adviser to assist you in the transition in or out of any form of asset.