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Back Home 5 News 5 Retirement village operators, residents spar over proposed sector restructure

Retirement village operators, residents spar over proposed sector restructure

27 Oct 2023

| Author: Diana Clement

Retirement villages are popular with older people, but the business model is poised for a shake-up with proposed legislative change threatening to dent village operators’ bottom lines.

These operators are throwing considerable resources into reducing the impact of potential government ‘interference’. With the aim of improving protections for residents, the government has embarked on a comprehensive review of the legislative framework for retirement villages.

Governed by the Retirement Villages Act 2003, a 15-year-old code of practice and three sets of regulations, the retirement village sector looks set for a regulatory overhaul as signalled by its watchdog, Te Ara Ahunga Ora – Retirement Commission, in a 2020 white paper.

Tūāpapa Kura Kāinga – Ministry of Housing and Urban Development (MHUD) subsequently released a 132-page review in August, The Retirement Villages Act 2003: Options for change. Key proposals include making disclosure statements shorter and less complex, forcing operators to be accountable for the actions of sales staff, standardising occupation rights agreements and a new disputes system. Submissions close on November 20.

Is this enough? Back in 2021, the Retirement Villages Residents’ Association told a parliamentary select committee that the business model was akin to a “quasi ponzi scheme” because residents are generally not entitled to share in any capital gains from the sale of their units but are usually forced to wear any losses. Whether the review will survive the change of government is anybody’s guess.

 

Proposed changes

The review proposes changes to:

  • disclosure requirements, by replacing existing disclosure statements with new plain-language documents with prescribed headings and maximum page and word counts;
  • occupation rights agreements (ORAs), by partially standardising them and considering whether certain terms could be declared unfair;
  • dispute resolution processes, by replacing the current complaints and disputes scheme with a new, independent, accessible scheme provided by either an appointed private dispute resolution scheme operator or a commissioner;
  • repair, replacement and maintenance responsibilities for operator-owned chattels, requiring operators to replace chattels and fixtures when they wear out, rather than charging residents; and
  • building standards, with new minimum quality standards similar to the Healthy Homes Standards for residential tenancies.

The review proposes the termination of weekly fees when units are vacated and quicker return of residents’ capital, and considers deferred maintenance fees and capital gains and losses.

 

Not miles apart

The Retirement Villages Residents Association (RVR) has welcomed the review more warmly than the Retirement Villages Association (RVA), which represents most operators. Troy Churton, a former lawyer who consults to the RVR, says residents have been lobbying the government for most of the last decade to highlight “unfair practices, [which create] suboptimal outcomes for residents”.

Churton spent six years at the Retirement Commission, has visited more than 200 villages, met with thousands of residents and authored the commission’s 2020 white paper, which led to the review. He says incoming residents and their families often want to see only the positive side of their decision. It’s not until they’ve lived in the village for a period that the nuances or implications sink in.

There is a natural tension between retirement village operators’ capital-based models and the underlying provision of accommodation to sometimes vulnerable customers, he says. The RVR has been conducting surveys of its 11,000 members, “which tend to paint a picture that there’s a lot of unhappiness on [certain] issues”. That data is seen by the RVA as unreliable though and its customer satisfaction surveys show that most residents are actually very happy in retirement villages.

“My own view is that yes, most of the residents are happy. But for certain types of issues, they are very unhappy because they don’t actually have that much power in the contractual arrangement,” Churton says.

 

Broad agreement

The “big six” operators – Ryman, Metlifecare, Summerset, Bupa, Oceania and Arvida – which between them hold almost two thirds of the country’s retirement living units, are either NZXlisted or large multinational organisations. At the other end of the scale are small church-run villages.

Churton says both the RVA and RVR have collaborated on solving most of the issues identified in his 2020 white paper. And the RVA has front-footed some of the proposals in the discussion paper, says Liz Rowe, a senior associate at MinterEllisonRuddWatts. But there are still different views on a variety of issues outlined in the paper.

On some issues, says Churton, the operators are throwing considerable resources into ensuring the least amount of change to the model. “They have a very profitable business model – and they don’t want too much government intervention impacting on that.”

Both agree that restrictive legislation could tie the hands of operators who want to offer models other than standard rightsto-occupy, together with service fees, deferred maintenance fees and loss of capital gain, Churton says. “It still remains for [agreed] issues to be formally addressed under the new framework and an updated statute because not all villages are members of the [RVA].”

 

Miles apart

The two sides differ on key issues, “which go to the heart of the business model that provides profitability for the operators”, Churton says. The first is the repayment of capital once a resident dies or moves out. Currently, residents or their estates are not paid out until the unit is resold. Residents argue the operators are not incentivised to sell quickly. “It prolongs the fact that it’s the resident’s capital, which is helping to stump up the preferred model of the operators,” Churton says. “The [RVA] counters that and says 90% or so get relicensed within nine months and having to wait for six or nine months is not disproportionate.”

