O'Shea, Lizzie --- "Retirement villages: The need to protect residents' rights" [2018] PrecedentAULA 57; (2018) 148 Precedent 24

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RESIDENTS OF RETIREMENT VILLAGES

THE NEED TO PROTECT RIGHTS

By Lizzie O’Shea

Where we live is an important consideration for our sense of dignity and well-being. It can also have an enormous impact on our financial position. The home is often the cornerstone of a family’s financial security: land and houses account for more than half of total assets in Australia.^[1] Two out of three households are home-owners and, for the majority of families, the home is the single largest source of wealth.^[2]

This situation has a particularly significant impact on the quality of life of older people. In Australia, more older people own their own home when compared with younger generations.^[3] This is important to older people’s sense of physical and financial independence. It also means that more older people than ever are in possession of a highly valuable asset. Older people in Australia are on average asset rich and income poor, and unless we have a legal system that protects their rights, this financial status can leave them vulnerable.^[4]

In recent times, there has been greater scrutiny of the Australian retirement village industry and how it treats older people. The industry’s conduct has a significant impact on the financial position of many older people, given that living in a retirement village can involve serious decisions about spending money. It is an issue that ought to concern us all, and the law does have something to say about it. In Australia, older people who are considering living in a retirement village are consumers and enjoy all the benefits of consumer protection law. We need to find ways to empower them to exercise these rights, and industry practices will improve as a result.

BACKGROUND

On 26 June 2017, a joint Fairfax Media-Four Corners investigation revealed questionable business practices of the Aveo Group (Aveo). Aveo is Australia’s largest publicly-listed retirement village operator, with a market capitalisation of around $1.3 billion.^[5] The company is in the ASX200.^[6] It has a deeply complex company structure.

Aveo operates and manages 91 retirement villages around Australia, and has done so for over 25 years.^[7] Aveo offers a range of types of accommodation, providing different levels of care. According to its most recent annual report, Aveo is responsible for 11,267 units of accommodation,^[8] up from 7,400 in 2015.^[9] The company is expanding rapidly due to Australia’s ageing population. The number of Australians aged over 65 is expected to double over the next 30 years.^[10] In its company documents, Aveo has noted that 7.5 per cent of Australians over the age of 65 will be expected to live in a retirement village by 2025. This is an increase from 5.7 per cent in 2015.^[11]

The Four Corners report focused on the fees charged by Aveo to residents, and the treatment of residents living in Aveo facilities. Residents and former residents complained about the size of the fees and the quality of services and care, which many found lacking. Some residents also felt locked into their current arrangements. This was because if they were to leave the retirement village, they would be required to pay deferred fees deducted from the lump sum that was invested at the beginning of their residency in the retirement village. These fees are often significant, leaving residents with insufficient funds to find an alternative place to live with access to necessary services. One resident was particularly concerned because her contract also allowed Aveo to terminate her residency under certain circumstances, depending on her capacity and her care needs. She felt deeply concerned about her future.

The Australian Consumer Law (ACL) provides certain protection and remedies for consumers that may be relevant in this context. The laws cover existing and former residents of retirement villages. In particular, the ACL prevents parties from relying on unfair contract terms in certain kinds of contracts. It also prohibits conduct that is unconscionable.

THE BUSINESS MODEL OF RETIREMENT VILLAGES

Residents of retirement villages may hold units either as freehold or leasehold. Freehold residents purchase an interest in the land from the previous owner of a unit, on a fee simple basis. Freehold residents are then required to execute a contract (usually called a service agreement) with the retirement village operator which will often set out a number of conditions on their residency, including fees payable, and conditions on the sale of the unit. Usually, a term requires that any future resident also executes a similar contract.

Leasehold residents are subject to a variety of arrangements in their respective villages which can be quite complex. In general leasehold residents pay the operator a lump sum amount – often called an ingoing contribution – equal to the market value of the unit in exchange for a long-term lease (say, 99 years). This kind of lease provides security of tenure (subject to unilateral termination by the owner or operator of the retirement village, for example, if the resident requires care that is not available in the village). Operators usually treat this lump sum as a loan and hold the money on trust, but do not pay any interest to the resident for the loan.^[12] These lease arrangements effectively create a life interest in the unit. The lease can be terminated by residents on provision of notice should they decide to leave the retirement village, or if they die. The lease is a contract and often contains terms that are similar in substance to the contracts executed by fee simple residents. (Together these documents are referred to in this article as ‘contracts’.)

In both situations, the retirement village operator will usually have use of the money paid by the resident (either to purchase the property outright, or to purchase an interest in the land) for the period for which the resident lives in the retirement village.

When the resident provides notice of an intention to leave, or dies, the process for selling the unit will usually be set out in the contract. It can take months or even years. The relevant terms in the contracts vary depending on the retirement village.

In general, it is at this point that a number of significant fees are charged. Upon termination of the contract residents are routinely required to pay a refurbishment or reinstatement fee. These terms can be drafted quite liberally. Refurbishment may not just be confined to returning the property to the original condition it was in when the resident moved into the unit. Some agreements can require that residents pay to refurbish the unit to the best possible condition for resale. This can cost many thousands of dollars.

