The NSW Government has released its discussion paper on proposed reforms to exit entitlements and a cap on recurrent charges in line with its election commitment to do so. You can find the paper here.
The purpose of the discussion paper is to seek feedback from the retirement village sector about the proposed reforms. Submissions on the discussion paper close at 5 pm on 16 August 2019.
The proposed reforms seek to remove any distinction between registered interest holders and non-registered interest holders in the context of exit entitlement payment timeframes and liability for recurrent charges after the resident permanently vacates.
Exit Entitlement Payment Timeframe
- For residents who are registered interest holders, unless their contract provides for earlier payment, the retirement village operator must pay the resident their exit entitlement within 14 days of the earliest of:
(a) the date their unit is sold;
(b)the date the operator enters into a contract with a new resident or tenant of the premises; and
(c)the date a person takes up residence in the premises with the consent of the operator.
- For residents who are non-registered interest holders, the retirement village operator must pay the resident their exit entitlement within a maximum period of 6 months after the resident provides vacant possession of the premises.
If implemented, the proposed reform will require village operators to pay residents their exit entitlement within a maximum period of:
- For metropolitan areas - 6 months from the date the resident provides vacant possession of the premises; and
- For regional areas – 12 months from the date the resident provides vacant possession of the premises.
This proposed reform will place registered interest holders (including freehold, strata, community and company title residents) in the same position as non-registered interest holders in terms of the exit entitlement payment timeframe. Also of importance, is the Government’s proposed “metropolitan area” which will include the Blue Mountains, Hawkesbury, Wollondilly and the Central Coast council areas.
The discussion paper also proposes that a form of independent valuation process be adopted for the purpose of determining the value of the exit entitlement at the time the payment is due, and that there be consideration of an “opt out” process for residents.
The proposed change to the exit entitlement payment timeframe is likely to have significant consequences for both residents and operators as it will remove the opportunity for industry innovation and is likely to adversely affect the liquidity of operators, debt financing for developing villages, sale prices of units and investment in the industry. The requirement for a valuation is also likely to significantly increase the cost to operators and residents to undertake the resale process. The opt in/opt out process will also increase the complexity, administration and costs for operators and residents.
Registered interest holders and non-registered interest holders are required to pay recurrent charges for general services for 42 days after they permanently vacate the premises. For registered interest holders, liability for recurrent charges ceases at the end of this period. However, registered interest holders must still pay a share (equal to their potential share of capital gain) of recurrent charges for general services until the premises are sold or a new resident enters into a contract for the premises.
The proposed reform will align liability for payment of recurrent charges for general services for registered interest holders with non-registered interest holders. This means that liability for payment of recurrent charges for general services for both types of interest holders will cease 42 days after the resident permanently vacates the premises.
Again, this will significantly increase the cost to operators of resales as they will bear the liability for recurrent charges for vacant units until the resale occurs.