To have and to hold – ‘life right’ explained

Buying property is a big decision at the best of times, but when you’re buying into a retirement scheme, there are other issues to take into account.

The biggest of these is probably whether to buy freehold, sectional title or life right. Most people have a pretty good idea of what freehold and sectional title are about, but life right is still a bit of a mystery, so let’s unpack that.

Life right is really simple. You pay a certain amount up front for the exclusive use of a cottage, house, flat or some other unit for the rest of your life. You treat it as if you own it. There are a lot of advantages, but there is one big disadvantage – namely that you will miss out on any capital gains on the property when it is sold back to the developer (which will probably be when you die). And that, really, is the big trade-off. When you buy into a life-right scheme, you are buying, basically, security. Rob Jones of Shire Retirement Properties explains that this is security of tenure, physical security, health security and financial security. And each of these is equally important.

Security of tenure

Life right is forever! So the most important thing to consider when buying a life right in a development is whether this really is where you want to live for the rest of your life, because it’s likely this will be your last property purchase. Yes, it’s important to think logically and clearly about all the financial and other implications, but you must also think with your heart. Buying a life right is a bit like getting married – to have and to hold, from this day forward, for better, for worse, for richer, for poorer, in sickness and in health, until death do us part.

And, like a marriage, it’s a two-way commitment. The developer is every bit as dependent on the health of the relationship as is every resident. So security of tenure is an absolutely basic construct of the life right system and is well covered by the Housing Development Schemes for Retired Persons Act (Act 65 of 1988)(RPA). In a nutshell, once you have bought a life right, the developer is stuck with you. And you’re kind of stuck with the development. Yes, you can sell your life right, but, much like getting divorced, you will almost certainly lose out financially.

Physical security

This is one of the big advantages. There is no homeowners’ association and, once you have bought a life right, you hand over responsibility for the maintenance and security of the community to the estate management. It’s up to them to ensure that everything works – including the fencing, alarm systems, patrols and security personnel. If the roof blows off, it’s their problem, not yours. And it is in their financial interests to ensure the happiness of residents, because, if there is lots of grumbling and complaining, they will struggle to resell life rights once they become available.

Health security

This is another big plus. Most retirement estates incorporate some level of frail care because, much as we don’t like to think about it, old age does come with some real physical and cognitive challenges. Before buying a life right, check carefully what your financial obligations will be if you are in frail care and, even more importantly, what constraints there are on staying in your own home.

There is a sad story of a woman who had a couple of really bad falls in her cottage in a retirement development, and the management would not allow her to employ a full-time carer, so she was forced to go into frail care, where she has been languishing for nearly two years. Frail care is not fun so, while it’s important that it’s available, it’s more important that there are other mechanisms that will allow you to remain more independent if your health deteriorates.

Financial security

One of the big advantages of a life right is that it is far more economically viable than renting, and often the price of a unit is less than it would be in a freehold purchase. Another really great aspect of life right is that if you can’t quite afford the purchase price, some developers will decrease the initial purchase price and, to compensate, decrease the percentage of the reselling price that will be paid into your estate.

It is important to understand that you will still be liable for levies, so do your homework carefully, or you may get a bit of a fright after a few years. The RPA states that the developer must specify what the levies will be for the first two years, but after that, it’s open to negotiation. The developer is under no statutory obligation to stipulate levy increases up front, but you should insist that they are outlined in your purchase agreement. Evergreen, for example, states that levy increases may be raised not more than once annually, and no more than CPI plus 1.5%.

The RPA is a bit vague on special levies, and some developers believe that they will be able to deduct special levies when necessary, if this is stipulated in the purchase agreement. As far as we are aware this has not been tested in court, and it will be interesting to see what happens the first time someone tries. Also check what other obligatory charges there may be. You really don’t want to be required to pay for meals if you aren’t going to eat the food provided, or to contribute hundreds of rands a month to a group membership of the golf course next door if you don’t play golf.

But there are two sides to financial security. It’s all very well having restraints on levy increases, but that’s not going to help you if it results in the development having insufficient funds for maintenance and management. So, before buying a life right, check on the reputation of the developer, and the financial viability of the levy base. As a rule, larger developments will have the advantages of economies of scale if they are using, say, 500 or 1 000 levies to pay for security, maintenance, gardening, etc., whereas a small estate of 50 units may struggle. But that’s a generalisation. Some people prefer to be in a small community, and are willing and able to pay the proportionally higher levies. Do your sums carefully before committing.

And that’s what it’s all about, really. Buying a life right is deciding to commit to a particular place and lifestyle and, in return, getting those four securities.