Buyer Beware: home ownership in land lease communities
By Paul Smyth, Land Lease Communities Solicitor at the Tenants' Union of NSW
When someone is buying into a residential land lease community (RLLC) the home purchased is either from the current home owner (vendor/ seller) or from the operator of the community selling a home. Over the past few months the Tenants’ Union has received a number of queries from residents and from advocates (acting on behalf of prospective residents or for current home owners). The queries about matters particular to home ownership included the following:
- How does a home owner evidence the ‘title’ they have to or the ownership of their home?
- What is the legal effect of a Disclosure Statement? And questions about the content of disclosure statements including what are ‘voluntary sharing arrangements’ or ‘shared equity’ in a home.
- What should a contract for the sale of a home in a land lease community contain?
How to evidence ‘title’ to the home?
The purchase deed or contract for sale of a home is the best and often the only documentary proof of ownership of a home in RLLCs. It is important that the document is kept safely, preferably together with a site agreement. There is no central register in existence in NSW for ownership of manufactured homes or other homes in RLLCs that is similar to, for example, the central registry of the Land Registry Service that has ‘land title guarantee’ and an assurance fund (the ‘Torrens Assurance Fund’) which provides compensation for any loss suffered as a result of either fraud or error in registration.
The majority of residents in RLLCs in NSW do own their home on the residential site. However, you lease the land
where the home is located from the operator of the community or the owner of the land on which the community is located. Your site agreement is a lease giving rise to valuable rights (as well as obligations) but it’s important to remember that they are leasehold rights only. A home owner has no equity in the land itself. Homes in land lease communities are defined as ‘chattels’ and not real property.
The standard form site agreement under the heading of important information sets this out clearly at point 4 “occupation of the residential site is a leasehold right only. [This] agreement may, in limited circumstances set out in the Act, be terminated”.
The contract for sale/ purchase of a home
The vendor (seller) warrants that they are the legal owner of the home on the residential site. This is the starting point for any sale procedure, particularly after a home owner has given the operator of the community a notice of intention to offer their home for sale (before actually offering it for sale).
What terms should the contract contain?
Ideally at a minimum the contract should contain the names of the parties, the date of signing, the contract price and the amount of deposit payable. The contract should provide that on payment of the balance of purchase monies (i.e. on completion date) ownership of the home shall pass to the buyer and the buyer shall be entitled to vacant possession of the home on site.
When the purchase monies is fully paid and possession of the home is handed over to the buyer; the vendor/ seller has warranted that the home is provided free of all encumbrances whatsoever, whether by way of chattel mortgage, bill of sale, sub lease agreement or other arrangement, or any restriction, legal covenant, charge or lien. This provision in relation to encumbrances will protect and indemnify the buyer or incoming resident from any adverse claims. Any encumbrance that adversely affects the use of, or ability of the home owner to transfer legal ownership of the home should be satisfied and discharged (for example by way of Deed of Discharge) at the date of settlement. Encumbrances are any burden or claim, right or legal interest in the home.
A term regarding the contents or certain fixtures of a home for example, the interior fittings, white goods (air con units, refrigerators, dryers, washing machines) and exterior items like satellite dishes, solar panels can be included in the contract for sale of a home by way of a schedule of inclusions list. An exclusions list may also need to be drawn up to provide certainty to the parties about what items are not included in the sale.
Other terms and conditions that may be included in the contract?
The Agreement (contract for sale) may be made subject to approval of the RLLC operator to the purchaser being offered a site agreement or an assignment of the existing site agreement between the operator and the vendor to the incoming purchaser by way of a Deed of Assignment. There can also be a cooling off period term included in the contract which would allow for the contract to be rescinded (i.e. revoked or cancelled). Some operators insist on the production of clean police checks from NSW Police being provided by incoming prospective home owners before approving an application for residency in their community.
It is vitally important for any prospective home owner to get a Disclosure Statement from the operator detailing fees and charges payable including site fees, services and facilities and other important mandated information about the community. This information should be carefully checked against what is contained in the contract for sale of the home and the proposed terms of a site agreement.
