Ownership has a variety of meanings in the retirement property market. It's vital that you understand whether you are buying physical property, a share in a company or occupancy rights. And each type of ownership imposes particular obligations - during and after your stay in a retirement village.
There are four different ownership structures through which you can buy a unit in a retirement village. They are sectional title, full title, shareblock and life rights.
Sectional title
Buying a sectional title unit gives you outright ownership of a unit in a retirement village. Generally, you buy the unit at a market-related price and pay a monthly levy to cover the costs incurred to run the complex.
You can sell your unit, but, depending on the nature of the scheme, in some cases you will have to forfeit a portion of the resale price to the retirement village to cover the cost of the services offered at the development or to subsidise the levies (see related article "Getting something out of it").
In addition, you may be required to sell your unit through the village's body corporate and use its appointed estate agent and/or you may have to sell the unit to someone who meets the complex's admission criteria - for example, someone over the age of 50 or 60 years.
A sectional title unit in a retirement village could be an asset you could leave to an heir, but the rules of the village may prevent you from passing on the unit to another owner. This will be the case if the village has an arrangement to take some of the resale profit to cover the cost of services or to subsidise levies.
A provision in the rules such as this is also designed to ensure that people on the village's waiting list have an opportunity to access a unit.
In sectional title arrangements you are usually responsible for all the costs related to maintaining your unit, such as those for a burst geyser or a broken window, as well as those for the areas that are designated for your exclusive use. However, in the case of retirement villages, the maintenance expenses for which you are responsible depend on the particular village and the terms of your contract.
As is the case with all sectional title schemes, the body corporate is responsible for maintaining the communal property.
A sectional title purchase in a retirement complex with frail-care facilities is the best way to own property in a retirement village, Judith van der Walt, a sectional title specialist at Graham Paddock and Associates, says.
Van der Walt says if you have sectional title ownership of a unit and if you need to move into a frail-care facility later, you will have a capital investment that you can sell to fund the cost of frail care. However, this may not suit you if your partner needs to go into frail care while you remain in the unit.
Although by this stage of your life your home loan should be paid off and you should not have to take out a loan to buy your retirement accommodation, sectional title ownership does mean you own an asset that you can use as security for a mortgage bond should you need to borrow against your property.
Some financial institutions offer what are known as reverse mortgages, which enable pensioners to unlock the cash value of their properties. Repayment can be delayed until you die and the property is sold.
Full title ownership
Personal Finance was informed that although full title ownership is not common, at least one retirement village is being planned where you can purchase this type of unit.
In a full-ownership development, you receive title deeds to the property, which includes the areas around the unit that are for your exclusive use. The property is registered in your name, so you can finance the property or borrow money against it by way of a mortgage bond with a financial institution, such as a bank. You are responsible for the services, rates and taxes associated with the property.
The maintenance of public areas in the village and the provision of security and other services, such as a frail-care facility, must be overseen by a homeowners' association, whose operating expenses are covered by way of a monthly levy.
Shareblock
Under this ownership structure, which is now less commonly used, the complex is registered in the name of a shareblock company, and each unit is allotted a certain number of shares in the company. You purchase shares, which give you the right to use a flat, cottage or townhouse and the complex's facilities, but you do not own your dwelling.
Shareblock arrangements are usually viewed as a more risky investment than sectional title ownership because you do not buy an actual property but a number of shares in a company that owns the entire complex or block of flats.
The number of shares allocated to each unit is determined when the shareblock company is formed and is based on the facilities offered by each unit. Therefore the price of your unit, the number of shares you acquire and the facilities your unit has are all interlinked. For example, a bigger apartment, a private garden or an extra parking bay will cost you more and will give you more shares than a standard two-bedroomed apartment in the same complex.
You are issued with a share certificate in your name once the purchase is concluded. However, because you do not have a title deed, it is not easy to borrow money against your shareblock investment.
A further risk is that if the shareblock company goes into liquidation, you will lose your investment, Bobby Bertrand, a property partner at law firm Bowman Gilfillan, says.
However, a shareblock company is less of a risk than an ordinary company because shareblock arrangements are governed not only by the Companies Act but also by the Share Blocks Control Act of 1980, which restricts the company's activities. For example, the Act prevents a shareblock company from increasing its loan obligations without the agreement of at least 75 percent of the company's shareholders, excluding the shareblock developer.