Outgoing residents are also often responsible for the costs associated with finding a new resident, including the real estate agent fees and commission and for legal costs associated with terminating the contract. The property might be advertised by independent real estate agents or by an agency owned by the retirement village operator. Residents may be required to use a particular agent until a certain period of time has passed, after which they can use an agent of their choice.

Once the refurbishment work is completed, and a new incoming resident has been found, the resident becomes entitled to be either paid the purchase price from the new incoming resident or refunded the original ingoing contribution loaned to the retirement village operator (depending on whether they are freehold or leasehold). The new purchase price will be paid to the outgoing resident minus the various deductions for legal and agent commissions.

To put it slightly differently, the resident is required to sell their interest in the unit in order to recover their original purchase price or ingoing contribution (minus fees charged). This can be a problem if the outgoing resident cannot find a purchaser for their unit. Agreements may provide that if the interest in the unit remains unsold after a certain period the operator will essentially buy back the unit, and repay the resident directly. Contracts may also explicitly give the operator an option to purchase the interest in the unit from the resident.

At this point the industry practice is that operators will deduct a ‘deferred management fee’ (or DMF), which is often the largest of these fees and charges. This model allows operators to charge a management fee as a condition of residency, but the fee is not collected until the residency terminates and the resident leaves the retirement village.

It is a fee structure that is used widely in the sector and is referred to in various regulatory schemes around the country. The model was originally designed as a way to reduce the purchase price of units to allow greater accessibility to retirement villages for people who might not otherwise be able to afford to buy into them.^[13] It appears that this approach no longer works in this way, given that units are routinely bought and sold for prices that reflect market values, determined without reference to this function of the DMF.^[14]

The DMF can be calculated in a number of ways. It may be a fixed percentage of the original purchase price/ingoing contribution, or the new purchase price/ingoing contribution, or the market value of the unit. It may also be calculated as a percentage of the highest of any two or all three of these figures. Sometimes it involves a sliding scale based on the length of residency. This may mean that a resident pays 10 per cent of the purchase price as the DMF if they terminate their residency in the first year, but this rises over four years to a maximum of 40 per cent.

The other significant deduction will relate to capital gain or loss. Some contracts may be silent on capital gains or losses and essentially treat the risk and rewards of investing in an asset of this nature as the responsibility of the resident to either bear or enjoy. However, contracts can also contain terms that allow the operator to take a certain percentage of capital gain or require the resident to bear a percentage or even the entirety of the capital loss. In essence, these terms shift significant risk associated with a large asset onto the resident and away from the operator.

Lastly, residents are often liable to pay maintenance fees. These are charged during the residency, but usually continue after termination of the contract and even after the resident has provided vacant possession, until the unit has been sold and the exit entitlement has been paid to the resident. These amounts can be significant given that the average time between termination and the payment of the exit entitlement for former residents can be months or even years.

As a result of all this the outgoing resident will often be repaid a greatly reduced sum when compared to the amount they originally paid for an interest in the unit. Depending on when the resident terminates the contract, this can mean that the resident pays a sum that gives them a right to reside but at many times the cost of the equivalent market rent of a similar property.

The contracts are routinely complex documents with detailed formulas for calculating fees. As such, the charges can come as a surprise to older people moving out of a retirement village. This is often a cause of significant distress to former residents, and can severely limit their housing options for life after the retirement village. They are also commonly a source of deep frustration for families and executors managing the estate of a resident who has died, who were unaware of these restrictive contractual arrangements at the time their relative signed the contract.

UNFAIR CONTRACT TERMS UNDER THE AUSTRALIAN CONSUMER LAW

The ACL contains certain provisions that are relevant to the retirement village industry and residents of retirement villages. While the law generally respects freedom of contract between private parties, the court will intervene in certain instances, and the ACL offers a statutory basis for setting aside contractual arrangements if certain conditions are satisfied. This regime is informed by a public policy position that favours protection of consumers and residents of retirement villages fall into this category.

In particular the ACL contains a number of provisions that govern unfair contract terms. These provisions only apply to certain types of contracts. For present purposes the most relevant of these categories is contracts that are consumer contracts. ‘Consumer contract’ is a defined term under the ACL: the contract must be for a supply of goods or services or a sale or grant of an interest in land. The contract must also involve an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption. Residents of retirement villages enter into a consumer contract when they sign a service agreement or a lease over their unit.

Section 23 of the ACL provides that a term of a consumer contract is void if:

(a) the term is unfair; and

(b) the contract is a standard form contract.

Standard form contracts are defined under s27 and are usually easy to identify.

Most relevantly for present purposes, s24 defines a term as unfair if:

(a) it would cause a significant imbalance in the parties' rights and obligations arising under the contract; and

(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

(c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

In making this assessment the court can take into account what it thinks is relevant, but it must consider the extent to which the term is transparent and the contract as a whole. A transparent term will be expressed in reasonably plain language, be legible, presented clearly and readily available to any party affected by the term.