The RVR argues that residents, when they buy units, provide interest-free loans to the operators in exchange for their occupancy. That’s confirmed in operators’ accounts, says Churton. A cost-benefit analysis posted on MHUD’s website with the review documents shows that, on average, for a unit worth $600,000, an operator makes about $1 million over a seven-year tenure from compounding interest, capital gain, development margin, deferred maintenance fees and the interest-free value of the capital.

The cost to operators of a 28-day mandatory buyback would be around $13,500, Churton says. “[If] you weigh that against the $1 million worth of revenue streams for the same unit, you start to get a different lens on the disparity of the pricing model and the opportunity to reset it.”

 

More gaps

Another area in dispute is complaints. Complaints that can’t be sorted out in-house can be escalated to a statutory supervisor. Residents have complained that supervisors aren’t sufficiently independent because they’re paid by the operators and don’t want to lose those contracts. The operators believe the system works well. Churton says most complaints get resolved between the resident and village, although he believes there is room in the framework for an independent industry advocacy service.

One of the other issues where both sides disagree, and is a continual cause of grievance, relates to the representation in disclosure documents of future developments and amenities. Residents often choose a village because it has rest home and hospital-level services on the drawing board. These units sometimes never get built. Ditto the recreational facilities listed in marketing material.

“[This may be] a key reason why they thought this village is going to be a good one to live in. Then a year later, they find that for whatever reason, usually commercial and business operational needs, [the work] is not happening or has been delayed,” Churton says. “There’s a vacuum about what pragmatic and realistically exercisable rights a resident has.”

 

Different views

Michelle Burke, a partner at Anthony Harper Lawyers, acts for the RVA as well as several village operators, not all of which are RVA members. She says the system works well, evidenced by how many people choose to live in retirement villages.

“I think the association would say that is the proof that the system is fundamentally fit-for-purpose.” She notes her clients have a range of different views on some of the proposed reforms. “The views of a small church-operated village of, say, seven units is likely to be quite different to those of a large corporate operator.”

The white paper canvasses the issues in a fair and open way although it’s fair to say operators might not agree with every statement, says Burke, who has some concerns about proposed disclosure documents that she believes mostly work well. She notes the review has picked up on the RVA’s best-practice guidelines for disclosure statements, a “very simple document, it’s only two pages long and [has] boxes where you can put in limited information”. The proposed information sheet is a more complex document, she says. “For example, it’s required quite a lot of detail about maintenance and repair, which at the moment is not a simple matter. And we don’t believe it’s suitable to have an initial comparison document which is going out to residents who are looking at different villages.”

 

More differences

Another concern, Burke says, is suggestions that the ORAs residents sign should be standardised. Most villages operate on a loosely standard ORA model, which does not offer residents a share of the capital gain when they move out. She cites Freedom Lifestyle Villages as well as Vivid Living by Fletcher Building Group, both of which offer a different model to the big six village operators. “I am not that keen on a standardised form of occupational licence. And that is because I am concerned that it will stifle innovation.” The rights of an operator to terminate the ORA could be standardised because they’re set out in the code of practice. “But most of the other terms, you need to have some flexibility.”

Three of the 17 items in the review relate to residential care: rest homes, aged care hospitals and dementia care. Some residents are unaware that there is no guarantee of availability of this level of care should they need it, and the review proposes making this clearer. “It is to ensure that residents are aware of the reality that availability cannot be guaranteed. I’m completely supportive of that,” Burke says.

Operators are not keen on a new disputes system. “There is, unfortunately, a perception that the system may not be easy to use and may be not fair to residents. I believe that it’s simply a perception, not a reality in my experience.” The current system works well, with disputes that villages can’t resolve being escalated to a statutory supervisor, Burke says.

“Statutory supervisors have the advantage that they understand how retirement villages work and can advocate in a neutral way for each other [party] to understand the position. The types of systems proposed by the paper totally remove the statutory supervisor from the process. I think there’s a huge loss of IP there.”

 

Unintended consequences

Burke warns that several of the proposals could cause unintended consequences and may affect the industry’s ability to continue to evolve the model to meet future demand and need. A one-size-fits-all rule on termination of weekly fees on exit, for example, may not work for a village where the resident has the responsibility of reselling the unit, she says. Issues around standardised ORAs and maintenance charges are also highlighted.

“Once you start saying, ‘if you don’t have an entitlement to capital gains, the operator must pay for all repairs of chattels and fixtures’, that’s fine. But potentially it might change another setting in the offering.” Burke questions whether the Retirement Villages Act should be amended to address matters when there is already other legislation in place that deals with the problems. Unfair contract terms, which the review suggests addressing in new legislation, are already governed by the Commerce Commission, she says.

“It’s just muddling with the legislation, introducing a dual system. I do not think that’s appropriate when, [with] every other contract in New Zealand, in order to determine whether a term is unfair a complaint needs to be made to the Commerce Commission. I’m not sure why in one particular sector we would suddenly have not even a court making a decision on an unfair contract term.”

The same argument applies to the ORA and breaches of the Privacy Act, she says. ■

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