The Act also stipulates that contracts to purchase shares in shareblocks must contain prescribed information, such as any special resolutions that have been passed since the company was formed.
Before you agree to buy into a shareblock complex, make sure you ask for a copy of the company's memorandum and articles of association. These will provide you with details of all your obligations and rights in that particular complex. The rules could include tying you down to using specific service providers for repairs and maintenance within your unit.
There will usually be an annual general meeting at which shareholders elect directors to the board. Directors meet throughout the year to discuss how the property is to be managed.
Find out about annual management fees or monthly levies, which shareholders are normally charged to cover all operating costs, including refurbishment and homeowner's insurance.
If you decide to sell, you need to sell your shares in the property and cede your rights to occupy the unit. However, the sale of your shares is also subject to the company's rules. For example, in a retirement complex, the rules may state that shares are not to be sold to people under the age of 50. This will preclude you from selling to younger buyers, who could be purchasing a retirement property for their parents or for their own use in the future.
Life rights
"Life rights" is still a vague concept to many people who are considering buying into a retirement scheme and, as such, is open to abuse, Sifiso Msomi, a property lawyer from Shepstone & Wylie, says.
"What's critical to understand with life right schemes is that despite reference to the buying' and selling' of a unit, there is no purchase of real estate but rather a purchase of the right to live in a specific unit. Therefore the ownership of the unit is retained by the development and is not transferred to the individual, as with sectional title," Msomi says.
In a life right scheme, you pay a sum of money in respect of a specific unit in the scheme and in return you and the occupants you nominate - usually your spouse if you are married - receive the right to live in that unit for the remainder of your lives.
Msomi says the sum of money, which is usually predetermined and market-related, is often viewed as a lifetime of rental paid in advance.
When you or your surviving spouse die or if you or your surviving spouse decide to leave the retirement village, the price you or your estate will receive for your unit varies widely and will depend on your contract (see related article "Getting something out of it").
In some cases, the holder of the life right receives nothing on death. In other cases, the original sum of money is repaid regardless of the length of time you have held the life right. In other schemes, a percentage of the price attained for reselling the unit is paid to the departing life right-holder or his or her estate.
The advantage of life rights, Msomi says, is that no transfer duty is payable, nor are there any registration fees because there are no title deeds. The life right- holder also does not pay VAT.
Billy Joubert, the director of taxation services at Deloitte, says a life right contract will probably also fall outside the capital gains tax net because these rights will probably not be regarded as immovable property. However, he says, this can be said with certainty only once the nature of the specific rights granted have been considered.
Msomi says it's critical to realise that a property subject to life rights does not itself become an asset in your estate and therefore it cannot be bequeathed to an heir in your will. The right terminates when you leave the village or die.
Another important thing to remember about life rights is that you cannot borrow money against the contract, as you can with a sectional title unit.
Carl Scheppening, a director of Cape Retirement Consultants who has been acting as a consultant to retirement villages for 14 years, says a life right contract is similar to a lease agreement. If you "buy" a unit in a retirement village under life rights, you secure the right to occupancy for life and are a tenant, but not an owner, of the unit.
Life rights are secured by paying an interest-free loan consideration to the developer or retirement village operator, Scheppening says.
Life rights are a personal agreement, Scheppening says, and cannot be ceded, assigned, sold or encumbered in any way. He says life rights are used in many retirement villages, both private ones and those run by welfare institutions.
Life rights provide welfare institutions with an effective way to raise funds to finance their objectives - for example, to provide housing to elderly people with limited means, Scheppening says.
"When the owner is not institution, care needs to be taken to investigate what happens to the proceeds from resales," he says.
Scheppening says although the prices of life right units were originally expected to be lower than those of units sold under other ownership structures, this has not been the case in practice, and in new villages the life right prices are usually substantially higher than those of existing villages.
Paul Wisenberg, a lawyer at Maurice Phillips Wisenberg, says life right contracts offer a retiree no real security, because you do not take transfer of the property and do not receive any title deeds, and therefore do not have the security of the property backing the contract.
The only security you have is that afforded by the Housing Development Schemes for Retired Persons Act, Wisenberg says.
In terms of the Act, the life right-holder is a creditor ahead of even the holder of the mortgage bond over the retirement complex, he says. But should the developer go bankrupt, your situation will depend on how badly or how well the developer has managed the scheme (see below "What the law says about retirement schemes").
