Retirement village contracts: unfair terms in the fine print
Unfair terms in village contracts are leaving a financial sting.
“Wake up with a song in your heart and a purpose for your day.” That’s the promotional plug for the 32 retirement villages owned by the Arvida Group. Along with hot pools and happy hours in your golden years, the company promises to make “it easier for you to live by your own rules”.
But the contract you sign when you move into an Arvida village – or any other retirement village – means you’ll also have to play by the company’s rules. Some of them may not make your heart sing.
Our review of contracts offered by six major retirement village operators – Arvida, Bupa, Metlifecare, Oceania Healthcare, Ryman Healthcare and Summerset – found terms we think unfairly favour the village and risk leaving residents out of pocket. They could also fall foul of the Fair Trading Act.
The village model
Retirement villages have grown rapidly in the past two decades and more are in the pipeline. They’re marketed as a safe and stress-free lifestyle option, and can be an attractive choice for retirees wanting freedom from home maintenance. An estimated 14 percent of those aged 75 and over have made the move.
Living in a village isn’t the same as owning or renting your home.
Most villages offer a “licence to occupy”, costing anywhere from $200,000 to more than $1 million for a one-to-two bedroom unit. Before moving in, you sign an “occupation right agreement”. It gives you the right to live in your unit – but no ownership rights to the property – and sets out what you can and can’t do as a resident.
It’s a business model that benefits from churn. Income is forecast on selling a licence to occupy several times within a relatively short period. The average tenure of a unit is about seven years.
In addition to the sum to purchase your occupation licence, you usually pay a weekly fee to cover the village's operating costs.
When you leave the village, you (or your estate) forego a large slice of what you paid for your licence as a “deferred management” or “exit” fee. This fee can be 20 to 30 percent of the licence cost. So if you paid $500,000, and the village charged a 30 percent deferred management fee, you’d get back $350,000.
No capital gain
Villages justify these exit fees as the residents’ contribution to management and refurbishment costs. However, they make it hard to move out of a village without taking a financial hit – prospective residents are typically cautioned moving into a village is a “lifestyle choice”, not an investment.
But the financial impacts on residents are much higher when they don’t receive any capital gain from the sale of their licence.
All six villages we reviewed retain any capital gain. Assuming your $500,000 licence sold seven years later for $650,000, the village would keep the extra $150,000.
Terms allowing the village to retain the capital gain clearly benefit the operator. But we think they significantly disadvantage residents. Across the Tasman, some operators allow residents to share capital gains, showing there are other options.
This idea has been flagged here by Retirement Commissioner Jane Wrightson, who’s responsible for monitoring the sector. A discussion paper, released by her office in December, suggested sharing the capital gain between the resident and the village could be one way to deliver fairer outcomes.
Villages’ retention of capital gains is a major bone of contention for residents. In our 2020 survey of residents, it was the number one complaint (see “Survey results”).
Liability for repairs
As well as missing out on any capital gain, residents can face other significant costs.
Our review found several contracts made residents liable for the cost of repairs to appliances and other items in their unit, even though they don’t own them.
Metlifecare had the most wide-ranging clause in its contract. The company gives you just one month from the date the agreement commences to advise “in writing” of any repairs needed. After that, you have to pay for repairs and maintenance to the unit’s interior, including to the stove, garage doors, plumbing and electrical fittings.
Our review found several contracts made residents liable for the cost of repairs to appliances and other items in their unit, even though they didn’t own them.
You’re required to pay repair costs “on demand”.
When we raised the matter with Metlifecare, GM corporate services Andrew Peskett said it was common in the industry for residents to be responsible for maintenance of their unit’s interior. However, Metlifecare was “open to reviewing” the one-month period in which residents must notify it of defects, he said.
We think these kinds of terms are hard to defend. They also conflict with residents’ rights under the Consumer Guarantees Act to receive goods and services of a reasonable standard. If the oven in your unit fails, the village should wear the cost.
