Most people when they retire opt to sell up and buy into a retirement home, as these offer a range of amenities, security and a social life with people of similar ages.

There are a range of options available, varying from luxury retirement villages with every conceivable convenience to charitable organisations which manage well run complexes that cater for those with limited income.

Within these are a range of ownership options such as sectional title, share block and life rights which allow for different needs based on income, age, and whether you expect a return on your investment.

According to Arthur Case, General Manager of Evergreen Lifestyles, a retirement village developer, the three main purchase options that buyers have available to them for retirement property are: sectional title, share block scheme, and life rights. In all three schemes, the buyer has the protection of the Housing Schemes for Retired Persons Act of 1988.

Life rights

Life rights is the most popular form of retirement-home ownership internationally; however it is still a relative newcomer to South Africa. It is considered ideal for those who have less capital to invest, or simply prefer this scheme due to other benefits such as lower monthly levies and less administration.

Life rights offer precisely what the name implies: purchasers have a legal right to occupy the unit for the duration of their life. The buyer does not purchase a unit, but secures the right to occupy the unit for the rest of their lives. The village and all its facilities remain both an asset and the responsibility of the developer.

When the life right terminates, through death or other circumstances, it reverts to the owner of the village, who is then entitled to resell it.

Upon successful resale your estate receives the original purchase price along with a percentage of the net profit which is determined and agreed at the time of purchase. With life rights the unit cannot be bequeathed to children, nor can a child buy one for their parents with the intention of living there themselves.

Cost benefits

There are significant cost savings under life rights. Firstly unlike sectional title developments, it is not a property transfer so there are no bond registration fees, transfer duties and no VAT payable.

Monthly levies also tend to be lower as the property owner is able to finance the upkeep of the village on the profit made when re-selling the units.

Effectively life rights converts a portion of the capital value of your property to fund ongoing improvements and maintenance in order to reduce your living expenses.

Case says residents enjoy similar privileges to the homes being purchased by sectional title except that the developer remains the sole owner of each unit.

The developer carries the responsibility of maintenance and upkeep of the village and its facilities, unlike a sectional title development where the developer has no interest in the property once the development has been sold.

The property is an investment for both the life rights holder and the developer so there is an interest by the developer to maintain the property.

Case says developers are aware that the ongoing desirability and performance of their asset will depend upon the quality, condition and affordability of the village and this naturally incentivises them to ensure that all three aspects are carefully managed.

Legal protection

Life rights are protected by an act of parliament and no developer or property owner can remove your right of occupation.

Importantly, the Housing Development Schemes for Retired Persons Act requires the life rights developer to provide a’ statement of basis’ upon which any levy is to be calculated as well as an estimate, for a period of two years in advance, of the amount of the levy.

In other words the retiree enjoys levy transparency and the ability to plan around predictable costs.

“Essentially a Life Rights scheme can be viewed as a housing product, an insurance policy and a worry-free existence rolled into one. This is not to say that peace of mind cannot be secured via other schemes but a well-run life rights scheme offers all the ingredients for a successful, secure, and stress-free environment,” says Case.

Beware the levies

Monthly affordability is a major concern for retirees as they often live on a fixed income and cannot absorb an unexpected increase in monthly levies or “special levies” for major maintenance work.

It is not uncommon for residents of sectional title properties to be suddenly hit with a R10 000 levy for major refurbishments.

Some villages make a profit or charge a management fee on levies and others may not. Some may charge more than actual operating costs to build up a levy stabilisation reserve. Levies are calculated based on the operating cost of a village divided by the number of housing units and may or may not include municipal rates and taxes.

Case says purchasers need to understand exactly what is included in the levy and to make sure that there is a reasonable levy escalation clause in the purchase or life rights agreement to avoid unrestrained levy escalation.

Levies are used to maintain the properties and to provide amenities, so when assessing a village one should weigh up the amenities and services offered against the monthly levy and make comparisons between the villages.

When you become too frail to care for yourself

For residents who cannot manage in their house any longer but don’t require full 24-hour nursing, there are Assisted Living units.

These units are usually bachelor units with en-suite bathroom. All meals and laundry are provided for the resident, and there is some assistance with daily living activities, e.g. administration of medication, help in or out of the bath, and dressing.

La Verne Hodson of Flower Foundation says depending on the village, some units are purchased and a monthly levy is payable to cover the costs of meals, laundry and nursing assistance. Others are rented on a monthly basis.

Fulltime frail care and around-the-clock nursing or frail care can be prohibitively expensive, with levies often more than double those at complexes that don’t offer it.

Owners may find themselves subsidising a frail-care facility for 20 years and then still paying increased fees when they need to make use of it.

As a result, frail care is usually run and funded separately from the village, as most residents do not wish to cross-subsidise the healthcare needs of others. This makes frail care an expensive commodity.

Ownership structures

SECTIONAL TITLE

Sectional title is the option that most South African property investors are familiar with and is similar to buying a regular townhouse, for example. The purchaser obtains ownership of a unit or residence by means of a title deed that is registered with the Deeds Registry.

A sectional title village is run by a body corporate and can often have quite a complex administrative infrastructure. Decisions have to be made by the residents as a group which can often prove to be an arduous affair.

Registration of a unit within a sectional title scheme occurs through the deeds office, and transfer duty and conveyancing costs are therefore incurred.

Importantly, the developer of a sectional title development carries no responsibility for the ongoing maintenance and cost management aspects once the development has been built. The onus falls upon the residents to do so.

SHARE BLOCK

With a share block scheme, owners do not obtain exclusive title to the unit they have ‘purchased’. Instead they obtain shares in the company that owns the residence. The purchaser is then issued with a share certificate.

Owning shares in a company and not a section of the building itself assists in minimising costs. However because the buyer doesn’t obtain a title to the share block unit, the majority of financial institutions do not offer mortgage finance on share block schemes.

From a conveyancing perspective, the transfer of the shares is very similar to sectional title. Transfer duty is still payable on the purchase price, although a share block transfer is not registered at the Deeds Registry.

The Share Block Control Act 59 of 1980 regulates the operation of a share block scheme and ensures that prospective investors receive full disclosure.

The ownership of the shares entitles the purchaser to the use and occupation of the unit, which is secured by a ‘use and occupation agreement’ concluded between the buyer, who is now a shareholder, and the company.

Whilst the purchaser does not have ownership of the unit, a shareholder plays a role in the management of the scheme through a general meeting of shareholders.

There are also management rules, similar to the rules in a sectional title scheme, which regulate the manner in which an owner or tenant occupies a unit.

The directors of a share block company establish a levy fund to which the shareholders contribute in order for the company to meet its running expenses, though shareholders are never liable for the debts of the company.

This article first appeared in City Press