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Recurrent charges - variation by different fixed formulae: the Carey Bay Case

Richard McCullagh - Wednesday, November 30, 2011

THE ISSUES

In a recent decision of the Consumer Trader and Tenancy Tribunal (CTTT) some interesting contentions were raised that may apply to many villages where recurrent charges are varied according to a fixed formula. What if the formulae have changed over time? A sensible way of dealing with a surplus was accepted. A more general problem for operators of multiple villages seeking to recover costs from particular villages also recurred. This last matter potentially has wider application to smaller or single-site operators charging 'management or administration fees' to recurrent charges.

THE CASE

The case is Carey Bay Retirement Village Residents Committee v Anglican Care [2011] NSWCTTT 497 (24 October 2011] (Carey Bay). In this Article I will focus on the issues outlined above rather than try to give a comprehensive analysis of the decision.

In passing, it is very pleasing to see CTTT quoting in full the legislative provisions relied upon in the decision as these often change over time and this practice makes the decision a more self-contained and helpful guide for all concerned.

DIFFERENT FIXED FORMULAE

The Residents Committee pointed out that various different fixed formulae had been used by the operator in different contracts in the village over the years. Recurrent charges for some residents was equivalent to, for example, 25% of the single age pension and rental assistance, with an additional $20.00/fortnight for a couple, while for others it was 30% of the single age pension for singles or 35% for couples.

The Committee submitted that this resulted in unequal contributions by different residents and was unfair.

Whilst acknowledging that the result may be inequitable, the CTTT held that 'there is no inherent unfairness in applying the terms of a contract' (at paragraph 12) and declined to interfere with the different formulae used.

Despite the differences in contractual wording and in the comparative contributions by different residents to village operating costs, the contract prevailed. So, always check your contract carefully and get good professional advice when moving into a retirement village.

APPLYING THE FIXED FORMULAE

The Residents Committee argued that recurrent charges should be based on the actual amount of age pension and rental assistance (if any) received by an individual resident.

The CTTT held that the wording of each contract made it clear that the amount of recurrent charge was determined by reference to the published maximum rate of pension as a formula, not the actual payment (if any) received by each resident. 

Residents and operators should check the wording of the fixed formula in service contracts to see if it is a formula, as in this case, or a specific calculation referable to a particular resident's circumstances.

With respect, the Committee's submission here would, if accepted, result in much greater unfairness than the previous submission. The result could be that wealthier residents not entitled to any pension would be relieved of paying any recurrent charges and so be subsidised by less well-off neighbours for as long as they lived in the village. 

DISTRIBUTING A SURPLUS

Both the Committee and the operator submitted that the audited surplus monies in recurrent charges should by agreement be distributed amongst residents according to how much each resident contributed to recurrent charges. This is consistent with the different formulae referred to above.

The Retirement Villages Act 1999 (NSW) requires that any distribution of all or part of a surplus in recurrent charges consented to by residents be 'to the existing residents in equal shares' (section 120B(1)(b)).

The CTTT agreed with the parties' joint position (at paragraph 17), thereby interpreting 'equal shares' by reference not merely to a per capita basis but according to the respective contributions by each resident (or couple) made to recurrent charges.

This is, I think, an eminently sensible approach in this case. Some may object that this is to read into the statute words that are not there and query whether the CTTT was bound to and did apply the oft-quoted three tests of McHugh J in Bermingham v Corrective Services Commission of NSW [(1988) 15 NSWLR 292 at 302] that need to be satisfied if words are to be added to a statutory provision. True, different words may have to be read into s.120B(1)(b) under different contractual provisions in future. However, in my view, justice in the individual case has prevailed over a strict uniform interpretation in a commonsense fashion.

APPORTIONING COSTS

Finally, the operator sought to recover from residents at Carey Bay 3.5% of the operator's total costs for software licences on the basis that Carey Bay comprised 31 units of a total portfolio of 904 retirement village dwellings. At first blush this may not seem unreasonable as this is broadly consistent with how, for example, strata levies are apportioned between lot owners according to each owner's unit entitlement under section 78(2) of the Strata Schemes Management Act 1996. This applies to strata levies in all strata retirement villages.

However, the District Court in Queens Lake Village Pty Ltd v Queens Lake Village Residents Association [2011] NSWDC 21 cast a high onus on operators of multiple villages seeking to recover costs through recurrent charges from particular villages. The Court affirmed the CTTT's approach below in disallowing any recovery of insurance and head office costs owing to a lack of clarity in the basis of apportionment.

'... these outgoings must be assessed by reference to the particular village in question, and not by reference to an artificial formula that has no particular application to the retirement village.' (per Levy DCJ at paragraph 74)  

In Carey Bay the CTTT referred to the above judgement as being 'illuminating and binding' (at paragraph 37) and held that any recovery must be based on a 'proper or chargeable connection with the conduct, management and maintenance of Carey Bay Self Care', that this had not been demonstrated and so disallowed any recovery.

This has potentially wider application to smaller, or even single-site, operators as clause 17(2) of the Retirement Villages Regulation 2009 provides that in relation to 'any costs associated with the operator's head office or any management or administration fees, these are to be broken down to show the goods or services to which they relate ...' (emphasis added). Clause 26(e) goes onto provide that a pre-condition of recovery via recurrent charges is that such 'costs or fees are associated with providing services to residents of the retirement village' (emphasis added). 

The CTTT and the District Court have set the bar quite high in this respect, certainly higher than is expected of a strata manager.

In my view, multi-site and even smaller operators will continue to have problems with cost recovery via recurrent charges unless they use, for example, time-costing software as used by large law and accounting firms to record how all office costs and management or administration fees are attributable to rendering particular services in respect of the particular village. Insurers who can provide a written apportionment of premiums between recoverable risks in particular villages will have a competitive edge over those who do not.

Until such measures are implemented, cost recovery, especially by multi-site operators, remains vulnerable to challenge by residents on the basis of an insufficiently clear and rational method of apportionment. 

OUTSOURCING

An alternative is to outsource head office costs, but this is likely to be more costly for all concerned. 

Further, this may not be completely straight forward where recurrent charges are varied otherwise than in accordance with a fixed formula and the overall increase exceeds CPI. In that case, the operator has an obligation under section 106(2)(c1) to include a statement of 'details of action taken to minimise the proposed variation of recurrent charges'. The CTTT may not look kindly upon an operator's efforts to enhance recoverability that increases the cost borne by residents for the same service. If the overall increase is within CPI taking into account any increase due to outsourcing, then the consent of residents is no longer required under that scenario.

The above is provided by way of general commentary only and does not constitute legal advice.

Richard McCullagh BA LLB

30 November 2011



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