Land lease sector shaken by Lifestyle Communities exit fee loss

Residents in two estates that won a legal case against the charging of hefty exit fees by Lifestyle Communities will now face appeal as the industry grapples with what the ruling means for seniors.

The Lifestyle Communities business model is under pressure.

The retirement living and land lease sector has been shaken by a ruling that found deferred management fees charged by listed operator Lifestyle Communities are invalid, shining a light on the commercial terms imposed on residents.

Unhappy residents in two Melbourne estates won their case before the Victorian Civil and Administrative Tribunal on Monday, putting the operator on the back foot and surprising market analysts, who thought the model was legitimised.

Lifestyle Communities said it would appeal the decision that voided its charging of exit fees. While the direct fallout across the industry could be limited, as Lifestyle Communities’ blended fee model was unique, land lease operators are bracing for the introduction of tougher rules to protect seniors.

The company’s stock is in a trading halt; it last traded on Friday at $7.04 and fund managers tipped it will open in the mid $5-$6 range following the adverse ruling.

The company has received the judgment from VCAT president Justice Ted Woodward.

“While we are pleased that Justice Woodward has found the concept of a deferred management fee (DMF) is legitimate, we are disappointed with his finding that certain Lifestyle Communities’ agreements should be declared void,” it said in a statement to the ASX.

Lifestyle Communities said it would change its new homeowner contracts to comply with the disclosure demanded by the tribunal.

The company said it would change the DMF calculation method to bring it in line with the tribunal’s ruling, so it is based on the homeowner’s purchase price, and pro-rated over five years, with a cap of 20 per cent of this price.

Chief executive Henry Ruiz said the company was disappointed with the outcome of the case and it had acted on legal advice when issuing contracts. It manages more than 4000 homes and receives income from managing them.

The company remains a strong believer in also using the DMF model, despite most of the land lease industry using rental-based payments. DMF models are more common in retirement villages.

Lifestyle Communities’ dual model of land lease accommodation, where residents pay rent for their homes, as well as charging hefty exit fees, had for years attracted industry scrutiny for potential “double-dipping”.

Residents of Lifestyle Communities at Wollert successfully challenged the company's billing practices.

Bell Potter analyst Andy MacFarlane told clients the decision was a disappointing outcome for the company and the situation had lingered for considerable time. He said there were disparate views in the industry about the ongoing charging of exit fees, but from a commercial perspective it was accepted.

“We think it was broadly held that the legitimacy of DMF would be maintained, and therefore the future value of the DMF on foot sustained, even if the model was to pivot towards optionality between use of DMF or not for an incoming purchaser,” he said. “These judgment findings imply that future DMF yet to be crystallised may not carry value.”

Large operators have poured into the sector on the back of the rising demographic tide that is expected to drive returns.

Stockland last year set up a strategic alliance with Invesco Real Estate to develop and hold a portfolio of land lease communities. The partnership involved an initial investment of $1.1bn and it is expanding. Mirvac in 2023 teamed with private equity firm Pacific Equity Partners to launch into land lease properties, aiming to add affordable housing to its arsenal.

These companies and listed group Ingenia Communities do not charge deferred management fees.

Newly listed GemLife, which does not charge the DMF fees, has traded down since raising $750m in its sharemarket float, potentially as investors expect greater regulatory scrutiny of the rapidly expanding sector.

Originally published as Land lease sector shaken by Lifestyle Communities exit fee loss