This is a really good question – w
hat is the status of money you have paid for your retirement village unit in the event that the owner of the retirement village goes broke?
To start off, it is important to make the distinction between the interests of the owner and the interests of the village residents:
Village owner
The village owner basically owns the freehold title to the land and all of the improvements (buildings, landscaping, etc). They also own the “enterprise” or “business” of the retirement village, which entitles them to the future cashflows of the deferred management or exit fee. Ownership of the business obliges them to fund any costs attributed to the owner, such as replacing capital items in the village, as well as refunding your exit entitlement when you leave and the unit is resold (understand more about this and an explanation of your exit entitlement HERE).
Refunding resident exit entitlements is usually where retirement village owners run into trouble. Over the past decade most states and territories have passed laws requiring retirement village owners to refund the exit entitlement to departed residents within a certain period of time, regardless of whether the unit has been resold. This means that if a retirement village is struggling to re-sell units, the village owner has to find the capital to repay exited residents entitlements from their own pocket, rather than the resale proceeds.
Which leads me to my next point – the money you pay at purchase for the lease of your unit (learn more HERE) is not revenue or income to the village owner. The easiest way to explain it is to describe your payment as a “bond” or “loan”, where there is an obligation for the village owner to repay those funds back to the lender (you) when certain conditions are met. The money you contribute for your purchase is recognised by the village owner (under accounting principles) as a debt to be repaid and is therefore held on the village owners balance sheet as a liability.
Furthermore, the exit fee, which comprises the village owner’s profit or return, is also not recognised until a resale of the unit has occurred, meaning that no income is received for the duration of your stay – only when you leave and the unit is resold! It is easy to see how a small village owner can run into trouble in a slow property market.
Village residents
While village residents don’t own the property or its improvements, they do have title or ownership of the village fees they contribute to.
As explained in more detail HERE, village operators estimate the running costs each year, divide the total expenses by the number of units in the village, then divide by 12 (monthly) or 26 (fortnightly) to determine your village fees. These fees are collected by the village owner and spent on your behalf in accordance with the retirement villages legislation. Residents have ownership of these fees, and the village owner may not use the funds for personal benefit, profit or otherwise not in accordance with the legislation. The village owner is accountable for these funds to residents and must arrange for the account to be audited and presented to residents annually.
Similarly, and as explained in the previous section, the funds you contribute for the purchase of your unit are in the form of a loan or bond, which obliges the village owner to repay (less the exit fee and any other agreed charges). Depending on the state/territory and your specific retirement village contract (learn more HERE), your funds would be create a statutory charge against the title of the village, or even registered against the title of the village (if your contract is a lease). This secures your interests against any actions brought against the village owner.
Conclusion
The above explanation is a long way of saying that your interests are protected in the event of the village owner going broke. Furthermore, your residence contract remains valid regardless of what happens with the village ownership.
What would happen if a retirement village owner went broke?
If a retirement village owner goes broke, it is likely that there is a bank (and too much debt) involved. The bank would step in and appoint an administrator to run the village and move to sell the site and business as soon as possible to get their money back. Hopefully, the new owner has a stronger balance sheet and can run the village more profitably. All residents’ leases, tenure and existing terms and conditions continue unchanged.
The only real downside to you as a resident, is that there would likely be media attention around the event and this may further adversely impact village re-sales.