Aged care and retirement village disposals and acquisitions
By Julie McStay20 Aug 2014
Since the commencement on 1 July of the latest aged care reforms and as the property sector warms up we are seeing increased activity in the development and sales of both aged care facilities and retirement villages. In this article we consider some of the key issues that parties are likely to face in buying or selling a residential aged care facility or a retirement village.
If you are intending to buy or sell a residential aged care facility and/or retirement village it is imperative that the sale is structured in a manner to best suit your needs from a commercial and operational perspective as well as to limit the inherent risks with any transaction of that type.
Contracts and structure of transaction
The nature and content of the sale contracts are vital. A standard ‘off the shelf’ type contract is typically inadequate to cover the unique circumstances of each individual sale.
When buying or selling an aged care facility or retirement village a threshold issue is whether the transaction is structured as a share sale or an asset sale.
In a share sale you buy the actual corporate seller entity (warts and all) whereas in an asset sale you buy the property that makes up the facility and business. You need to consider the risks and benefits of each approach from both a liability and taxation/duty perspective.
Usually there will be a contract for the real property (being the land and buildings) and a separate contract for the business and other assets (can be either or both a residential aged care facility and/or retirement village). While less common, some transactions may involve the purchase of the business of operating the facility/village only – in those cases there would need to be a lease or other arrangement in place for the use of the land and buildings for the buyer as operator after settlement. This type of transaction can be more complex and will usually involve a higher level of scrutiny from regulators.
The contracts must clearly set out the assets and liabilities that are being transferred (or not transferred) between the parties for the agreed purchase price as well as timing for various stages during the transaction.
The contracts should be subject to various conditions being satisfied before the parties are committed to the sale and purchase, including:
- due diligence
- finance / board approval
- application for the transfer of aged care allocated places (bed licences and home care packages)
- application to be an approved aged care provider (for new providers only)
- consents of residents to the transfer (if required)
Other matters to consider include the following:
- warranties and indemnities
- adjustments to purchase price
- tax benefits or subsidies
The above is not an exhaustive list of the issues that may be relevant to a particular transaction.
A buyer should consider the warranties and indemnities provided by the seller as the buyer will usually inherit all liability of the seller entity after settlement. There is always an element of commercial risk but including the proper provisions will seek to limit that risk to a manageable level.
A prudent seller will also want to include some correspondence warranties and indemnities from the buyer, mainly in respect of anything that happens after settlement.
From a buyer’s perspective a thorough due diligence is critical. Effective due diligence should give a buyer far greater clarity on what they are buying which is of course essential to setting price as well to limit the buyer’s risk of any costly surprises post-settlement.
It will also give the buyer a chance to seek a response from the seller on any issues that arise while they still have that leverage – once the contract is unconditional the seller will generally be less motivated (and definitely less obligated) to provide any such assistance.
From a seller’s perspective it may be that the deal is structured on the basis that the buyer’s recourse is limited once they conduct their due diligence enquiries. As an example that could mean if there were any issues reasonably discoverable by a prudent due diligence then the seller wears no liability in respect of those issues.
Ultimately the actual content of any particular due diligence will depend on the nature of the sale and each buyer’s particular circumstances and expected outcomes.
At a minimum a buyer should seek legal and accounting advice as part of their due diligence. They should also consider planning consultants, building professionals and to assist with the due diligence process depending in the nature of the assets being purchased.
While there is naturally a cost for a buyer in engaging the right professionals for due diligence, it is an investment that will both:
- give that buyer piece of mind regarding the purchase to ensure any issues are dealt with before settlement where possible; and
- shift the risk relating to the acquisition onto those other parties.
Some key considerations that apply specifically in the aged care context are listed below:
- the resident/care recipient agreements – it is important to review (at a minimum) a sample of the agreements to check for compliance but also to consider whether any particular arrangements have been offered to any resident that the buyer will have to meet post settlement
- any significant capital expenditure issues that will need to be addressed such as fire safety requirements post settlement
- employee entitlements and/or short falls that you will have to address post settlement, rosters and staff mix
- any significant outstanding compliance issues under the Aged Care Act
- any outstanding litigation including WHS prosecutions, civil claims or coronial matters
- any significant ongoing resident complaints that have been long standing and are likely to create significant operational drains post settlement
- the value of the bond pool
- the nature and type of allocated places being sold as part of the assets and any conditions attached to the places to be transferred
Some key considerations that apply in the retirement village context are listed below:
- types of tenure – it is important to look at what type of tenure applies to the village – that may affect your profitability and also perceived attractiveness of the units to prospective residents in the market. Some residents may prefer the perceived security that a registered lease provides in contrast to a licence.
- different financial models/deals – there can be various models which apply in one scheme. The scheme operator may have also agreed to various one-off arrangements with residents which would affect a buyer as the new scheme operator on their departure.
- whether there are any rental arrangements in the village
- financial due diligence – this is crucial especially with respect the village funds as the buyer may inherit any issues or deficiencies after settlement
- checks undertaken for those persons in decision-making positions
Other issues and considerations
Buyers should also consider the following as part of the process:
- duty exemptions – depending on the circumstances not-for-profit organisations may be entitled to a total or partial exemption of transfer duty payable on an acquisition.
- operators and providers will also need to manage aged care document reviews, retirement village turnovers and ongoing legal and compliance issues post-settlement.
It is vital that any transaction is structured properly and that you obtain the right advice along the way to avoid any unexpected issues and to limit risk. We are well placed to assist both sellers and buyers at each step in the transaction.
This article is only intended to highlight some of the issues you need to consider in the purchase of an aged care facility or retirement village scheme. The matters listed above are by no means an exhaustive list of issues to be considered, but they are the first things you should consider in any transaction in the aged care and retirement living industry.
For further information on buying and selling an aged care facility please contact Julie McStay.