By our calculation, up to 35% of retirement village contracts could have their DMFs voided as well if applied across the country.
We can’t see this actually happening but we do believe lawyers received a mid-year Christmas present yesterday when the president of the Victorian Civil and Administrative Tribunal basically said DMFs should not be paid when they are calculated on the exit value of a home.
Land lease operator Lifestyle Communities was being taken to task as it charges a DMF on the exit price. VCAT decreed this is not legal under tenancy laws because “the amount of the DMF is neither known nor knowable when the residential site agreement is signed.”
The chart below from the Retirement Living Council’s latest Census shows ~25% of new village contracts have the DMF calculated on the future (unknown) exit value of the home.
Given it has only been in the last 7-8 years that private operators have been moving to the DMF being calculated on the entry rather than the exit fee, you can add another 10%+ of contracts to the 25% mentioned above that in concept could be ‘voided’
Lifestyle Communities will have to appeal the VCAT decision. First, it will no doubt say people entered the contracts with their eyes wide open. The contracts are clear and transparent. Second, they are not seriously aged people, with an average entry age in the early 60s; they should understand what they are doing.
And third, it is a life and death situation for Lifestyle Communities on two counts. They have over 5,000 homes that they expect to get around $60,000 each in DMFs and have $400 million in debt funded in part on that income, which will be jeopardized.
And they were just regaining the trust of buyers, lost when the the ABC 7.30 program brought the DMF to the attention of the broader public – which killed sales.
Even worse, think of the dire position if Lifestyle Communities were told they have to repay past DMFs, and think of the class action lawyers that would appear to ‘fight for the residents’. Remember it was 80 plus residents spurred on to take the DMF to VCAT.
Lifestyle Communities next step will be to appeal to the Supreme Court of Victoria – all of which is certain to generate media coverage of the DMF as a concept. The retirement village lawyers will be on high alert. The Australian newspaper headline from today above demonstrates that retirement villages will be drawn into the discussion.
Everyone must be hoping for sanity to prevail, to prevent uncertainty and fear in existing residents, and to maintain trust in the village sector which is shaping up to be a major strategic resource in the aged care tidal wave coming. Investors must not be spooked.
Perhaps it is time that the sector adopted the LDK membership model where, in effect, the DMF is paid up front and the contract simply says when you leave you get the value of your home back to the dollar.
