Defining a Life Lease Agreement
A life lease agreement (also referred to as simply a life lease) is a type of contract which many developers of retirement residences in Canada have utilized for years to provide a secure residence for senior citizens. Unlike normal rental leases or the sale of a home, life leases are designed to provide a residence to a senior citizen for the balance of their life, or until they vacate the residence. A life lease generally takes on the structure of leasing the unit from a developer or management company while paying a one-time entrance fee similar to a down payment in the real estate market; an additional ongoing occupancy fee is paid equal to the monthly rent paid by a tenant. Some life leases operate much like condominiums or cooperatives in that under certain circumstances the operator may retain some control over the unit paid for by the resident and affect the ability to sell or transfer the beneficial interest in the property .
Life leases are popular with residents of retirement communities as they provide a single person or couple with physical space that may be their own for the remainder of their lives without concern for rising cost of the residence, and with many of the benefits of other independent living units such as meals. Life leases are popular among some developers of retirement residences as they provide security to owners without placing the burden of the initial capital costs of both the land and construction on the owner; life leases may often be purchased with funds held by insurers of the elderly or by taking a mortgage on the unit. In effect, life leases manage to achieve the desired end goal of the parties without the risks often associated with the usual structure in the sale of land. However, there are substantial risks that should be considered prior to entering into a life lease as the consequences of these agreements greatly affect the rights of the parties.
Features to Look for in Life Lease Agreements
In a life lease agreement, the tenant makes a substantial and long-term investment. The duration of a life lease agreement is not short-term, with the lease being registered against title to the property for the life of the tenants and their possible survivors. Although the tenant or tenants occupying the unit may engage in other activities or move away, the life lease agreement encumbers the property.
The financial investment is substantial as it is usually necessary for the tenant to pay considerable deposits prior to taking possession of the unit which are usually held in trust by the landlord with accrued interest payable to the tenant upon termination of the lease. The investment may easily be 20% or greater up to the market value of the leasehold interest. For the life lease tenant, there is likely to be very few options to recover any sizable portion of this deposit or investment made by the tenant or tenants ("tenants") upon termination.
The property is often built around the life lease tenant or tenants use so that the ability to rent the space to tenants other than the named life lease tenants is limited. In addition to the exclusivity aspect, the costs of the property may not go down significantly upon lease termination as the life lease tenants are often responsible for maintenance and other expenses associated with the property, therefore, the property may not appreciate in value in proportion to the investment made.
In considering a life lease agreement, the tenant(s) should consider whether they wish to give up the right to sell their interest in the property and if necessary seek agreement regarding what happens to their interest in the property if either tenant dies before the other. Are the tenants comfortable with the operations, maintenance and other potential expenses of the property if there is no longer anyone residing at the property that has knowledge of the operations? It is important to know if the landlord has an obligation to maintain the common elements. For example, is the telephone system included in the common elements? Are the parking spaces apportioned?
Life lease tenants are typically not tenants as defined by the Residential Tenancies Act, 2006, S.O. 2006, c. 17 ("RTA"), but instead life lease tenants have similar rights to owners of the property. The tenants are not protected from eviction pursuant to the RTA but, agreements are regulated by the Act. Life lease tenants could assign their interest in the lease agreement if the landlord permits it; otherwise, the agreement may be terminated by notice upon expiry. The tenant may apply to the Landlord and Tenant Board if the landlord unlawfully restricts assignment of the lease agreement. There is a 2-year limitation period for filing claims at the Board which runs from the date of termination of the lease agreement. Therefore, upon discharge of a Certificate of Possession the tenants should be aware of the limitation period in Canada.
Tenant(s) should seek independent legal advice and to have legal counsel review the lease agreement prior to signing.
The Benefits and Drawbacks of Life Lease Agreements
Understanding the specific advantages and disadvantages of life lease agreements can assist you in making an informed decision as to whether you would like to enter into a life lease agreement.
Pros
Financial Security. Since you are not expected to pay rent on the unit once you move in, life lease arrangements provide you with stability and make it easier for you to budget your retirement income. You no longer need to worry about annual rent increases. Instead you will expect to pay a monthly condo fee or maintenance fee for your unit. The monthly fee is usually worked out so that over the life lease term you should have expected to pay the developers investment in the residential property back.
Tax Benefits. Depending on the life lease agreement, you may find that you are paying less tax on the monthly fees you pay instead of rent. This could be the case as rent is not a taxable supply for HST purposes, however maintenance fees are. You could deduct for tax purposes the amount of GST paid on maintenance fees whereas as you cannot deduct HST paid on rent.
Cons
Limited Right to Property. Almost all life lease agreements restrict the rights of the unit owner. You will generally find that you are unable to rent or sublet your unit without the permission of the developer. You will also usually be required to have a purchaser approved by the developer before you can sell the unit. Also, some life leases only grant you occupancy rights to the unit until the end of the terms of the life lease and do not grant you any interest in the underlying property.
Resale Concerns. Life leases may require you to re-sell your unit through the developer. The model may work well if you wish to purchase a similar unit through the developer. However if you want to move away from the complex or do not wish to purchase another unit through the same developer you may run into problems. In addition it can be difficult to re-sell a life lease as many purchasers will not be familiar with life lease agreements.
Potential Inheritance Issues. Life leases do not allow the unit owner to pass their property rights down to their heirs. It may be difficult for your estate to collect on the sales of life leases as the developer will control the re-sale of a life lease.
