When a Developer is establishing a retirement village one of the first decisions that it needs to make is to determine what the underlying legal nature of the scheme will be. In this regard Developers generally have three broad options available to them, these being distinguished from one another by the nature of the right which a prospective purchaser will acquire. These three options are:
- Schemes where the prospective purchaser will acquire full ownership of a unit or house;
- Schemes where the prospective purchaser will acquire a “lesser right” than full ownership; or
- A mixed-use scheme, in terms of which the above two options are made available to prospective purchasers.
One of the most popular lesser rights which a Developer can grant to a purchaser is what is commonly known as a “life right”. In this article we will give a basic outline of what the legal nature of such rights are, and look at the benefits of same.
Life rights are regulated by the Housing Development Schemes for Retirement Persons Act 65 of 1988 (“the Act”), which provides protection for the holders of such rights. In essence, when purchasing a life right a purchaser is acquiring the right to live in a particular unit within a retirement village for the duration of his or her lifetime, or until he or she decides to sell such right, whichever event is first occurring.
It is important that particular attention is paid to the contract in terms of which the life right is acquired, as this will set out the basis on which the life right will be valued in the event of death or the sale thereof. A common clause contained in life right agreements provides that on the death of the holder thereof the right will revert back to the Developer, and the Estate of the holder will be paid an amount equal to the initial investment together with a percentage of the profit which the Developer makes on resale of the right to a third party. In this way the holder of a life right can benefit from the capital growth of his or her investment, but not to the same degree as if he or she had acquired outright ownership of the unit in question.
Some of the protections offered to holders of life rights by the Act include the following:
- Section 4(1) sets out what information must be contained in the contract in order for it to be valid, including the fact that the Developer must disclose whether the property is bonded, if so, how much is owing on the bond as well as giving an undertaking that a further bond will not be taken out;
- Section 4A provides that the holder of the life right will have the same rights as those held by a lessee in terms of a long lease that has been registered against the Title Deed of the property concerned (this gives additional strength to the right);
- Section 4B prevents the Developer from alienating the property unless at least 75% of the holders of life rights have consented thereto. Furthermore, if such vote is passed and the property is sold the holder of the life rights will have a preferential claim against the proceeds of such sale, and must receive an amount equal to what such person paid to acquire the life right;
- Section 4C provides that the title deed of the property must be endorsed to the effect that such land is subject to a housing development scheme.
From a prospective purchaser’s point of view purchasing a life right can be advantageous, as they are generally cheaper than acquiring full ownership of the unit in question. Furthermore, given the unique nature of such rights the Act contains specific provisions to protect the holder thereof as set out above.
Prospective purchasers must however bear in mind that close attention should be paid to the contract in terms of which the right is acquired, the fact that such rights cannot be bonded (the purchase price will therefore have to be secured in cash) and the fact that such rights cannot be bequeathed in a Will to beneficiaries.
Article by David Campbell