This provision has relevance to many of the contractual terms used in the retirement village industry. For example, a contract that requires a resident to bear capital loss in situations where the operator takes some or all of any capital gain is likely to fall within the definition of unfair. Other terms that impose significant fees which are not designed to protect a legitimate interest on the part of the operator may also be captured. If a resident is required to use the operator’s agent to sell their unit, and this process stretches out for months or years, the court may not look favourably upon residents being charged large commissions upon sale or significant maintenance and service fees throughout this period.

There are other exclusions under s26 of the ACL. In particular if the term defines the main subject matter of the contract, or sets the upfront price payable, or is required or expressly permitted by law, s23 does not apply. These exclusions prevent a contracting party from arguing, for example, that the price of a good or service is unfair purely on the basis that it is too high (provided it is transparent and otherwise complies with the ACL). This is significant for the purposes of a DMF, which is not necessarily unfair even if it is exorbitant. However, excessive DMFs that are not disclosed transparently at the time the contract is entered into may well be considered void by a court under the ACL. A term that gives the operator the right to charge fees upon termination without any limit or cap or any way for the resident to know what the fee will actually be at the time he or she enters the contract, might well be considered lacking in transparency.

Unfair terms cannot be relied on and the ACL offers a range of options to consumers who want them to be set aside. The contract will continue to bind the parties if it is capable of operating without the unfair term.

UNCONSCIONABILITY UNDER THE AUSTRALIAN CONSUMER LAW

The ACL deals with unconscionability under ss20 and 21. In ACCC v Get Qualified Australia Ltd (No. 2)^[15] Beach J outlined the approach to be taken in order to understand the concept. He noted at para [60] that: ‘“unconscionability” means something not done in good conscience or conduct against conscience by reference to the norms of society’. The test is high. In determining whether conduct is unconscionable the court will look at the entirety of the arrangement and the benefits and their value to the consumer. In ASIC v Cash Store Pty Ltd^[16] Davies J noted that the insurance sold by Cash Store was ‘evidently unsuited to the needs of most customers and were most unlikely ever to confer a benefit’. This was part of the reason he determined that the Cash Store had behaved unconscionably.

The assessment of the conduct of retirement village operators, and whether it meets the standard of unconscionability, will depend on the specific circumstances of each contract. In some situations it may be that the particular fees charged are unsuitable and fail to confer any benefit, particularly the DMF in situations where the remaining costs of managing the retirement village are already accounted for in other fees such as capital replacement funds, service fees and maintenance fees.

It is also worth noting that retirement village residents are usually older people – for example, the average age of Aveo residents is 83 years. This does not automatically put these people at a special disadvantage, but it does suggest that contracts involving older people need to be designed in a way that gives people clarity and understanding. It may also require that referrals for independent advice on the terms of these contracts are needed to ensure that consumers are fully informed, given the seriousness of these transactions. The Victorian Parliamentary Inquiry considered this issue in some depth, making recommendations around requirements for standard disclosure of information to potential residents.^[17] Its recommendations also suggested that the skills of legal practitioners in this area need to improve so that advice given to potential residents is accurate and meaningful. Mandatory referrals for independent advice may well be the next step in this area of law.

CONCLUSION

Retirement village operators enter into complex contracts with older people on a daily basis and these arrangements involve significant sums of money. Older people need to think carefully about the costs and consequences of entering these kinds of arrangements. But operators also need to make sure that they conduct themselves fairly and that their contracts comply with the law.

Lizzie O’Shea is a Senior Associate in Maurice Blackburn’s class actions department. PHONE [phone] EMAIL eo’[e-mail].

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^[1] Housing Decisions of Older Australians, Productivity Commission Research Paper (December 2015) 3.

^[2] Ibid, 3.

^[3] Ibid, 4.

^[4] Ibid, 12.

^[5] See <https://www.investsmart.com.au/shares/asx-aog/aveo-group>.

^[6] As at 9 August 2017.

^[7] See Aveo, Annual Report (2017) 7 and <https://www.aveo.com.au/about-aveo/>.

^[8] Aveo, Challenging start to FY18 – recovery well underway, 2018 Half Year Results presentation (14 February 2018) 45.

^[9] Aveo, On track for FY16 targets, 2016 Half Year Results presentation (17 February 2016) 38.

^[10] See above note 7, 11.

^[11] Ibid.

^[12] See A Kollmorgen, ‘The hidden costs of retirement village contracts’, Choice (last updated 26 June 2017) <https://www.choice.com.au/money/property/buying/articles/retirement-village-contracts>.

^[13] L Parker, ‘Lifestyle’s hidden costs’, Sydney Morning Herald (online), 16 February 2011, <https://www.smh.com.au/money/planning-and-budgeting/lifestyles-hidden-costs-20110215-1auny.html>.

^[14] Consumer Action Law Centre et al, Submission to the Legal and Social Issues Committee, Parliament of Victoria, Parliamentary inquiry into the retirement housing sector (30 June 2016) 5.

^[15] [2017] FCA 709.

^[16] [2014] FCA 926.

^[17] Legal and Social Issues Committee, Parliament of Victoria, Inquiry into the retirement housing sector (March 2017) 32-41.