The Statutory Review Report of the RLLC Act 2013 tabled in the NSW Parliament on 29 November 2021 made a number of key recommendations for reform of the RLLC Act including greater transparency for prospective home owners with the proposed introduction of a ‘sale information sheet’ for all prospective home buyers. This is a welcome development.
Obtaining an appraisal or independent valuation of the value of a home for sale on site may be recommended. In addition, getting an inspection pre-purchase for example for termites (white ants) or other pests, and to check structural integrity of a pre-loved home is advisable. If there is a selling agency agreement you can check the agent’s licence with NSW Fair Trading and get advice on the amount of commission proposed to be charged by the agent on the sale of home on site.
Part 10 RLLC Act 2013 (NSW)
This part of the RLLC Act deals with the sale of homes in RLLCs. Pay particular attention to your obligations as a home owner regarding what you need to do before offering your home for sale.
For prospective home owners and downsizers selling their bricks and mortar and considering moving to a RLLC there are many important things to think about after you have seen the glossy sales pitch or youtube videos showing the lifestyle. Under the Real Property Act 1900 and the Torrens title system, land title is guaranteed by the NSW State Government. In effect, the State Government promises that the registered land owners recorded in the NSW land title system are the true owners of their land. There is however, no equivalent for residential land lease communities. Make enquiries, try to speak to residents or residents committees in the community you are contemplating moving to.
Shared equity agreements or voluntary sharing agreements
Arrangements like shared equity are an alternative to buying an expensive home outright. Parties retain an equity share in the home. The home owner however, has to fully insure the home. There is no sharing of the cost of home insurance. The home owner is also responsible for the full cost of maintenance and upkeep of the home. Shared equity agreements usually contain terms regarding entry fees payable, an exit fee and opportunity fees. Opportunity fees are where any capital gain on sale of the home on site is payable to the operator as specified in the voluntary sharing agreement or shared equity agreement. Capital gain is defined in section 110 RLLC Act 2013.
Prospective home owners are strongly encouraged to obtain independent legal advice before entering into any shared equity agreements or voluntary sharing agreements with operators, as vendor of the home. You might be able to get some advice from your local Community Legal Centre: www.clcnsw.org.au or your local Legal Aid office: www.legalaid.nsw.gov.au
A case study
An incoming home owner entered into a Shared Equity Agreement (SEA) with a term of a $3,000 entry fee payable by the home owner – this was offered by operator in return for a $14 per week ‘reduction in site fees’ under site agreement for duration of the site agreement. However, some 3 years after entering into the arrangement the home owner discovered they were actually paying the same site fees as their near neighbours in the community. So in effect under the SEA the home owner paid $3,000 to their operator for nothing in return.
Some prospective home owners have confused shared equity with vendor finance or loans that are sometimes offered by operators as vendors of homes or new homes where a purchaser does not have the full purchase price up front of the home being offered for sale.
In one case we are aware of a purchaser looking at homes in a community to buy. The purchaser spoke with the operator’s representative and looked at homes in the RLLC. The discussion turned to the option of possibly buying a new home to be located on a vacant residential site. The purchaser disclosed that their maximum budget for a new home was $285,000. The operator had an associated manufactured home building company. There were ultimately many questions about the pre-contract disclosure and the subsequent agreement and
shared equity arrangement. The operator said the agreement to build the home was between it and the builder (that was an entity in the holding group of operator companies). The new home owner was ultimately hit up for $335,000 after she had sold her own property and was ready to move and now feared becoming homeless. During a heated discussion with the operator about the price hike the purchaser was offered shared equity. The purchaser didn’t obtain any independent legal advice on the documents given and felt pressure to agree to what the operator offered.
There are a number of important checks that any potential purchaser should carry out before buying a home. By ensuring prospective home owners are aware of what to look out for in the contract for sale, disclosure statement and site agreement hopefully they can protect themselves from some of the pitfalls we have outlined in this article. If in doubt or unsure about any terms or conditions we strongly encourage prospective home owners to seek legal advice.
This article was published in Outasite magazine issue 9. Outasite is published once or twice annually. Outasite Lite email newsletter is sent several times a year – subscribe here. All past issues are available in the archive.