Levitt, Stewart A; Meyerowitz-Katz, Daniel --- "Setting an important restraint on retirement village operators: The matter of Luke v Aveo Group Ltd" [2018] PrecedentAULA 58; (2018) 148 Precedent 28

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SETTING AN IMPORTANT RESTRAINT ON RETIREMENT VILLAGE OPERATORS

THE MATTER OF LUKE v AVEO GROUP LTD

Stewart A Levitt and Daniel Meyerowitz-Katz

On 13 September 2017, Levitt Robinson filed a class action in the Federal Court of Australia against retirement village operator Aveo Group Ltd, pursuant to Part IVA of the Federal Court of Australia Act 1976 (Cth).^[1]

Aveo is an ASX-listed company whose business consists primarily of acquiring, developing, and operating retirement villages. Aveo manages 91 retirement villages across Australia^[2] and after LendLease is the second largest retirement village operator in the country by units under management.^[3]

The Aveo Group has a complicated ownership structure, so for ease of reference in this article we will we refer to Aveo Group Ltd and its subsidiaries and related entities collectively as ‘Aveo’.

The class action follows from an investigation by Levitt Robinson into Aveo’s conduct that lasted for about two years and included acting for various residents of Aveo retirement villages in private disputes against Aveo. Levitt Robinson also brought its concerns about Aveo contracts to the attention of the ABC and Fairfax Media, which sparked a joint investigation into Aveo, culminating in the 26 June 2017 episode of ABC Four Corners entitled ‘Bleed Them Dry Until They Die’.

In about mid-2014, Aveo began trialling the ‘Aveo Way Program’ in its villages, which was rolled out nationally from about May 2015. This primarily involved rolling out a standardised ‘Aveo Way Contract’ to all units in all villages, and is discussed in more detail below.

The applicants in the class action are Michael and Meredith Luke, who are brother and sister, as the executors of the deceased estate of their late father, Robert Luke. The group members whom they represent are people who own or owned a freehold interest in a unit in an Aveo retirement village where the Aveo Way Program has been introduced.

The class action is being funded by Galactic Aveo LLC, a commercial litigation funder based in the USA.

THE AVEO WAY PROGRAM AND CONTRACT

In Australia, retirement villages are regulated by state Retirement Villages Acts (RV Acts). Each RV Act provides that a retirement village must have a manager (also known as an operator), and requires a resident of the village to enter into a contract with the manager in relation to the services that the manager provides. Such contracts are referred to interchangeably as ‘management agreements’, ‘residence contracts’, ‘service agreements’, and other variations of those terms.

As noted above, the Aveo Way Program involves the introduction of the Aveo Way Contract, a standardised management agreement, across all of Aveo’s retirement villages, subject to the necessary variations in order for the contracts to comply with applicable RV Acts and other state legislation. That is, each resident entering an Aveo village in which the Aveo Way Program has been implemented is required to sign an Aveo Way Contract with the village manager. Before the introduction of the Aveo Way Contract, there was no uniform management agreement applied across all of Aveo’s villages. Rather, there was a substantial variation between the terms of the management agreements applying to units in different villages, or as applied from time to time to different units within the same village.

The main features of the Aveo Way Contract are:

1 The new resident is given a 99-year lease over the unit.

2 The new resident has to pay an exit fee of 7 per cent of the ingoing contribution in the first year, 21 per cent in the second year, and 35 per cent from the third year onwards.

3 Added to the exit fee is an ‘Aveo membership fee’ of $1,500 each year, indexed at 2.5 per cent per annum from 2015.

4 The resident receives no capital gain on the resale of the unit and also bears no capital loss.

5 The resident can transfer to another unit in an Aveo village and effectively ‘carry’ an accrued exit fee with them – or more accurately, the exit fee payable for the two units will be capped at the higher of the exit fees payable for the first unit and the second unit, respectively.

In order to facilitate the introduction of the 99-year leasehold tenure necessary for the Aveo Way Contract, in accordance with the Aveo Way Program, where an outgoing resident owns freehold title over the property, the outgoing resident sells the unit to Aveo, and Aveo then leases the unit to the new resident in accordance with the Aveo Way Contract. The resale price of the unit is taken to be the ingoing contribution paid by the new resident.

In its marketing Aveo states that the Aveo Way Contract has been designed to offer certainty and clarity to residents of Aveo’s retirement villages,^[4] although its ASX releases also highlight the increased profitability resulting from the higher exit fees and the higher share of capital gains that Aveo receives.^[5]

THE APPLICANTS’ CASE

The basic facts of the applicants’ claim, as alleged in their Statement of Claim, are as follows.

In September 2003, the applicants’ father and mother purchased a unit in what is now known as Aveo Peregian Springs Retirement Village, which was then a new development of a retirement village in Peregian Springs on the Sunshine Coast in Queensland. The applicants’ mother passed away in May 2007.

In late 2014, the applicants’ father’s health began to decline. In October 2014 he was hospitalised, and he then had to move to a nursing home, before passing away in March 2015. From late 2014 the applicants managed their father’s affairs under powers of attorney, and then became the executors of his estate under his will.

The applicants’ father’s unit was vacated and handed over to Aveo in about early November 2014. In about December 2014, Aveo’s real estate agency, Aveo Real Estate Pty Ltd, was appointed as the exclusive real estate agent to market and sell the unit.

After refurbishment and reinstatement works were conducted, the unit was marketed over the course of 2015 and ultimately resold in about September 2015. In about mid-2015, Aveo introduced the Aveo Way Program into the Peregian Springs village and provided some promotional material in relation to the Aveo Way Program to the applicants. The applicants did not agree to their father’s unit being marketed and sold under the Aveo Way Program at this time.