While contracts can hold residents liable for repairs to the villages’ chattels, the six contracts we reviewed stated the village won’t take any responsibility for damage to your possessions. In our view, these clauses risk misleading consumers about their rights: if the village caused the damage, it should pay for repairs.
Villages said the intention of these clauses wasn’t to avoid liability when they did the damage but to encourage residents to get insurance for their possessions to cover other losses. We don’t think that’s clear. Four villages – Arvida, Bupa, Ryman and Summerset – said they’d review the wording of their terms.
Other fees
Most contracts also included penalties if you’re late paying any bills.
Metlifecare’s terms state you’ll be charged default interest “on demand” if you don’t pay by the due date. Arvida’s and Bupa’s contracts said you can be charged if you’re five working days late with payment, while Ryman’s and Summerset’s state seven days.
These late fees are interest-based – rather than flat fees – so the higher the bill, the more you’ll end up paying.
However, if you’re waiting for the village to pay money it owes you, it’s a different story.
Summerset doesn’t pay interest on money owing to the resident. Arvida, Bupa, Oceania and Ryman only pay interest on your exit payment (the money due to you when you leave) if your unit remains unsold after six months. With Metlifecare, you have to wait nine months before interest kicks in.
The Retirement Villages Code of Practice, developed under the Retirement Villages Act, requires operators to repay the resident within five working days of reselling their occupation licence. However, the code is silent on how long it’s reasonable for residents to wait for their licence to be sold.
It could end up being months, leaving residents without their money or interest earnings in the meantime.
Limits on residents’ rights
Contracts can also give the village significant discretion in deciding what residents can and can’t do.
For example, if you want guests to stay longer than two weeks, Summerset and Ryman require you to get approval. Arvida and Bupa limit guests to three weeks, unless the village agrees otherwise.
Operators defended these clauses, stating they needed to be able to manage the number of people using facilities and village “dynamics”. However, contracts give villages wide discretion to decide whether a request would be granted. At a minimum, we think the contract should state consent won’t be unreasonably withheld.
Several contracts also restricted residents’ right to raise reasonable objections about village developments.
Metlifecare’s contract stated the village “shall be entitled at its sole discretion” to make alterations “in any manner whatsoever”. You’re not entitled to make any objection to building works, including to “the dust, noise or other discomfort or nuisance which may arise”.
Similarly, Summerset requires you to “sign any consents or other documents” relating to development of the village. You must not object or complain, including complaining about dust, noise “or other disturbance or discomfort arising from such works”.
Summerset said residents were made aware of planned developments before signing their agreements and the company was required to minimise any inconvenience.
We think these clauses are far too broad and don’t recognise residents’ rights to raise reasonable concerns.
Consumer safeguards
The Retirement Villages Act is intended to provide protection for consumers moving into a village. However, the act hasn’t been reviewed since it was introduced in 2003 and is showing its age. The code of practice, developed in 2008 to set minimum standards for villages, also remains largely unaltered.
Neither reflect changes to the Fair Trading Act that ban unfair terms in consumer contracts.
Retirement Village Residents Association of New Zealand president Peter Carr believes a review is needed. He describes existing regulation of the industry as “heavily skewed” in favour of villages.
Carr has lived in a retirement village for 10 years and is well-versed in the pros and cons of village life. He counts himself “very lucky” with the village he picked but not everyone strikes the same luck, he said.
Carr singles out the Retirement Villages Code of Practice as a big part of the problem.
Villages base agreements on the code’s provisions, “some of which are vague and consequently allow for contract clauses that are open for unacceptable interpretation and also unfair outcomes”, he said.
The Retirement Villages Association, which represents the industry, accepts some minor changes may be needed but rejects there’s a case for wholesale reform. “In general, we consider the act offers residents a high degree of protection and does not need to be reviewed," executive director John Collyns said.
But Carr’s view that it’s time to revamp the rules has got backing from Retirement Commissioner Wrightson.
The discussion paper released by her office last year recommends reviewing both the act and the code. It acknowledged “there are consumer issues with the framework, reflecting the way [it] tends to favour commercial imperatives of operators”. The commissioner intends to brief ministers after submissions on the paper close in February.
