During the twenty years that I have worked with Retirement Villages, I have often been struck by the lack of understanding surrounding the principles of life-rights schemes. People, often the family of elderly residents, tend to shy away from such transactions; their aversion either born of ignorance; or motivated by self-centred concerns about diminishing legacies. When in reality the most that they can hope for is that during your retirement years, you won’t become a financial burden on them. And the correct choice in respect of retirement accommodation may assist in preventing such an eventuality. It was for this purpose that this article was written!
The various options that prospective purchasers encounter when embarking on a search for retirement accommodation can be extremely confusing. Options include freehold / full title, share block, as well as sectional title and life-rights. Of the four, the two main ones confronting would-be purchasers are sectional title and life-rights; with the latter being the most misunderstood. And, as retirement choices are invariably one-way streets from which few are able to retrace their steps unscathed, it is essential that the various options are weighed up; and the correct choices made.
Weigh up your options carefully!
Life-rights properties are effectively subdivided portions of larger properties, with the allocated area extending to the mid-points of the ceilings, walls and floor thicknesses. The main difference between sectional title and life-rights is that full ownership is never granted to ‘owners’ of life-rights. Life-rights transactions should be considered akin to pre-paid rental agreements rather than purchase transactions. Consequently bonds and loans cannot be raised against the value of the property, as in effect they are never owned by occupiers. (But should one really be dabbling in large scale debts of that nature at such a late stage in one’s life?)
On the plus side no transfer duty is payable. And while some developers may claim that no rates are payable, if a situation arises where a developer is rated, this will merely be passed on to occupiers in the form of increased levies, with the attendant risk that, not being the owner, the life-rights holder may then not be eligible for the pensioner’s rebate granted by some municipalities.
The life-rights system is considered by the property industry to be an option that costs less and provides the retired individual with the right to occupy specific accommodation for the rest of their life. This right is paid for with a capital investment, and on relocation or death, the use of the unit reverts back to the developer, with the original purchase price either being forfeited or, to varying degrees, refunded. Some later models even refund the full purchase price, and increasingly portions of any profit generated by the resale of the unit are credited to the deceased’s estate. If a resident voluntarily vacates the unit, the rules are normally the same as for death.
Life-rights sales initially started as a means by which the middle class, and people of limited means, could afford to purchase retirement accommodation. They were developed by non-profit organisations for the purpose of funding the other services representing the NPO’s core business. Thus, the surpluses generated by life-rights sales were used to fund other charitable activities in which the organisation was engaged. In a manner of speaking, it was a case of borrowing from Peter to pay Paul, with both parties benefiting from the transactions. Today, however, even profit-driven developers, having cottoned on to the financial advantages of life-rights schemes, and are increasingly using this form of sales arrangement.
There are many variations to the structuring of life-rights sales. The earlier arrangements, in the 1990s, were very often based on the purchaser paying only a small percentage of the cost of the unit, but receiving nothing back if they vacated or died. For example, if a unit cost R1 million to build, it could be purchased for R400,000; but, after a three-month cooling off period, the tenant (or the family) received nothing back if they left or died. The successful establishment of this model depended very much on the developer’s ability to outlay the initial capital and to sustain the loss of interest over the period that would be required for the first departures or deaths to materialise. You thus had to be very sure that you were not going to change your mind, because the longer you lived the more you gained – similar to being married rather than just having an affair! Today, there are as many variations on the life-rights theme as marketing can devise, and in the main, they are designed to accommodate the social standings and needs of the marketplace. The schemes vary from low purchase prices with no return, to high prices and a return that may even include a portion of the profits generated on resale.
Some variations are as follows:
- Pay 50% of the construction cost, and on death or departure, get nothing back. Low cost – no return!
- Pay 75% of the construction cost, and on death or departure, get 50% of the purchase price back. Medium cost – medium return.
- Pay a normal market-related price but on death or departure, get the purchase price + 40% of any profit generated back. High cost – high return. (This model potentially holds a similar risk for the developer, except that, developers have – theoretically, as can be expected – already made a profit on the initial sale).
In one of the latest Retirement Villages in which I have been involved, the units were sold at higher than built cost but the return on death or departure yielded the full investment plus slightly less than 50% of any profit gained from the resale. This result is fine in a booming property market, but is less attractive once prices have settled at more realistic levels. It does, of course, also mean that only people of means can afford to purchase, as bonds are not normally granted in respect of life-rights sales.
The choice amongst the many life-rights models boils down to matching affordability with need. I have always been of the opinion that the differing models will yield similar benefits and that there is a financial balance which moderates the attractiveness of the various models – with the appropriateness being dependent on the circumstances of developers and the prospective purchasers alike.
And then there are levies
It is self-evident from these examples that there are no free lunches! It is merely a matter of matching financial resources (and needs) to the models on offer. All have differing benefits and pitfalls! But in choosing a scheme, please remember one important aspect: Levy! Levy! Levy! The capital outlay of a retirement unit does not even begin to compare with the burden of annually increasing levies. (Additionally often one spouse may require frail care?). Who is responsible for the levy payment after the death of the life-rights holder? I was recently exposed to a debate in which it had been alleged that for a levy to be charged to a deceased resident’s estate in respect of their life-right unit was illegal… I think that the proponent of that viewpoint is wrong. I think that where a person has signed a contract agreeing to an after-death obligation, then this is a legally binding contract which must be honoured. BUT… legality is what you can get away with, whereas morality is what no one should try to get away with! In terms of morality there is no simple answer to the question of what would constitute good practice, as it would depend on what repayment had been agreed to; and whether the occupier fully understood the nature of the agreement.
In conclusion, I can only advance my personal belief that, in specific circumstances, life-rights is as attractive an option as sectional title. Do not be put off by the fact that your investment may be reducing over a period of time. Your purchase of retirement accommodation should not be considered a financial investment. It should rather be viewed as the last and most important lifestyle investment that you are likely to be called upon to make. It is an investment into a meaningful and secure life at a time when you seldom have the luxury of a second chance. Do not be swayed by family decrying the merits of life rights. And do not be put off by the protestations of your bank manager because he is probably more alarmed at the thought of a declining investment. In any case, given the managerial debacles that led to the recent financial depression, it is unlikely that he will know too much about money anyway! Do not be persuaded by sweet-talking sales people or developers! Retirement accommodation decisions are about you! By all means obtain advice, shop around and most importantly, have your attorney examine the small print. But avoid being swayed by others who invariably have vested interests. Ensure that you purchase reasonably-priced accommodation from a company that you can trust, in a complex where you will be happy, and where you will be able to enjoy an affordable and meaningful life.
– Henry Spencer (Chapter in book – Retirement Choices)