The exit fee danger lingering for retirees

Confusion is rife following a recent Victorian Civil and Administrative Tribunal (VCAT) decision that found exit fees charged by land lease company Lifestyle Communities to be unlawful.

Justice Ted Woodward determined that exit fees must be known and calculable when the land lease contract is signed; because the fees were tied to a future sale price, they were deemed unlawful.

Exit fees are synonymous with retirement villages, but Lifestyle Communities is not a retirement village operator – it operates land lease communities. Land lease communities were born out of caravan parks – residents buy their home but rent the land on which it sits. The operator typically profits upfront from the construction of the homes, and then continuously from the weekly rent. As a result, most operators don’t charge exit fees.

The implications of the VCAT decision for Lifestyle Communities – and its residents – are enormous. In January 2023, the company’s share price peaked at almost $20, giving it a market value of $2 billion. Fast forward to now, and the shares are hovering around $4, with more than $1.4 billion wiped off its market capitalisation. Its most recent balance sheet had about $250 million in accrued “deferred management fees” – funds the company was due to collect from current residents on exit – money it won’t get.

The implications for residents could be just as weighty. The deferred management fee clause in their contracts is void, meaning they will no longer need to pay it. The fee was calculated at 4 per cent a year for up to five years – capped at 20 per cent – meaning a resident selling for $600,000 would have faced fees of up to $120,000. Now, that fee will be zero. It’s less clear what will happen with former residents who have already paid an exit fee.

Shareholder advisory group Ownership Matters estimates that exit fees paid since 2010 could be total $73 million, and with penalty interest, the refund liability could be as high as $131.5 million. Refunds are not automatic, meaning they may need to be claimed through a class action.

On the surface, the decision is a victory for residents, but it may not be all upside. Residents may be spared a six-figure exit fee, but there’s a very real risk that houses in these communities could take longer to sell and sell at a lower price. There are no guaranteed buybacks in land lease communities, so residents could be paying rent for months (potentially years) while trying to find a buyer. There is also the very real risk that house prices fall, eroding capital gains.