There appears to be a level of confusion existing about the relationships of the Residents and their Retirement Village owners, and this may not be helpful for the residents.
It seems generally accepted that there is just one association between the Owner /Developer and its residents; in fact there are two.
1) Initial contact : The first relationship occurs when a sale by the owner to a purchaser (now a resident of a unit – whether by strata title or lease) takes place, but then the association virtually ceases until exit, when the Owner receives a settlement of a Deferred Maintenance Fee (“DMF”) which is a substantial 25% or 30% of the gross selling price. This is actually a trail profit to the owner, and which will repetitively apply every time the unit is re-sold, as residents rotate over the years. In the case of Loan / Lease departures, there will be other deductions from the settlement price such as a DMF (or levy) and the costs of refurbishment, which should be reasonable, without up- grade.
2) On-going commitments : Is with the owner’s Management Company, the other party to the Management agreement which residents have signed and which becomes the contract to live with. It is imperative that residents have access to, and read and digest the covenants and obligations therein, to better understand the relativity of the Service (or Maintenance) fees set to a budget of the estimated costs, and expended to operate the village on your behalf. The specific operational maintenance requirements of the village are clearly spelled out, and these apply to each current year’s budget. They will probably include a provision for a Capital Replacement Fund (CRF), or Sinking Fund, or in some villages this may be in a separate Maintenance Fee. As this is a ‘recurring’ charge, it comes within the ambit of Service/Maintenance Fees when it comes to dealing with an increase.
Having back-grounded those relationships, it is appropriate to look at the problems which are occurring, as owners attempt to infringe their contractual obligations, to the detriment of the residents. To protect their rights in all events, residents need a dedicated 2 or 3 residents with accounting or commercial experience to form a Finance sub-committee of the Residents Committee, even if it has some owner representation.
Previous years deficits :
Referring to the initial relationship when a resident has purchased a unit, typical examples of conflict have arisen after the owner/developers have acquired land, built a village which has incurred all the usual initial costs of a project including interest on bridging finance during construction. Like any other complex (be it a shopping centre, apartments, offices or factories) these are capital costs of the Owner until completed, and then sold or leased out to achieve their return on investment by a construction once-up profit or on-going lease rental income, and the DMF on departure. However, some Owners are now seeking recovery of those earlier development costs under the guise of “previous years deficits” from current and future residents, by imposing a Special Levy or increasing the Service fees or by dipping into the residents’ Long-term Maintenance (or Sinking) Fund or Capital Replacement Fund.
This type of claim is unlawful, retrospective and totally unacceptable, and in practically all cases, is not provided in their Management Contract ; but it is happening ! It must be rejected.
Other invalid expenses :
Reverting now to the on-going operations with the Management Company, there is clear evidence that many owners are claiming and expensing items of expenditure which are not included in the agreement, thus causing blow-outs to the budget, with much anguish to the residents. Examples are brought forward deficits, RVA subscriptions, abnormal repairs, surcharges etc. and particularly previous year’s deficit(s) (unless in the agreement).
Capital vs. Expenses:
The main abuse lies in the expensing of capital costs which are clearly the responsibility of the owner, i.e. all assets, properties, village bus, emergency telephone system etc comprising the communal facilities made available and promoted to potential residents at their point of sale. Herein lies the most controversial interpretation in any Management Agreement and that is the word ‘replacements’, usually in the framework of “repairs, renovations, replacements and maintenance “. The word has been used by some owners to replace items of a capital nature as listed above, whereas it should be correctly interpreted (within the context of operating ‘repairs and maintenance’) as replacements of ‘parts’. Whilst “maintenance charges “ has been defined in the Retirement Villages Act 1986 (“RV Act”), the Act fails to define “capital costs”- RRVV has made representation to have this included, but so far without success.
Be aware of this one – ‘big’ money is involved!
The key function of the Management Committee in administering the village operations should be accounted for separately with its own bank account; however it is usually an Owner’s account, but who obviously has another account into which the DMF’s are paid. To this extent, the owner has ample funds to underwrite any shortfalls in the budget.
Residents Committees should be presented with financial statements at regular intervals during the year whenever meeting, to monitor progress against the appropriate budget.