Our view
- Moving into a retirement village is a major financial decision. Given the risks for consumers, it’s vital contracts are fair. Based on our review, many don’t measure up.
- Regulation of the industry needs to ensure there are effective safeguards for consumers. Changes are overdue and we support overhauling the rules to make sure residents get a fair deal.
Survey results
Last year, we asked residents for their views on village life. Of the 1680 respondents, 81 percent were satisfied with their village, with 58 percent very satisfied.
The most common reasons for making the move were wanting freedom from home maintenance (69 percent) and a safe and secure environment (66 percent). Having aged care facilities on site was also a factor for 50 percent.
Respondents were much less enthusiastic about the quality of their occupation right agreements. Just 44 percent thought the agreement was “very easy” or “somewhat easy” to read and understand. Only 18 percent rated the terms and conditions as “very fair” and 26 percent as “somewhat fair”.
The top three complaints:
- 63 percent of respondents were unhappy their agreement didn’t allow them to get any capital gain when their unit was sold.
- 29 percent thought the deferred management fee charged by the village was too high.
- 24 percent said the agreement required them to use the village’s nominated tradespeople, preventing them shopping around for better rates.
It wasn’t possible to survey a randomised sample of village residents, so results may not be representative of the sector as a whole. However, the findings are in line with those of other research.
Research carried out for this report was supported by a grant from The New Zealand Law Foundation.
What the contracts say
Arvida Group
Number of villages: 32
Resident entitled to capital gain: No
Deferred management fee: 30%
Key contract terms:
You’re responsible “for the costs of any repairs or maintenance” to the unit’s interior and chattels, even though you don’t own them. You may also be charged a fee to cover the village’s administration costs.
You’ll be charged default interest of 7.5% on any unpaid bills. But the village only pays interest on your exit payment after 6 months at a rate of 1% above the official cash rate.
On your demise, your possessions must be removed from your unit within 5 working days. If the items aren’t collected within a further month, the village may sell them and deduct removal, storage and sales costs.
Company’s response: Arvida chief financial officer Jeremy Nicoll said its agreements are drafted “with a plain English approach in mind and we are generally of the view that they are easy to read and understand”.
Nicoll said residents pay a fixed weekly fee for village outgoings on the basis that costs for repairs and maintenance to a unit’s interior will be charged separately. He said the village will pay to fix any “underlying defect”. We think the contract fails to adequately recognise the village’s CGA obligations to ensure services it provides are of an acceptable standard – and fix the problem if they’re not.
In regard to the five-day time frame for removing possessions after a resident’s death, Nicoll said Arvida had identified this “could cause stress” and was planning to extend the period to 20 working days.
Bupa Care Services
Number of villages: 37
Resident entitled to capital gain: No
Deferred management fee: 30%
Key contract terms:
You must replace “all fittings”, including power elements, if they break or wear out, even though you don’t own them.
You’ll be charged default interest at Westpac’s floating home loan rate if you’re 5 working days late with a payment. But the village only pays interest on your exit payment after six months at Westpac’s 30-day term deposit rate.
You’re required to “sign all consents and other documents” relating to development of the village and can’t “claim compensation in respect of any development or building works”.
Company’s response: Bupa media and external communications manager Robert Walker said the company is confident its agreement complies with the Fair Trading Act.
“The agreement says that a resident is generally responsible for the inside of their home and Bupa is responsible for maintaining the exterior,” Walker said. But as with Arvida, we think this fails to recognise the village’s CGA responsibilities to ensure services are of an acceptable standard.
The company disagreed it was unreasonable to prevent residents claiming compensation for adverse effects from village developments. Development plans may change over time but “are generally intended to positively enhance the village look and feel”, Walker said.
Metlifecare
Number of villages: 25
Resident entitled to capital gain: No
Deferred management fee: 30%
Key contract terms:
You have only one month after the agreement commences to advise the village, in writing, of any defect or repairs needed. Otherwise, you must pay “on demand” all costs for repairs and maintenance to the unit’s interior and chattels, including to the stove, garage doors, plumbing, and electrical fittings and fixtures.
