Retirement Village Contracts: What Buyers Should Check

When you move into a retirement village in New Zealand, you're not buying property in the traditional sense. You're purchasing an occupation right agreement (ORA), a license to occupy a unit for life, or until you choose to leave. This distinction matters enormously because the financial terms are completely different from a standard property purchase.

According to the Retirement Villages Act 2003, villages must provide disclosure statements and follow specific rules, but the contracts themselves can vary dramatically. The deferred management fee (DMF) you'll pay when you leave, the capital gain you may or may not share, and the timeline for your exit payment are all negotiable terms that differ from village to village.

This isn't a decision to rush. The median retirement village unit costs around $500,000 to $650,000, and the financial implications of your contract will affect both your retirement income and your estate.

The deferred management fee is the village operator's primary source of profit, and it's the single biggest clause to examine carefully. This fee is deducted from your exit payment when you leave the village, whether that's to move to higher-level care, to live elsewhere, or when your estate settles after death.

Common DMF structures include:

• Annual compounding model: A percentage (often 3-5%) charged each year you're in the village, sometimes capped at 30% after 6-10 years
• Fixed percentage model: A flat 20-30% fee regardless of how long you stay
• Sliding scale model: Increasing percentages over time (e.g., 5% year one, 7% year two, up to a cap)

Here's what this looks like in practice. If you purchase an ORA for $550,000 with a 4% annual DMF capped at 30%, and you stay for eight years:

• Year 1: 4% of $550,000 = $22,000
• Year 2: 4% of $550,000 = $22,000
• Years 3-7: $22,000 each year
• Year 8: Final 2% to reach the 30% cap = $11,000
• Total DMF: $165,000

That's $165,000 deducted from whatever your unit resells for. If your unit sells for $600,000, your estate receives $435,000 before any capital gain sharing is calculated.

Some contracts charge the DMF on the resale price rather than the original purchase price, which can significantly increase the amount if property values have risen. This is a critical distinction to clarify with your lawyer.

After the DMF is deducted, the next question is: who gets the capital gain if your unit sells for more than you paid? And equally important, who wears the loss if it sells for less?

Capital gain sharing arrangements vary:

• Full capital gain to resident: You receive 100% of any increase in value (best for residents)
• 50/50 split: You and the operator each take half the capital gain
• Operator keeps all gains: You receive only your original purchase price back (less the DMF)
• Hybrid models: Different percentages depending on length of stay

Capital loss provisions are equally important. In most contracts, if your unit sells for less than you paid, you wear the full loss, not the operator. Your exit payment is reduced accordingly.

Combined with the DMF, unfavorable capital gain terms can dramatically reduce what you or your estate receives. Using the example above, if your $550,000 unit sells for $600,000 (a $50,000 gain) after eight years:

• Sale price: $600,000
• Less DMF (30% of $550,000): -$165,000
• Less capital gain kept by operator (if 50/50 split): -$25,000
• Your exit payment: $410,000

You've received $140,000 less than the resale price, and $115,000 less than what you initially paid, despite the property appreciating. This is why understanding both clauses together is essential.

When you leave a retirement village, you don't receive your exit payment immediately. The village must first find a new buyer for your unit, which can take months or even years in a slow market. This creates a significant cash flow issue if you're moving to residential care or another living arrangement.

Contracts typically specify:

• Maximum timeframe: How long the operator has to pay you after your unit is vacated (commonly 12-24 months)
• Resale responsibility: Whether the operator or you (via your estate) controls the resale process and pricing
• Interim arrangements: Whether you continue paying weekly fees until the unit sells
• Payment triggers: Whether payment is due when a new buyer settles, or when they sign (settlement can add another 8-12 weeks)

If you're moving to residential care, this delay can be financially stressful. Residential care costs in New Zealand range from $1,200 to $2,500+ per week depending on the level of care and location. If your unit takes 18 months to sell, you could be paying $93,600 to $195,000 in care costs before receiving your exit payment.

Some considerations for managing this risk:

• Maintain accessible savings or a line of credit to bridge the gap
• Understand whether the residential care subsidy treats your unsold ORA as an asset (it typically does, which can affect eligibility)
• Consider whether your village contract allows early payment at a discount
• Check if you can retain some control over pricing decisions to encourage a faster sale

Beyond the exit-related fees, you'll pay ongoing weekly service fees (sometimes called maintenance fees or village fees) for as long as you live there. These cover maintenance of common areas, village management, insurance, rates, and often some utilities.

Key questions to ask:

• What's included? Rates, building insurance, garden maintenance, activities, emergency call systems, and common area upkeep are typically included. Electricity, contents insurance, and internal unit maintenance usually aren't.
• What's the current weekly fee? Expect $80 to $200+ per week depending on the village and your unit type.
• How are increases calculated? Most contracts allow annual increases tied to CPI or a fixed percentage (often 3-5%). Some contracts allow the operator to increase fees at their discretion to cover costs.
• Can you be charged for capital improvements? Some villages can levy additional fees for major village upgrades (new facilities, earthquake strengthening).

Over a 15-year stay, weekly fees of $150 per week (increasing by 3% annually) would cost you approximately $143,000 in total. This is a significant ongoing expense to factor into your retirement budget alongside NZ Super and your other income sources.

Many retirement villages offer a continuum of care, from independent living to serviced apartments, hospital-level care, or dementia care. Your occupation right agreement should clearly outline:

• Priority access: Do you have guaranteed priority for a care bed when needed, or are you on the same waiting list as external applicants?
• Cost structure for care: What are the fees for rest home or hospital care, and are they competitive with standalone facilities in your area?
• Your unit while in care: If you move to the village's care facility temporarily (e.g., for rehabilitation), can you return to your unit? Do you continue paying weekly fees on both?
• Permanent care transfer: If you move permanently to the village's care facility, when does your ORA terminate and the exit process begin?

