Lifestyle Communities overruled: Deferred management fees on the out for land lease companies
The listed housing provider lost a crucial court case about its controversial exit fees. The tribunal found these provisions were harsh, if not unconscionable, and put an unreasonable financial burden on estates.
Slugging residents of retirement communities with deferred management fees upon their departure will become harder for land lease operators after a Victorian tribunal ruled against Lifestyle Communities’ hefty bills.
The listed property company’s stock is expected to suffer in the wake of its defeat before the Victorian Civil and Administrative Tribunal on Monday after complaints by residents of two Melbourne estates.
The tribunal found that fees levied on residents were void due to the uncertainty in quantifying their value in advance.
“We see this as a setback for Lifestyle Communities given it is against our base case assumption that the deferred management fees may have been allowed,” analysts at broker Citi said.
The company could write-down its $250m of deferred management fees, which make up about 30 per cent of Lifestyle Communities’ assets. Its gearing and earnings would also be adversely affected, Citi predicted.
Since a Four Corners expose on its practices in July 2024, Lifestyle Communities’ share price has almost halved, with more volatility expected should the company could appeal the decision.
The stock was halted from trading on Monday.
“However, share price could decline initially given the negative outcome and magnitude of deferred management fee contribution to earnings and assets,” Citi said.
Residents complained that what had been marketed as low-maintenance, affordable, resort-style living was marred by excessive fees that were in breach of the law. They also claimed there was a lack of transparency about the fee model.
Lifestyle Communities and its legal team “are reviewing today’s Victorian Civil & Administrative Tribunal judgement and considering its impact on the company, its communities and homeowners”, a spokesman said.
“While we are pleased that Justice Woodward has found the concept of a deferred management fee is legitimate, we are disappointed with his finding that certain Lifestyle Communities’ agreements should be declared void,” he said.
VCAT president Ted Woodward determined the terms imposing the deferred management fee were void under some provisions of Victoria’s Residential Tenancies Act and that meant the tribunal found the fees should not be paid.
The fees kick in at 4 per cent of a property’s value per annum, and are then ratcheted up before capping out at 20 per cent. The impost meant that some residents felt they were effectively trapped as they could not afford to move out.
The dissenting residents also challenged rules in their contracts which allowed the company to keep charging rent and fees even after death, while also blocking these properties from being occupied ahead of sale.
The tribunal found these provisions were harsh, if not unconscionable, and put an unreasonable financial burden on estates.
But the ruling does not explicitly prevent a company from levying exit fees on residents.
Broker Jarden said ahead of the case that even if Lifestyle Communities won the VCAT proceedings, the deferred management fee aspect of its brand “could be tarnished”.
Lifestyle Communities is the only major land lease operator to use a deferred management fee structure. Rival company Ingenia did have a portfolio of four assets which were converted into a deferred management fee structure in 2010, but the last of those assets was sold in 2021.
“We expect Lifestyle Communities to consider offering customers a choice, at which point the case for deferred management fees would likely be tested,” Jarden said.
The drawn out nature of the case had also hurt the company’s brand and rate of sales, and Jarden warned of further risk to the future of the deferred management fee model in land lease.
A fund run by asset manager HMC Capital holds a stake in Lifestyle Communities and in an update ahead of the case, it said the stock had disappointed as it was down 10 per cent for the June quarter. HMC blamed this on investors assuming the issue may not have a swift resolution.
It added that the recent listing of Gemlife Communities had weighed on both Lifestyle Communities and Ingenia as investors sold shares in other listed land lease businesses to fund their participation in that initial public offering.
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