You’ll be charged default interest “on demand” on unpaid bills at 4% above BNZ’s wholesale prime overdraft interest rate plus a 10% admin fee (up to $1000) when costs you owe are charged directly to the operator. But the village only pays interest on your exit payment after 9 months at a rate equal to BNZ’s monthly term deposit rate.
The village “shall be entitled at its sole discretion” to make alterations “in any manner whatsoever” and you’re not entitled to make any objection to building works, including “the dust, noise or other discomfort or nuisance which may arise”.
Company response: Metlifecare GM corporate services Andrew Peskett said it didn’t consider the clauses unfair. However, “in the interests of continuous improvement”, Peskett said it would include a detailed review of several terms we’d questioned as part of its regular review process.
He said the company was “open to reviewing” the one-month time frame in which residents must notify it of defects.
Oceania Healthcare
Number of villages: 25
Resident entitled to capital gain: No
Deferred management fee: 30%
Key contract terms:
You can’t make any improvements to your unit without consent, which can be withheld at the village's “absolute discretion”.
The village only pays interest on your exit payment when you leave after 6 months at the bank 30-day term deposit rate.
You have to pay a handling charge “on demand” if any costs you owe are charged directly to the village. However, this charge isn't stated.
Company’s response: Oceania considers its agreement complies with the Fair Trading Act. General manager operations Jill Birch said it reserves the right to withhold consent for alterations for a number of reasons, including “preserving the uniformity” of the village. Birch said Oceania may recover “a reasonable charge” if a third-party supplier bills the village direct for goods or services provided to a resident.
Ryman Healthcare
Number of villages: 36
Resident entitled to capital gain: No
Deferred management fee: 20%
Key contract terms:
You must repair electrical fittings and power elements when they wear out or break, even though you don’t own them.
You can be charged default interest of 3% above the bank overdraft rate if you’re 7 days late with a payment. But the village only pays interest on your exit payment after 6 months at a rate of 1% above the 90-day bank bill rate.
You’re not allowed to “oppose any application” for resource consent or other application relating to the village development or operation.
Company’s response: Ryman said it would review the issues we’d raised and “look to provide more clarity”. Corporate affairs manager David King said agreements “are written in the context of all the legislation, including the Fair Trading Act” and it aimed to ensure they are “as fair and easy to understand as possible”.
Summerset
Number of villages: 29
Resident entitled to capital gain: No
Deferred management fee: 25%
Key contract terms:
Changes you want to make to improve the property, such as installing a heat pump, must be carried out by the village's contractors at your expense so you can’t shop around for a better price.
You can be charged default interest of 3% above the bank overdraft rate if any payment is 7 days late. But the village doesn’t pay interest on money it owes you.
You’re required to “sign any consents or other documents” relating to development of the village and must not object or complain, including complaining about dust, noise, “or other disturbance or discomfort arising from such works”.
Company’s response: Summerset communications manager Jenny Bridgen said it believes its agreement complies with the Fair Trading Act.
Bridgen said its contractors are “vetted” and encouraged to invoice the resident directly for work done so Summerset isn’t involved in the payment process. Where that’s not possible, costs are on-charged to the resident “together with any amount required to reimburse Summerset for administrative time and expenses”, she said.
Company information is sourced from disclosure documents and occupation right agreements lodged on the Retirement Villages Register, and from company websites in December 2020 and January 2021. Deferred management fee shows the maximum fee charged on leaving the village.
Retirement villages checklist
Use our checklist to assess prospective villages.
We're not suggesting you should only go into a village where the answer to every question is "yes". Rather, be aware of the issues raised by our checklist and decide what's best for you.
Retirement villages checklist (222 KB)
Stay in the know
Keep up-to-date with Consumer's latest news, investigations and product and service reviews, plus join the Consumer panel with invitations to take part in surveys.
Support our mission
Your contribution will help fund research, investigations and campaign work; represent consumers on committees and promote change; and ensure consumer welfare and raise public awareness of consumer issues.
Member comments
Get access to comment