You need to choose the developer with which you contract wisely, he says, because choosing the wrong developer could be the biggest mistake of your life.
That said, many developers are offering life rights and there hasn't been a scheme that has gone bad yet, Wisenberg says. Life right contracts appear therefore to be working, he says.
How should you assess a developer? Wisenberg says if the developer does not have any track record in developing retirement villages, you should be nervous, but if it is a well-known company that has developed many retirement villages, this should instil some confidence.
If a well-known bank is a partner in the development or is involved in it, this should also instil confidence, he says.
Scheppening says unfortunately few developers develop more than one village, which means they often lack the essential experience.
Wisenberg says if the developer does not have a track record of developing retirement homes, you should ask for personal sureties from the key people involved in the project. You should also ask for information, including audited financial statements, about the developer. If it is open and transparent, Wisenberg says, there is no reason why the developer would not make these available.
Msomi says that because life rights is a contract, the usual legal remedies would apply if the developer failed to honour its obligations.
Beyond the ownership structure
Nick Baines, the founder and former shareholder of Manor Enterprises, which runs four retirement villages in the Western Cape, says the danger of buying into a retirement village is not inherent to the ownership structure, but rather lies in the contract as a whole that residents have with the developer and/or operator of the village.
Scheppening agrees and says it is important to look at whether the developer has the financial resources and the experience to develop the village, and whether it can deliver on what has been promised.
"The design of the village, its financial and legal structure, and the experience and structure of the village management are all crucial to the success of the village. The development period is the real period of risk for all retirement villages, and if the development is not soundly financed, or if the inexperience of the developer leads to mistakes, there will be a problem, whether or not the village is a sectional title or life right scheme. There are examples of sectional title, shareblock and life right villages which have experienced difficulties and they did not arise solely out of the form of ownership."
One well-known example is Helderberg Village, which was originally sold on a shareblock basis. After building 300 of the 500 planned units, the developer ran into financial difficulty and could not complete the promised facilities. Residents raised funds to pay for these facilities, and a new developer bought the right to build further units.
Baines says there is nevertheless a problem in the way people perceive life rights. People are reluctant to buy an interest in a regular retirement village, especially at the top end of the market, through life rights. Baines says in developments in which he expects to be involved in future, he will sell ownership in the villages through sectional title.
Life right contracts are, however, perceived as acceptable for assisted-living units, which change hands more often, Baines says.
What the law says about retirement schemes
The Housing Development Schemes for Retired Persons Act of 1988 was designed to protect people who buy into retirement villages.
In terms of this Act, the title deed of a property on which a retirement village is constructed must be endorsed to state that a development specifically designed to accommodate retired people is being built on the property. This requirement applies to all retirement villages, regardless of the form of ownership.
The endorsement gives you a claim to your rights in the village that ranks before those of any mortgage bond holder, Carl Scheppening, the director of Cape Retirement Consultants, says. The endorsement also prevents the developer from selling any portion of the village without the consent of the residents.
The Act also prevents developers from using your money to develop the complex unless they are able to provide "financial guarantees", Scheppening says.
A retirement village developer is not allowed to receive any money from you unless an architect or a quantity surveyor has issued a certificate verifying that the complex has been built in line with approved building plans and local by-laws, and an attorney has issued a certificate stating that the title deed has been endorsed.
You are entitled to a copy of these certificates and can place your money in the trust account of a lawyer or an estate agent until the developer has fulfilled its obligations. If you pay the developer directly, it should provide you with a bank guarantee in return for the money. This ensures that the developer completes its obligations in the agreement timeously because the developer will not receive any payment until it has done so.
Thirdly, the Act requires a high level of disclosure by a developer to people who buy into the village. The information that must be disclosed includes details about the property, who owns it and whether the land is encumbered by a mortgage bond. The facilities that the developer intends to provide must be detailed and the date by which these facilities will be provided must be stated.
The developer is also obliged to give you an estimate of all expenditure for the control, management and administration of the scheme and all its services and facilities for three years after you become entitled to your interest in the village or complex.
The estimate must state who will be liable for what expenditure and it must contain a statement that you will not be held liable for costs over and above any levy already stated in the sale agreement.
