Fixed method site fee increases becoming the trend
By Eloise Parrab
The Tenants’ Union have noticed a trend towards operators preferring to use the fixed method for site fee increases. This trend has many implications for home owners and will ultimately lead to higher site fee increases, well above actual costs incurred in operating and maintaining residential land lease communities by the operator.
There are two methods for site fee increases for home owners in residential land lease communities in NSW. The method for a site fee increase that applies to a home owner will be listed in the site agreement. The site fee increase method that is more common in communities is increase by notice. Under the increase by notice method operators are required to send a notice to all home owners to notify them of the amount of the increase, provide an explanation for the increase, and the date the increase will start (they must be given 60 days notice). It is very common for there to be little detail provided by the operator to explain the need for the increase to site fees and this can make the notice invalid. The good thing is that home owners can challenge this type of site fee increase if they believe it is excessive. They must apply for mediation with NSW Fair Trading first and if this fails can lodge an application at the NSW Civil and Administrative Tribunal (NCAT). During these processes home owners can argue that the increase is excessive and dispute the reasoning provided by operators for the increase. Operators are required to justify the increase and importantly provide information to the Tribunal on why they think the increase is necessary, which includes showing how costs have increased in operating the community. The Tribunal will look at evidence provided by the home owners and operator and decide on the amount of the site fee increase.
The second method for increasing site fees is the fixed method. This method does not receive the same level of scrutiny as increase by notice. In the site agreement it will state the fixed method that will be used to determine the increase to the site fees. This could be for a specified number of years or the duration of time that the home owner lives in the community. There can only be one fixed method for determining the amount of the increase. If there is more than one method in the site agreement the one that results in the lower or lowest increase applies. The troubling aspect of this method is there is no oversight by the Tribunal. There is no mechanism for a home owner to challenge a fixed method site fee increase as excessive. A home owner can challenge whether the method is actually a fixed method (i.e. fixed amounts or a fixed calculation) at the Tribunal but not argue it is excessive.
When we consulted with home owners and resident organisations in 2020 on the Statutory review of the Residential Land Lease Communities Act 2013 (RLLC Act) we received concerns that the fixed method increases are now commonly 3.5% or above and are presented by operators as ‘not negotiable.’ The Tenants’ Union has recently seen fixed method increases coming in quite high at 5%. With the move of operators to the fixed method there is no analysis about whether the operator’s costs have actually increased to the same extent as the increase in site fees. The operator is not required to provide any evidence of increase in costs and there is also no incentive for operators to maintain the community and communal facilities. While site fees increase steadily under the fixed method the communities facilities and services can be left to run down by operators.
As the fixed method for site fee increases that applies is set at the time the home owner is signing their site agreement with the operator, it is very difficult for the prospective purchaser to negotiate the terms of the agreement. They generally have no knowledge of the fixed method that applies to other home owners in the community. There is an unequal bargaining position of home owners and operators, if they don’t agree on the method or amount they have to walk away from buying the home. (Unless an assignment of the existing site agreement is made).
A much fairer approach would be for home owners to be given a choice on which method of site fee increase applies to their site agreement. This would then allow a home owner to make an informed choice weighing up the pros and cons on which method they want to have applied to their agreement. In a key recommendation of the RLLC Act Review, Fair Trading identifies making site fee increases simpler to understand and easier to predict.
In the meantime as part of the trend towards fixed method site fee increases, operators are encouraging home owners who are on site fee increase by notice method to sign new site agreements with fixed site fee increases for 10 years. One resident advocate Charles Dalgleish who is the Chairperson of Teraglin Lakeshore Resident Committee and a member of the NSW Residential Land Lease Communities Forum has done the sums for his community. All home owners in the community on increase by notice received a letter offering to lock in an annual fixed method site fee increase of 3.25% for the next 10 years. The proposal by the operator will mean that in 10 years time, a home owner currently paying site fees of $364.90 per fortnight will be paying $518.75. This is an increase of $153.85 per fortnight which is a 42.16% increase in the site fee over the 10 years due to the interest compounding each year. Charles has compared this to the site fee by notice increases (which have an explanation for the increase) that have been negotiated through mediation for the previous 9 years. In the past 9 years the site fee increase for those on the by notice method apart from one year has always been less (sometimes considerably less) than 3.25%. Moving to fixed increases for site fees might give the home owners certainty but going on the experience of this community it will lead to home owners paying very high site fees which may become unaffordable for many and importantly cannot be challenged and require no explanation from the operator.
Ideally we would like home owners to have the right to apply to the Tribunal regarding a fixed method increase in some circumstances. Particularly if other home owners in the community have received a lower increase by notice or the Tribunal has ordered a lower increase for other home owners after looking at the evidence from both parties. This would help to try and ensure that the fixed method increases are consistent with the operator’s increase in costs and the condition of the community. This would help to better balance the rights of home owners and operators.
Understandably many home owners do prefer the fixed method as it gives them certainty and they often do not have the desire, skills or confidence to challenge an excessive site fee increase. This needs to be balanced against the real risk that if fixed term method increases are left to continue to rise without any scrutiny many home owners will find their site fees become unaffordable in the not too distant future.
This article was published in Outasite magazine issue 8. Outasite is published annually. Outasite Lite email newsletter, is sent several times a year – subscribe here. All past issues are available in the archive.