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Supreme Court of Appeal places “life-rights” under the spotlight

Fasken
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Overview

The development of residential estates has been a growing trend in the South African property market over the last few years.  The main reason for this trend is the ever-increasing consumer demand for lifestyle communities that provide all amenities in one space.

The same trend applies to housing developments in the retirement sector – long have the days passed when the only available choice was to retire in an old age home.  Several options are available for middle and higher-income groups with a wide range of lifestyle choices, including sports facilities (even a golf course in a golf estate), medical facilities, meal services, assisted living, and frail care services.

One of the options[1] available to a retired person[2] is to acquire the “life-right” to live in the development, which essentially means the right to occupy the unit for the rest of the retiree’s life.  These rights could include using the available ancillary services in the development by paying a monthly levy to the managing agent – all the reason why it makes sense that these types of developments are generally known as “retirement villages”.

As it is evident that life-rights holders can easily be exploited, the Housing Development Schemes for Retired Persons Act[3] (“the Act”) regulates the alienation of life-rights and ancillary matters. 

From a developer’s perspective, the Act can be pretty restrictive.  This can be seen in the judgment of the Supreme Court of Appeal (“SCA”) in Flower Foundation Pretoria Homes for the Aged NPC v Registrar of Deeds, Pretoria and Others[4] (“Flower Foundation judgment”), which turned on the interpretation and application of section 4B of the Act, that prohibits the alienation of the property without 75% consent of life-rights holders.

In this note, we will give a high-level overview of the Act’s provisions protecting life-rights holders, the facts and judgment of the SCA in the Flower Foundation judgment and some key takeaways for developers of retirement villages.

Protection of life-rights holders in the Act

The objects of the HDS Act have been described[5] as:

The Act falls within the category of what might be termed as “social” or “consumer protection” legislation. Its object is to protect elderly or retired persons investing their savings in a housing development scheme from possible exploitation by a developer.

Examples of the protection of life-rights holders (or as described as “holders of housing interests” in the Act) are:

  • Sections 2 to 4 of the Act provide in considerable detail what a contract for the acquisition of a housing interest by a retired person should contain, e.g.:
    • Details as to precisely what he is acquiring and what his obligations will be;
    • Details of what other facilities or services will be provided (which also binds the developer to provide the promised facilities and services);
    • If the property is unencumbered, keep it unencumbered;
    • The developer must estimate, three years in advance, what the scheme’s upkeep is likely to cost.
  • Considerable security is given to a life-rights holder in terms of sections 4A, 4B and 4C:
    • The title deed of the property must be endorsed by the Registrar of Deeds that the property is subject to a housing development scheme; in other words, this creates a real right in favour of the life-rights holder; and
    • The rights of a life right holder are the same as those granted in a registered lease and prioritise any other right, whether or not such a right has been registered or endorsed against the title deed.
  • Importantly, section 4B prohibits the alienation of the property without the written consent of 75% of the life-rights holders.

The acquisition of life-rights is generally an affordable route available to a retired person – the consideration payable is usually considerably lower than acquiring ownership in a sectional title unit.  The consideration could be structured as an interest-free loan or a purchase price and is ordinarily payable on occupation.

On termination of the life-rights contract, a percentage of the consideration will be refunded to the life-rights holder or their estate. From a capital growth perspective, this may be unattractive to an investor – there will be no capital appreciation of what would happen if the investor were an owner of a sectional title unit.

The refund of the consideration or the agreed portion thereof will be suspended until the developer sells the life right in respect of the relevant unit to a new purchaser and receives the consideration that the new purchaser paid.

In addition to the consideration, the life-rights holder will be responsible for paying a monthly levy regarding the residential unit, similar to the levy payable to a body corporate of a sectional title scheme. The levy contributes to the scheme's control, management and administration costs.

As the effect of the Act and the contractual terms can be pretty complex, it is advisable that a life-rights holder understands the contents of the contract and what is offered in the scheme.

The Flower Foundation judgment

The SCA heard an appeal against the decision from the Gauteng division of the High Court, Pretoria, dismissing the appellant’s application to declare that an agreement selling part of the property does not transgress the provisions of section 4B of the Act.

The appellant is the registered owner of a property in Groenkloof, Pretoria. The appellant established a housing development on the property in 2001, and the title deed was endorsed as such in terms of section 4C(3) of the Act.  The development consists of 39 rental units or guest rooms, of which 19 are life-rights. The sale agreements of such life-rights owners were drawn in compliance with the provision of the Act.