That statement should also include details of how the levy will be calculated and an estimate of the levy costs for the next two years, as well as a precise outline of the current or proposed management structure of the retirement village or complex.
The Housing Development Schemes for Retired Persons Act defines a retired person as someone who is over the age of 50. (Whether or not you are working part- or full-time is immaterial.)
Retirement villages can set their own minimum age for the residents of the village. For example, the village may be restricted to people who are over the age of 60. But if the age restriction limits the village to retired people as defined by the Act, the Act applies.
New developments are currently being built outside the ambit of the Housing Development Schemes for Retired Persons Act, says Nick Baines, the founder and former shareholder of Manor Enterprises, which runs four retirement villages in the Western Cape.
Typically, these "lifestyle" developments target people who are over the age of 45 or 50, but do not specifically set age restrictions and in this way sidestep the requirements of the Act.
Syd Eckley, a director of the board of the Older Persons Forum and formerly the national director of the Council for the Aged, says "lifestyle" developments are aimed at active retired people - those in their 50s or early 60s who are, for example, retiring from one career to enter another.
Eckley participated in drafting both the Housing Development Schemes for Retired Persons Act and the Older Persons Act of 2006. He says the Housing Act was really aimed at people who buy into villages through life rights. The "lifestyle" villages are sold as sectional title developments, and the owners are protected by the Sectional Title Act. Nevertheless, before you buy into a village it may be worthwhile determining whether you enjoy the protection of the Housing Development Schemes for Retired Persons Act and if not, to take care.
But Hoffie Hofmeyr, the chairman of the Interest Group for Retirement Villages, which represents the controlling bodies of villages in Gauteng, says unless the land on which the village is built is zoned as a retirement village and the constitution of the managing body reflects that the housing scheme is a retirement village, it is just a security village. Disputes can then arise, with, for example, residents refusing to subsidise the frail-care facility or to abide by the rules relating to the age of the residents in the village.
Retirement villages generally cater for people who can and want to live independently. However, many villages also include facilities for people who can no longer care for themselves. If a retirement village includes a frail-care facility, it has to be registered with the Department of Social Development and will be subject to the Older Persons Act of 2006.
Community rules, OK?
A retirement village is a community with certain common social and financial interests, Carl Scheppening, the director of Cape Retirement Consultants, says. Although you are entitled to full enjoyment of the common facilities within the village, it is also necessary to ensure that everyone's privacy, property and investment are protected, he says.
To reap the benefits of high-density community living and to comply with the Housing Development Schemes for Retired Persons Act, it is essential that retirement villages have some rules. In some villages, the rules are registered on the title deed, but in others they are not.
Residents of some villages have been heard to complain that their managing committee enforces the rules like the Gestapo.
Failure to adhere to the rules could even jeopardise your future in a village. You should therefore find out the rules of a retirement village and whether you are comfortable with them.
These are some of the rules you may encounter:
- Entry requirements.
The entry requirements may relate to your age and your health. If, for example, a village stipulates that owners must be over the age of 60, check if this also applies to your spouse and any dependants who live with you.
Some villages will admit younger dependants under certain conditions - for example, if the dependant is unable to take care of himself or herself.
You may have to undergo a medical examination and prove that you are able to live independently before you are eligible to buy in the village.
- Pets.
Some villages allow you to keep pets, but there may be rules about the number and the type of animals you can have. In some villages, for example, dogs may not be taller than 40cm at the shoulder.
Others allow you to bring a pet with you when you move in, but do not allow you to replace a pet that dies once you are a resident of the village.
Some insist that you erect a fence of a particular height around your unit to keep your pet within the grounds of your unit.
If you are not an animal-lover, check the rules on pets' access to the areas bordering your unit to ensure that other people's pets don't become a nuisance.
- Visitors.
There may be rules about the number of family and friends who may stay with you in your unit or visit you in a frail-care centre and how long they stay. Some complexes expect young grandchildren who are visiting their grandparents to behave in an orderly fashion and to be accompanied by an adult at all times.
- Noise.
There may be rules about silence during certain hours of the week and on Sundays.
- Alterations.
In many complexes you may not make any externally visible alterations to your unit without management permission. These alterations include installing shade netting, burglar bars or a satellite dish.
This article was first published in Personal Finance magazine, 1st Quarter 2008. See what's in our latest issue