How to Choose the Right Life Lease Community
When considering a life lease, it is critical to take the time to thoroughly research the community to ensure that you understand the nature of the community and your obligations to the governing body. As with any real estate purchase, it is important to review relevant information about the property and also to do your due diligence. You must ask: how long have the current residents lived in the community? What do those residents like or dislike about the community? Who manages the community? What are the physical features of the property? Are the apartments bright and sunny? Do the units have balconies? Are there laundry facilities available and are they accessible? How close are shopping and entertainment facilities? Does the unit have a storage locker? Is there a parking facility? Does it cost anything to use the parking spaces? Is the medal door lock protected against forced entry? What are the security measures? You should ask to see the last three years of budgets. What type of expenses does the community have? For example, what are the administrative costs? What are the general maintenance and upkeep charges? What are the utilities? Ask what the extra or unanticipated expenses have been for the past three years? Ask for an explanation of the specific financial terms and obligations: what specific fees must you pay each month? What charges will you be responsible for? Ask what the monthly fees cover. Make sure that you are comfortable with the community environment. Make sure that you can live within the community and you can see yourself continuing to live there into the future. You should also be given copies of the governing by-laws. Make sure that you understand the restrictions and obligations imposed by the by-laws and ask questions if anything is unclear. Be diligent in researching the community and ensuring that you fully understand your obligations before signing an agreement.
Life Lease Agreements: Important Legal Aspects
When entering a life lease agreement, it is crucial to understand the legal implications involved. Building owners and occupants will face numerous legal issues that will determine the success of this type of project. Every state has different laws and obligations relating to life lease agreements, so it is essential to get as much legal information as possible before moving forward.
While it may be possible to enter a life lease or life lease community without acquiring legal representation, it is not advisable to do so. Having a qualified legal professional who has experience in these unique properties looks over all the terms and conditions, requirements, and obligations of a life lease is crucial. A lawyer, for instance, may recognize employment laws and tax benefits that those involved in a life lease may not understand on their own. Determining how much money a property owner will save on taxes , or which labor laws apply to the life lease building or community, is usually the job of a legal professional.
From the resident’s perspective, it is also important to consult with a qualified legal professional with experience in life lease agreements. Like with any other type of housing association or community, life lease agreements have terms and conditions that are unique to each property. No two properties are alike, even if they are part of the same life lease community. A qualified legal professional will have the experience necessary to navigate the complex terms of the agreement and determine how to best protect the resident’s interests.
Whether you are a building owner or a resident, it is important to consult with legal professionals about life lease agreements. You could end up saving yourself thousands of dollars when it is time to file your taxes, or even avoid being considered an employee if you would have otherwise been classified as one.
How to Obtain a Life Lease Agreement
The specific steps to obtain a life lease agreement can vary across providers, but the process generally follows a consistent pattern. The first step is to thoroughly review the life lease agreement terms and conditions. It’s essential to understand what outcomes the agreement guarantees, such as maintenance and repairs, types of fees, and rules around occupancy. In this regard, it may be useful to consult an attorney who specializes in real estate or contract law to help clarify legal jargon or implications.
Once you are comfortable with the terms of the agreement, you should conduct a face-to-face meeting with the provider. A proper assessment of the suitability of a life lease agreement requires both parties to have an in-person discussion where each can ask questions and make clarifications. If the prospective provider does not offer an explanation or clarification of the facts and obligations in the life lease agreement, it is a good idea to check out other providers. An experienced attorney can assist you in negotiating a life lease agreement that serves both of your interests.
Before signing the agreement, you will need to secure financing if you plan to obtain it through that means. Life leases typically require one-time lump-sum payments that can be financed through various sources such as mortgages, savings, or other financial products. If you are opting for a mortgage, it is advisable to seek out your best options by comparing the interest rates and the provisions of the different offers. In the case you are able to pay a down payment by cash, it’s important to determine whether the life lease agreement permits you to remain in it if you can no longer meet the costs of living at the provider’s facility. It is highly recommended to consult a mortgage lawyer to help you navigate this stage.
Once the provider and you reach a mutual agreement and you have secured financing for your desired life lease, you can now sign the life lease agreement. The life lease agreement will outline all your entitlements, obligations, and restrictions during your stay at the provider’s property. Make sure you have reviewed everything with your lawyer or trusted adviser so that you are well aware of what to expect.
Your Guide to Life Lease Agreements FAQs
Are there additional costs when entering into a Canadian life lease agreement?
There can be other fees paid when purchasing or entering into a life lease depending on the terms of the life lease and the policies of the life lease issuer. While some life leases will be governed by the Condominium Act, some are not and will instead be governed by a separate set of by-laws. These by-laws can be quite detailed and costly to prospective purchasers.
In addition, prospective life lease purchasers must check their own province’s applicable legislation on these transfers to determine whether land transfer tax is payable on the conveyance of the property.
At what age can I sign a life lease agreement?
Life lease agreements are typically signed by prospective purchasers when they turn 55 years old. However, issue of age is not universal and can depend on the life lease. Life leases obtained from builders registered under the Ontario New Home Warranty Plan (ONHWAP) requires purchasers be age 55 or older . Other life leases offered by independent providers does not require purchasers to be 55 years old and may not permit a sale or purchase until the purchaser is at least 55 years of age. Check with the life lease issuer for their requirements.
Are monthly fees paid to address any repairs and maintenance on the life lease property?
In addition to life lease agreements, the builder may also require the purchaser to enter into a Contribution Agreement and Declaration. The party responsible for specific repairs and maintenance may vary depending upon the type of repair. In many cases if the amenity is common, all life lease owners would be responsible, through their monthly fees paid to the life lease issuer. If the amenity is individual to the owner, the life lease owner would be responsible. Again this will depend on the life lease and the individual circumstances of the life lease.
Are laundry facilities provided within the life lease?
Some life lease agreements will provide for individual washing and drying units while others may only provide communal washing and drying units for the use of the life lease owners. Check with the life lease issuer for their requirements.