Despite the applicants not having agreed to the unit being marketed and sold under the Aveo Way Program, when the offer was made to purchase the unit they were told that the offer was under the Aveo Way Contract. They then signed an authority allowing the sale to proceed on that basis, which was in substantially the same form as the authority that they had declined to sign a few months earlier.

The sale of the unit to Aveo settled in about November 2015, with sales commission being paid to Aveo Real Estate. The new resident simultaneously entered into a lease of the unit in accordance with the Aveo Way Contract. This meant that even though their father had paid money for a freehold unit, the buyer of their unit was only offered, and paid for, a leasehold interest.

THE ALLEGATIONS IN THE CLASS ACTION

The main allegation in the class action is that for the applicants and most of the group members, the Aveo Way Program will mean that when it comes time to sell their units, they will receive less money than they would have received had the units been sold as freehold instead of leasehold, and subject to the previous management contracts. This is because the less favourable terms of the contracts, including the accelerated and often higher exit fees, and the change in tenure type from freehold to leasehold associated with the Aveo Way Contract, mean that the ingoing contribution that a new resident pays would likely be substantially less than the market value of the unit under the previous arrangement.

Another issue in the class action is the appointment of Aveo Real Estate to market and sell units in Aveo retirement villages, which then proceeds to charge commission on sales under the Aveo Way Program, even though the buyer is Aveo or a related entity of Aveo.

The applicants allege that the above conduct is unconscionable within the meaning of s21 of the Australian Consumer Law^[6] (ACL) and results in loss or damage to the residents when they sell their units.

The allegations of unconscionability rely in part on the vulnerability of retirement village residents, both when they purchase units in retirement villages and when they sell those units. Retirement village contracts are complex documents and are not readily understood by most lay people. There is also a clear informational and power imbalance between a large and commercially sophisticated entity like Aveo on the one hand and most of its residents on the other.

Further, people entering into retirement village contracts are generally at a particularly vulnerable stage of their lives. They have obviously made the choice to leave their independent lives behind them and move into a more supportive environment, which generally means that they will be in less of a position to scrutinise complex contract terms than most property buyers. Similarly, as in the case of the applicants, people selling their units are generally either residents attempting to sell up quickly as a result of their deteriorating health, or residents’ loved ones trying to sell the unit either while also attempting to care for an ailing relative or while grieving for the recently departed. Such circumstances could easily place people in a position where they could be taken advantage of by sophisticated retirement village operators looking to make an easy profit.

The unconscionability claim also focuses on the level of control that Aveo has over the sales process at its villages, where incoming residents are required to enter into contracts on Aveo’s terms, and where Aveo often controls the sales process through Aveo Real Estate.

The applicants further allege that Aveo has engaged in conduct that is misleading or deceptive, in breach of s18 of the ACL. This is based on the grounds that Aveo’s marketing of the Aveo Way Program induced the residents to believe that they would be no worse off if their units were sold pursuant to the Aveo Way Program, and that it is misleading to induce the residents to appoint Aveo Real Estate as real estate agent when no agent is needed for the sale.

In addition to the damages being sought, the applicants are seeking declarations that Aveo has breached the ACL and injunctions restraining Aveo from engaging in unconscionable or misleading or deceptive conduct in the future. This will benefit those residents who have not yet sold their units.

IMPACT ON RESIDENTS

The fact that the residents receive less money on resale of their units under the Aveo Way Program can have a serious impact on their lives. The most common reasons for people departing a retirement village is that they pass away or their health deteriorates to the point where they require a level of care that the retirement village is not able to provide. In the latter case, the amount received on exiting the retirement village is often required to pay for the bond to provide residential care at an aged care facility or to pay for other care and medical expenses. Having less money on the resale of their units can significantly reduce the quality of care that residents in this situation can afford.

As for those residents who die while still residing at an Aveo retirement village, less money on resale means that less money will be left to their loved ones after they depart.

IMPACT ON THE INDUSTRY

If the applicants’ claim is successful, it will set a precedent that a retirement village operator cannot compel a resident to sell their unit on less favourable terms than the terms on which it was purchased, where the effect of the transaction is to reduce the resale value of the unit. This will be an important constraint on retirement village operators’ conduct in the future.

While Aveo is the target of the class action, the claim may have implications across the entire retirement village sector, going well beyond any compensation paid to the applicants and the group members. Given the profitability of Aveo’s model and its prominence in the retirement village market, it is likely that other operators are watching the case very closely. If Aveo is ultimately vindicated in its approach, it is almost inevitable that its competitors will soon follow suit.

That possibility should concern everyone involved in the retirement village industry whose concern is for the residents. A well-supported class action with a large number of current and former residents of Aveo registering as class members will be an important initiative to prevent such conduct becoming commonplace amongst other retirement village operators.

Stewart A Levitt, Senior Partner and Daniel Meyerowitz-Katz, Senior Associate work at Levitt Robinson and are part of the team acting for the applicants in the class action against Aveo. PHONE [phone] EMAIL [e-mail]; [e-mail].

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^[1] Luke & Another v Aveo Group Limited (Case No VID 996 of 2017).

^[2] Aveo Group Ltd, Results for the period ended 31 December 2017 (2018) 45.

^[3] J Little and J Barker, Aveo Group: On the front foot (Morgans, 16 August 2017) 8.

^[4] See, for example, Aveo launches ‘game changing’ retirement village contract (13 May 2015) <https://www.villages.com.au/infocentre/post/retirementvillages/aveolaunchesgamechangingretirementvillagecontract>.

^[5] See, for example, Aveo Group Limited, Results for the year ended 30 June 2016 and acquisition of RVG (2016) 12.

^[6] Schedule 2 to the Competition and Consumer Act 2010 (Cth).