In February 2018, the appellant had general meetings with the life-rights owners, informing them of the intention to sell a portion of the property on which the communal hall is situated.  The appellant sought the consent of the life-rights owners, but only two gave their consent.

Notwithstanding being unable to get the consent, the appellant concluded a deed of sale and option agreement in July 2018.  In terms of this agreement, the appellant intended to sell a portion of the property to use it for a mixed development consisting of medical-related uses, offices and/or residential uses.  The agreement was subject to the fulfilment of the following suspensive conditions:

  • approval by the relevant authorities to subdivide the property;
  • approval of the amendment of the town planning scheme to allow the development on the property;and
  • approval is granted in terms of section 4 C of the Act by 75% of the life-rights holders for the sale of the property and the alienation thereof to the purchaser.

The majority of the life-rights holders refused to give their consent, despite being called upon to do so by the appellant’s attorneys, and an application to court would follow.  The appellant approached the court in which the matter was heard for an order declaring that:

  • that the proposed transaction does not transgress the provisions of section 4B of the Act;
  • the consent of life-rights holders is not required where only a portion of the property is alienated;
  • the subdivision and the alienation and transfer of the subdivided property are not null and void as contemplated in section 4B(2) of the Act; and
  • the registrar of deeds be authorised to transfer the subdivided property to the purchaser.

The court that was hearing the matter dismissed the application and held that the consent of the life-rights holders was required, as the housing scheme was established on the entire property.

In the SCA, the appellant contended that the housing scheme was only established on the part of the property; in other words, the life-rights holders’ interests are limited to the occupation of their respective units only and their rights of occupation are not affected by the contemplated sale.

The SCA dismissed the appeal on the following basis:

  • the title deed of the property was endorsed in terms of section 4(C) of the Act – as there is only one property and one title deed, the housing scheme was established on the entire property and not just a portion thereof;
  • the life-rights holders bought into a scheme as described in the title deed, which is supported by the wording in the sale agreements in terms of which the life-rights holders acquired their interests, that they have to pay a monthly levy for amongst other services for roads and access, internal street lighting and security services. This confirms that they were paying levies in respect of the entire property and not only a portion;
  • as there is only one title deed, and if it were intended that only part of the property would be used as a housing interest, the endorsement would have stated that; and
  • the text of section 4B of the Act must be interpreted purposively, namely that it was intended to “…provide protection to the life-rights owners against possible exploitation by a developer. Section 4B clearly prohibits the appellant from alienating the proposed portion of the property without the 75% consent of the life-right owners.[6]

Conclusion

As discussed, the restrictive provisions of the Act may make it unattractive for a developer to use the life-rights structure in a retirement development. 

In order to avoid the deadlock effect occurring, as illustrated in the Flower Foundation judgment, it is advisable to fully disclose the medium to longer-term plans to all residents.  If the life-rights holders know about any plans to extend or sell off parts of the property when they sign the sale agreement, it is less likely that they will withhold their consent in due course.

A developer can also obtain subdivision of a property before establishing a housing scheme, which means that subdivision and the consent of the life-right holder will not be necessary.  This would be a relevant consideration where development is done in phases – it would be best to have a separate title deed for each phase which can be endorsed.

For a retired person, the provisions of the Act grant not only security of tenure but also protection from being exploited.  It is no wonder that several high-end retirement developments[7] make use of this structure.



[1] Other options include, for example, ownership of a sectional title unit and leasing the unit in terms of a lease agreement.

[2] The Act refers to a person of 50 years and older, but a developer could impose a higher age. Other options include, for example, ownership of a sectional title unit and leasing the unit in terms of a lease agreement.

[3] Act 65 of 1988.

[4] (942/2020) [2022] ZASCA 8 (20 January 2022).

[5] In Eden Village (Meadowbrook) (Pty) Ltd v Edwards and Another 1995(4) SA 31 A at 44 A-F as quoted in [15] of the Flower Foundation judgment

[6] At [17] on page 7.

[7] https://www.valdevieevergreen.co.za/about-life-right/

https://flower.org.za/independent-living/elm-park-village/

Contact the Author

For more information or to discuss a particular matter please contact us.

Contact the Author

Author

  • Johan Coetzee, Partner, Johannesburg, +27 11 586 6044, jcoetzee@fasken.com

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