‘Retirement Village Amendment Bill NSW Released,‘ Mondaq Business Briefing, July 02, 2008.  

On 26 June 2008, the New South Wales Minister for Fair Trading, Linda Burney, introduced to Parliament the long awaited Retirement Village Amendment Bill NSW (the Bill).
While many provisions are similar to the exposure draft released in November 2006, this new Bill still contains a number of refinements that operators need to be aware of and consider. The changes will also affect financiers lending to the sector as some of the reforms affect any ability to have 'pre sales' as well as introducing a statutory charge.
Critically, the reforms affect all contracts and to that extent act retrospectively.
What the reforms show is that legislation in this area can change over time and that operators who merely repeat the provisions of the current Act (eg. in relation to capital replacement), may find themselves contractually locked out from using the flexibility presented by these and subsequent reforms.
When considering these and subsequent reforms, operators should consider 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. Operators should review village contracts to determine if they should be updated in light of the proposed amendments.
'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 [2006].
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. Though the language is friendlier, the concept is in fact troubling as the ordinary meaning of a 'budget' can be either 'a forward estimate of expenditure/revenue that is subject to change' or 'a specific limit on the amount of funds available'. Operators prefer the former, residents the latter. 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. Under the transitional provisions, non-owners who have already vacated their premises will continue to be liable for recurrent charges for a maximum period of 6 months after departing. Registered interest holders will be liable for the full amount of recurrent charges for either 42 days from the commencement of the Bill or 6 months from the date they departed, whichever is the earlier. 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 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 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 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. The gap in the legislation is that a person may have the right to occupy but never occupies and yet may have the benefit of the settling in period. This will have an impact on financiers.
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: These provisions have had an extensive overhaul and have brought some balance in favour of the operator. The operator is responsible for maintenance and replacement of any items of capital which are not owned by the resident. Common property in a strata village and association property in a community title village are excluded from the operation of these provisions. Up to 50% of the operators costs for capital maintenance and replacement may be funded from recurrent charges and, where the operator has established a capital works fund, from the capital works fund. The capital works fund is similar in effect to the current capital maintenance fund and is funded from recurrent charges according to the approved budget. Residents who are registered interest holders and operators will be able share the cost of capital for items within units on the same proportion as they share capital gains however this will depend on the terms of the village contract. To the extent contracts do not allow for such sharing of expenses or passing of expense to residents at all, the provisions may not be of much help. 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 placed 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.
Overcoming Wollcott Court: It is clear that the Government was greatly affected by what happened at Woolcott Court. There are a number of reforms that address the issue and will affect all operators. In relation to administrators, it is proposed that administrators appointed by the Director General will be entitled to be paid from recurrent charges or other moneys otherwise payable to the operator. Interestingly, it specifically excludes any liability on the Department for any costs of the administrator so appointed. The provisions go further and give specific powers to the administrator to vary village services, budgets, recurrent charges, and the ability to terminate the village contracts if no suitable operator is found. To further combat the problems of Woolcott, the Act allows the Department to issue notices, warning people of risks involved in dealing with certain operators. The notices may relate to the risks involved in dealing with a person who has a recent history of 'unconscionable conduct' in dealing with consumers. This is an extremely dangerous and powerful tool. The safeguards for operators in this case are fairly limited. 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.
Other reforms: Other reforms include: introducing a penalty provision for amending a village contract without a solicitor's certificate, with a maximum penalty of 100 penalty units, which currently equates to $11,000 ensuring there is vehicular access for emergency and care services with penalties attaching for any failures.
Conclusions 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. Unfortunately, there were other reforms and recommendations proposed prior to the Exposure Draft, such as accreditation regimes, which have not been incorporated into the Bill. It is these types of reforms that improve the quality of operators that will in fact raise the standard of the industry. This publication is provided to clients and correspondents for their information on a complimentary basis. It represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws. 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.
Gadens Lawyers Skygarden Building 77 Castlereagh St. Sydney 2000 AUSTRALIA Tel: 2 9035 7103 Fax: 29931 4888 E-mail: info@nsw.gadens.com.au URL: www.gadens.com.au Click Here for related articles(c) Mondaq Ltd, 2008 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com