17 Aug 2023


by Sifiso Msomi, Partner, Durban,
Practice Area(s): Property & Conveyancing |

Retirement developments are usually either based on sectional title, life rights or a combination of both. Although the concept of life rights in property is fairly established in South African retirement schemes, the concept remains quite vague amongst prospective buyers and therefore has been open to abuse.

In a life rights scheme, the basic concept is that an individual pays a sum of money in respect of a specific unit in the scheme and in return they and their spouse receive the right to live in that unit for the remainder of their lives. On the death of one spouse , the surviving spouse will be entitled to continue living in the unit until their death or until they sell the unit. The sum of money that is paid is a market-related and pre-determined amount which is often viewed as a lifetime of rental paid in advance. The payment of the sum will be set out in the sale agreement between the parties and will usually take the form of a deposit with the outstanding amount being paid within a few months of signing the agreement.

Although reference is made to the purchase and sale of a unit, there is no purchase of real estate but rather a purchase of the right to live in a specific unit. Therefore, the ownership of the unit is retained by the development and is not transferred to the individual. This results in their being no transfer duty payable and no registration fees. The property itself does not become an asset in the purchaser’s estate and therefore cannot be bequeathed to an heir in their will. Section 4A of the Housing Development Schemes for Retired Persons Act (the Act) ensures that life rights are afforded in the nature of registered leases as the right of occupation is only protected once the title deed has been endorsed to the effect that the land is subject to a retirement scheme.

Upon resale of the unit, the outgoing resident (or their deceased estate) receives a percentage of the market related resale price. The exact percentage will differ between each development but will be in relation to the number of years the resident occupied the unit. Therefore , the more years spent in the unit, the lesser the amount transferred to the outgoing resident. The amount retained by the development is usually used to subsidise the number of facilities provided by a retirement village. This therefore stabilizes the monthly levy and removes the risk of inflation and drastic increases in levy which could be of great concern to a retired person with a limited income.

These facilities also require control and maintenance in order to function adequately. In a sectional title development this burden is carried by the owners in the form of the body corporate, therefore the residents run the village themselves. In a life rights scheme the development remains responsible for the control and maintenance of the scheme. Therefore, the understanding of labour legislation with regard to employees and the professional medical management of the frail care facilities etc. will not become the concern of the residents.

A disadvantage of a life right is that a financial institution will generally not finance a life right property because of the lack of security. Retirement developments sold on a sectional title basis assist buyers in securing finance as this system allows them to actually acquire ownership of the asset. However, the fact remains that financial institutions will still take an individual’s age into consideration when they apply for a home loan, and with the National Credit Act in place, there is a greater risk on the banks when granting credit. Some banks will allow senior citizens to finance their purchase in a retirement village by means of a covering bond in which they put up their existing property as security for the loan. Therefore , an individual can buy off plan and remain in their existing property until the new property is built. Once they sell their existing property, they then pay off their loan.

Owners of life rights are protected by the Act as any reference in an advertisement to a life right or any concept of limited occupation in relation to the duration of the life of the purchaser shall be considered to be a right of occupation (life right) as defined in the Act and therefore will attract the protection of the Act.

Making the decision to downsize into a retirement village is always a delicate subject, especially as retirement age draws nearer. The reality is that retirement should be planned and approached with full knowledge of the particular development involved.

Should you require property law related advice, please contact me, Sifiso Msomi on 031 575 7113 / msomi@wylie.co.za.