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RTV04

Retirement Villages

NZ $45.00
incl GST
John Greenwood Simon Marks
John Greenwood
Chapman Tripp
Wellington
Simon Marks
Anthony Harper
Christchurch

Published: 25 February, 2004
Pages: 146

Introduction

The concept of retirement villages has been with the New Zealand environment for the last three decades. Retirement villages evolved from council housing, religious, welfare and war veteran housing developments which all can be characterised by having the following features:

  • cluster residential buildings;
  • a sense of communal living;
  • sharing of facilities; and
  • basic security.

As the very name suggests they are focused on retirees but in today’s and tomorrow’s world the age of residents and whether or not they are retired will become increasingly unimportant.

In recent times the retirement village industry has undergone considerable growth. There are over 300 villages currently in operation in New Zealand accommodating more than 20,000 people, comprising at least 4% of people aged over 65. It is the older group who are taking a flight to retirement villages but developers are equally targeting younger age groups, whether or not retired, by offering excellent facilities and high security. The average age of entry is estimated by the Retirement Village Association to be 74.

New Zealand has a fast growing population of over 55 year olds and 55 is generally accepted as the threshold age for people to enter retirement villages. It is important to note that where retirement villages specify an age limitation such as “persons over the age of 55 only, may apply to acquire an interest in a retirement village” an argument could be raised that there is a potential breach of s 19 of the New Zealand Bill of Rights Act 1990. Although s 55 of the Human Rights Act 1993 provides a clear exception in terms of that legislation excluding facilities which offer accommodation such as in retirement villages for persons in a particular age group, s 19 of the New Zealand Bill of Rights Act does not expressly include the exemptions in the Human Rights Act 1993. However, s 5 of that Act acknowledges that the right not to be discriminated against, is subject to “such reasonable limits prescribed by law as can be demonstrably justified in a free and democratic society”; arguably s 55 falls within that saving.

Also, of interest is that s 56 of the Human Rights Act 1993 may permit a retirement village to deny access to a person on health grounds to the extent that admission could pose a safety risk to that person or other residents or staff. Whilst therefore s 55 permits villages to cater especially for people with particular disabilities arguably s 56 does not allow villages generally to discriminate against residents on health grounds.

It is, important to note that much of the recent growth is coming from people aged 80 and over which is becoming a new phenomenon in the New Zealand environment.

At least 12% of the population is expected to be 65 years old or older by 2011. By 2030 this is expected to rise to 25%. Statistics New Zealand predict that by 2050 New Zealand will comprise over 1 million people aged 65 years or over. On the basis of a current 6% growth rate in village occupancy the Retirement Village Association estimate that between 65,000 to 70,000 people will be living in retirement villages by the year 2020.

It is possible that predictions of 65,000/70,000 could well double or triple. In the United States some 15% of their population reside in retirement type villages with some single village complexes comprising 30,000 or more residents. See for example www.suncity.com.

Retirement villages span a wide range in terms of target age groups and facilities. Many are resident funded and financed through negative pledges without registered mortgage securities. Village developments are in general funded by capital payments received by residents who purchase occupation rights. Additional payments are then made for the services and facilities provided. Payments for the services and facilities provided vary throughout the country. Some are front-end loaded into the purchase price for entry into the retirement village but most typically are “back-end loaded” where the cost of provision for facilities and services for the period of occupation or residency is deducted from the resale value of the flat or unit occupied at the end of the occupancy.

Some villages have large complexes of 200/300 units with elaborate facilities sometimes built around a theme while others comprise very few residential units on their own. Many provide long term care facilities in the form of rest homes and geriatric hospitals and although care facilities are subsidised by Government many operators believe there is insufficient subsidy to encourage growth of such facilities.

There is also much diversity in ownership ranging from public companies to religious and charitable and Masonic Lodge trusts, charitable trusts and incorporated society organisations. A few of the large operators have both their own building/development arm and a separate operational/management arm.

The diversity in village structures is reflected in the numerous funding arrangements with the cost of units being paid on entry, and then with deductions being calculated typically up to a maximum of a 20% reduction from the on-sale price. The so-called “back-end loaded” arrangements generally help fund facilities and offset services provided in a retirement village.

The actual legal ownership and/or occupancy arrangements have traditionally comprised the following:

  • unit title;
  • cross lease;
  • contractual licence; and
  • lease or tenancy for life.

The different legal ownership/occupancy structures are explained in the 1997 NZLS seminar paper on retirement villages presented by Peter Jones and Helen Melrose. Surprisingly the more flexible flat owning company structure has not found favour (see ss 121A-121P of the Land Transfer Act 1952) and the alternative use of ground leases with controls on uses, aided by the Council consent notice process, have not featured as more sensible and arguably more marketable alternative structures. Another legal vehicle is the possible use of recent personal property legislation (viz the Personal Property Securities Act 1999) to formalise registration of residents’ interests.

The actual occupancy arrangements vary from outright ownership, albeit with management control at the points of entry and exit, to mere contractual monthly licences terminable on one month’s notice.

It is estimated by the Retirement Village Association that approximately 65% of units within retirement villages are secured by licence to occupy. It is estimated that some 13% offer direct titles to residents. However a number of units with separate titles have encumbrances or life tenancy restrictions secured over them. These include constraints on sales which remain a standout feature in most retirement villages in vesting control of the sale process in the hands of village management.

The regulatory law up to the time of passing the Retirement Villages Act 2003 governing control over retirement villages was the Securities Act 1978. This was a consequence of maybe one third of retirement villages (absent those issuing titles to residents) being considered to be contributory financial or security investments. The result was the need to produce prospectuses.

Thus some villages have been required to adhere to compliance rules while many others have not. Coupled with prospectuses, village operators and their legal and tax advisers, spawned a plethora of sophisticated and complex documentation such as occupation agreements, deeds of participation and trust, priority or security sharing deeds with banks, encumbrances protecting statutory supervisors and management arrangements and donation and amenity agreements. Such documentation has served to add to the confusion as to what exactly residents were acquiring.

Confusion was compounded by the suggestion that retirement village units were an investment. As the 1999 Law Commission Report advised in paragraph 5 of that Report the question of an appropriate legal structure for retirement villages taxed the ingenuity of conveyancing lawyers. Whether schemes were devised to avoid the impact of securities legislation or were tax driven or both, led to wholesale confusion and artificiality not conducive to protecting sacrosanct property rights nor delivering certainty to residents as to the whole package.

Lawyers were alerted to the legal difficulties in the Privy Council decision of Culverden Retirement Village v Registrar of Companies [1997] 1 NZLR 257. That case determined that a buy-back arrangement of units constituted a debt security within the meaning of the Securities Act 1978. Also, unlike the High Court and Court of Appeal in New Zealand, the Privy Council made obiter comment that an “offer of units” was no less one involving investment because the return comprised partly money and partly use of land. It could thus be a contributory scheme as defined in the Securities Act 1978 and was not exempt under s 5(1)(b) of the Securities Act 1978.

As a consequence of the Culverden decision new lawyer devices and schemes were invented such as the Ryman Healthcare approach of creating a life interest and then encumbering or mortgaging the reversion, thus arguably falling within the exception of s 5(1)(f) of being “a mortgage of land other than a contributory mortgage” to secure its debt obligations. A promotion/advertisement explaining the Ryman structure is Appendix 1. Also, the Securities Commission has issued a series of Exemption Notices by requiring alternative forms of disclosure for intending residents.

Authors

Author(s): John Greenwood, Simon Marks

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