Some contracts allow you to retain your independent unit for a limited period (e.g., 30-90 days) if you're in temporary care, which can be valuable if you're recovering from surgery or illness. Others terminate your ORA immediately, triggering the exit payment process even if you stay within the same village for care.

This matters for both your care continuity and your finances. If the village terminates your ORA when you move to care, but your unit takes 18 months to sell, you'll be paying care fees for that entire period while waiting for your exit payment.

The Retirement Villages Act requires operators to provide you with a disclosure statement at least 10 working days before you sign an occupation right agreement. This document must include:

• The village's financial statements
• Full details of all fees (entry, ongoing, exit)
• The standard form of occupation right agreement
• Information about disputes processes
• Details of the village operator's experience and any related party transactions

This 10-day window is your opportunity to have the contract reviewed by a lawyer who specializes in retirement village agreements (general conveyancing experience isn't sufficient). You're also entitled to request a further disclosure statement update if more than three months pass between receiving it and signing.

Warning signs to watch for in the disclosure statement:

• Financial losses or declining occupancy rates in the village's financial statements
• Related party transactions that aren't at arm's length
• Unusual clauses in the standard ORA that differ significantly from industry norms
• Vague language around fee increases or operator discretion
• High turnover of units (could indicate resident dissatisfaction)

Don't waive your right to this 10-day period, even if the operator suggests it's just a formality. This is your protection under law.

Under the Retirement Villages Act, you have a 15 working-day cooling-off period after signing the occupation right agreement. During this time, you can cancel the contract for any reason and receive a full refund of your deposit and any payments made, minus the operator's reasonable legal and administrative costs (typically a few hundred dollars).

This cooling-off period runs from the date you sign, not from when you receive the disclosure statement. The timeline looks like this:

• Day 1: Receive disclosure statement
• Day 10+: Sign occupation right agreement (can't sign earlier)
• Day 10-25: 15 working-day cooling-off period begins from signing

After the cooling-off period, cancellation becomes much more difficult and expensive. The contract will specify cancellation terms, which typically involve forfeiting your deposit or paying a percentage of the purchase price.

Factors that might prompt you to use the cooling-off period:

• Your lawyer identifies problematic clauses during their review
• You discover the village's financial situation is worse than you understood
• You find a better alternative during your due diligence
• Family members raise concerns you hadn't considered
• Your financial situation changes (e.g., your house sale falls through)

The cooling-off period is your safety net. If you have any doubts, it's better to cancel and forfeit a small administrative fee than to be locked into a contract that doesn't serve you well.

When reviewing any retirement village contract, work through these questions with your lawyer and financial adviser:

About the DMF:

• What is the exact percentage and compounding method?
• Is there a cap, and if so, how many years until it's reached?
• Is the DMF calculated on the purchase price or resale price?
• Are there any scenarios where the DMF is waived or reduced (e.g., early death)?

About capital gains and losses:

• What percentage of any capital gain do I receive?
• Who bears the risk if the unit sells for less than I paid?
• How is the capital gain calculated (is it after or before the DMF is deducted)?
• Are there any circumstances where these terms change?

About exit timing:

• What is the maximum timeframe for receiving my exit payment after I vacate?
• Who controls the resale process and pricing?
• Do I continue paying weekly fees until the unit sells?
• Can I request early payment at a discount if needed?

About ongoing costs:

• What is the current weekly fee and what does it cover?
• How are weekly fee increases calculated and capped?
• Can I be charged for capital improvements, and if so, how much?
• What happens to fees if I'm away from the village for extended periods?

About care transitions:

• Do I have guaranteed access to the village's care facilities?
• What are the costs for different levels of care?
• Can I return to my unit after temporary care, and for how long?
• What triggers the termination of my ORA if I move to care?

If you're comparing multiple villages, create a spreadsheet with these questions as rows and each village as a column. The differences will become immediately clear, helping you make a more informed decision.

A retirement village contract is likely the second-largest financial commitment you'll make after buying a house, but it's far more complex. The financial implications stretch across decades and will affect both your retirement lifestyle and your estate.

You'll need two types of professional advice:

Legal review: A lawyer experienced in retirement village law (not just property law) should review your occupation right agreement before you sign. They'll identify unusual clauses, explain the exit payment process, and ensure your rights are protected. Expect to pay $1,500 to $3,000 for this review, depending on the complexity of the contract.

Financial assessment: The decision to enter a retirement village has major implications for your retirement income, your estate, and potentially your eligibility for the residential care subsidy down the track. Consider discussing your situation with a licensed Financial Advice Provider who can help you model the long-term costs and compare them to ageing in place alternatives.

Some questions a financial adviser can help you work through:

• How will the DMF and weekly fees affect my retirement income over 10, 15, or 20 years?
• Should I use KiwiSaver, sell investments, or tap home equity to fund the entry cost?
• What will the likely exit payment be under different scenarios (length of stay, property value changes)?
• How does this decision affect my estate planning and what I'll leave to family?
• Are there other housing options that might better suit my financial situation?

The upfront cost of professional advice is minor compared to the financial impact of entering a retirement village contract that doesn't suit your circumstances.

This article is general information only and does not constitute personalized financial advice. For advice tailored to your situation, speak with a licensed Financial Advice Provider. You can find a registered adviser at fma.govt.nz.