Most importantly, at the year – end, a new budget should be tabled to the Residents Committee for mutual consideration of the setting of Service fees applicable for the ensuing year. This budget will be compiled taking into consideration the actual figures for the current year, not the budget which had been prepared the previous year which could be quite different. In some instances, this ‘budget’ step may be prepared before the year- end (to communicate the increase immediately) in which case 11 months‘ figures may be extrapolated to provide a reasonably full-year projection.
Increases in fees:
In the event that the new budget justifies a percentage increase in the fees within the CPI rate, calculated by the (Melbourne All Groups) total of the preceding 4 quarters’ indices ending at the quarter before the year-end (example – ending June, September, December and March if the financial year 1July to 30 June is adopted) divided by the total of the 4 quarters indices for the prior year) :
i) the RV Act allows it automatically.
ii) if in excess (of the CPI), a Residents Committee can authorise the increase, failing
which any such increase must be put to the residents for approval “by resolution of a majority of the residents at a meeting of the residents” under the important Section 38 (4) of the R V Act 1986, “despite anything to the contrary in ……a management contract “ – Section 38 (2)”. This puts the increase in the control of the residents, provided they vote responsibly one way or the other. It should be noted that the adoption of a budget does not satisfy the Section, which specifically requires approval of the increase, by a resolution – as above.
There is a significant difference in the case of a Special Levy as the Residents Committee cannot approve it, so the residents are in control as it must be put to them at a Special or Annual General Meeting requiring a 75% majority. However there is an apparent exception under Section 6 (b) (iii) “…if the management contract ….provided that the residents are responsible for the expenditure or the class of expenditure which the special levy is intended to cover”, but this appears to be pre-empted by Section 38 (6) of the Act stating “Despite anything to the contrary in a management contract …..a resident is not required to pay a special levy.”
The right to vote then, is the residents’ safe-guard to reject any illegal expenses which may be inflicted on the residents, but it is vital that a co-ordinated effort be made to alert them of the contravention, as it is a well-known fact that a majority of elderly residents may raise their hands in support of a motion, without knowing or understanding the ramifications. Again, this happens (and not in isolation !). One must spread the ‘word’ by ‘word of mouth’, a meeting or letter-box drop etc.
Owners Corporation Act 2006 (“OC Act “) :
There has been some confusion since the ‘old’ Body Corporates now come under the new Act – the main one being exacerbated by the Consumer Affairs Victoria edict that villages with strata titles should hold two AGM meetings with two (impractical) sets of financial statements. The RV Act Part 1 Section 3 ‘Definitions’ (1) (b) clearly states that “where there is an owners corporation the annual meeting (is the ) annual meeting of the owners corporation”. This means the village holds one AGM at which the business as set out in the OC Act (Section 73) is conducted (including tabling the normal RV accounts) which may be headed “Owners Corporations Act”.
The holding of this AGM does not detract in any way the ramifications of the RV Act of the villages, except in a few appropriate clauses which “do not apply”. Section 38 (4) re an increase is not one of these, and still requires “a resolution by the residents at a meeting” – any meeting !
The key strategy to combat any wrongful demands (if prior written demands – with requested written responses) have not been satisfactorily met, lies in refusing to accept any expenses not specifically set out in the management agreement – by voting against the appropriate motion.
If not acceded to by any owner- controlled management, the steps to remedy any breach are :
1) By negotiation with the owner, or by submission of an Internal Dispute Resolution Scheme (unlikely to succeed), failing which :
2) Taking the complaint to the Consumer Affairs Victoria – preferably on separate Complaint forms if multiple breaches occur, and submitted by different individual residents. A copy or notice may be given to the owner either before or after submission.
3) Resort to VCAT.
Details of the various procedures to be taken may be obtained by contacting RRVV.
As a last move (as is actually occurring), a letter-box drop advising residents just to continue paying the usual fees until the legalities of an increase are properly approved, or until some outcome is reached following a formal Complaint Form lodged with CAV.
Unfortunately, all these actions involve effort (usually by a few dedicated Residents committee members, or a ‘Lone Ranger‘) but the penalties for not doing so can be far-reaching and very costly in the future, not to mention the disruption of the peace and harmony residents expect to enjoy when they sign on the dotted line.
An Internal Dispute Resolution Scheme is required to be in place, being clearly spelt out in the Act.