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Court of appeal lays down new requirements for Retirement Village budgets

9 December 2013

 

On 29 November 2013, the Queensland Court of Appeal handed down its decision in the case of Australian Retirement Homes Ltd v Ash [2013] QCA 355.  The decision will require many retirement village operators to change the way they currently prepare their budget documents.

Background

The case involved a retirement village at Peregian Springs which was developed in stages.  Consistent with common industry practice, the operator subsidised expenditure on general services over several financial years during the development of the village.  This was to ensure that the annual increase in general services charges payable by residents did not exceed the CPI cap imposed by Section 106 of the Retirement Villages Act 1999 ("the RV Act").  Over a period of 5 years, the subsidies contributed by the operator totalled approximately $475,000.

Despite this, the resident claimed that this practice was inconsistent with the RV Act.  The resident contended that the annual CPI cap applies to total expenditure on general services, regardless of the extent to which that expenditure is funded by residents or the operator.  This would mean that any increased expenditure on general services above CPI (as is commonly experienced in developing villages) would require a special resolution of the residents, despite the fact that residents' payments would be so capped and the operator intended to subsidise any shortfall from its own funds.  In effect, the resident's argument amounted to an assertion that developers of retirement villages should cede control of their developments to their residents. 

The decision

Thankfully, the Court of Appeal rejected the resident's argument and found in favour of the operator.  In doing so, the Court recognised that general services are typically funded from a variety of sources, which may include:

  • general services charges levied on existing residents (under Section 103 of the RV Act);

 

  • general services charges levied on former residents (under Section 104 of the RV Act);

 

  • contributions by the operator in respect of unsold or unoccupied units (under Section 105 of the RV Act); and

 

  • operator's subsidies.

The Court held that the CPI cap relates only to the total of the general services charges to be levied on existing residents and former residents and not to anticipated contributions by the operator.

 

The Court's comments regarding preparation of budgets

In reaching its decision, the Court considered the obligation on operators under Section 102A of the RV Act to adopt a general services charges budget for each financial year.  Under that section, operators must give a draft of the budget to the residents committee upon request.  It is also common practice for operators to include a copy of the current general services charges budget in their Public Information Document, to discharge their disclosure obligation under Section 76(c) of the RV Act. 

The Court laid down the following principles regarding the preparation of budget documentation for general services charges:

  • The revenue budgeted to be received from residents must be identified separately to any anticipated contributions by the operator.

 

  • A budget which merely states a single line revenue item without distinguishing between anticipated contributions by residents and the operator would be insufficient to properly inform residents and therefore deficient.

 

  • Although operators may levy a single charge on residents to cover all the general services, the budget must state individually the dollar amount of the charge payable by residents for each general service. The Court suggested that this information might be supplied by way of a schedule to the budget.

What operators should do

This decision has particular application to operator subsidies for villages under development.  However, the Court's comments regarding the separate identification of operator contributions for unsold or unoccupied units will potentially apply to developing and established villages alike. 

The difficulty with these comments is that, at the time of preparing a budget for the next financial year, the factors which determine the amount of these operator contributions will be largely unknown (for example, the number of departing residents and the period until resales occur).  Accordingly, it appears that separate identification of these operator contributions is likely to require a fair degree of estimation based on observed trends for previous financial years.

Although the Court did not consider the issue, its comments could equally be applied to the preparation of maintenance reserve fund budgets under Section 99 of the RV Act, which adopts very similar wording to Section 102A.

Operators and their consultants will need to carefully consider how to comply with the principles laid down by the Court without losing sight of the commercial practicalities of budget preparation.  Operators may need to adapt their budgeting procedures accordingly and should contact a solicitor with expertise in retirement village law to clarify those obligations.

If retirement village operators or their consultants wish to discuss any retirement village issues, please contact Stuart Lowe, Mullins Lawyers on 07 3224 0355 or slowe@mullinslaw.com.au.

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