Lifestyle Communities shares plummet after tribunal voids exit contract clause

Lifestyle Communities (ASX: LIC) shares have plummeted 38 per cent to eight-year lows today, shaving off $325 million in value as the developer looks to appeal a tribunal decision that rendered its exit fee clauses in contacts with homeowners void.

It has now been almost a year since ABC's 7:30 current affairs program brought to light the concerns of some residents over Lifestyle's deferred management fees (DMFs) that start at 4 per cent and rise to a cap of 20 per cent in the fifth year of ownership.

As an example this means the company would take a $100,000 cut on a $500,000 property sale, even if it were only initially purchased for $300,000.

The program, which also contained other allegations around the company's practices including insensitive internal documents to target "Miss Lonely", saw its shares fall 16 per cent in a single day, equating to $250 million in shareholder value.

The situation went from bad to worse for the land-lease developer as profits fell and a small percentage of customers cancelled their deposits on homes. Amidst the turmoil, co-founder and managing director James Kelly retired at the end of 2024.

Claiming that many homeowners were "really offended" by the ABC's coverage, Lifestyle looked to hit the nail on the head and move on by expediting a hearing with the Victorian Civil and Administrative Tribunal (VCAT).

But the findings from VCAT this week were far from favourable for Lifestyle, determining the DMF clause in its residential site agreements (RSAs) was void due to the lack of disclosure of a precise amount.

Justice Woodward found that while the Residential Tenancies Act 1997 in Victoria does not prohibit a DMF, it must be capable of being accurately calculated on the date of entry into the RSA.

The judge considered that because the existing DMF clause is calculated as a percentage of the homeowner’s sale price, which is unknown at the time of entry into the RSA and will almost certainly be different to the purchase price, it is unable to be calculated as an amount at the time of entering into the RSA.

"Justice Woodward found that the DMF clause in the RSAs was void and unenforceable as it did not meet the requirements of the Act," Lifestyle stated in its update today.

VCAT received 83 applications on various dates in 2024 from residents of Lifestyle Wollert against the site owners, all primarily focused on the exit fee issue.

Whilst the latest findings in the tribunal involve only five named applicants from two Lifestyle Communities companies, the judge noted other Lifestyle Communities residents with claims or prospective claims will be indirectly affected.

Orders have not yet been made, and Lifestyle Communities has announced its intention to appeal the decision and apply for a stay of the orders until after the appeal is heard.

The company clarifies the decision does not trigger a breach of the loan to value ratio or the interest cover ratio covenants in Lifestyle Communities lending agreements, emphasising it will continue to engage with banking partners constructively as it undertakes the appeal process. It notes that operating cash flow is underpinned by rental annuity from more than 4,000 homes under management.

However, in the interim Lifestyle will amend its new homeowner contracts to "comply with the disclosure as articulated by Justice Woodward".

This means the cap of 20 per cent will relate to the property purchase price and not the sale price, although sales of properties under existing contracts will continue to operate under the existing contractual arrangements unless VCAT orders otherwise.

"We respect and acknowledge the rights of homeowners to seek clarity through VCAT on matters that are important to them and where we have been unable to reach agreement via our usual engagement channels," says chief executive officer Henry Ruiz, a former CEO of REA Group's (ASX: REA) REAx property research platform who joined Lifestyle Communities in March this year.

"We take our compliance obligations very seriously and have sought and obtained legal advice at various stages in our history to ensure our contracts are compliant with all relevant legislation. We are disappointed with the outcome of the VCAT proceedings and intend to lodge an appeal.

"Separate to the VCAT case, the company has refreshed its strategy and customer centred approach and was already considering enhancing the options we provide homeowners; including the handling of the DMF and rent on deceased estates."

Following the decision and pending an appeal, Lifestyle will also no longer charge rent on deceased estates.

"All other aspects of our existing contractual arrangements will remain the same," Ruiz says.

"We have high conviction over a DMF model as it practically lowers the entry costs for downsizers in the midst of a well-documented housing affordability crisis and helps release equity from their homes to boost their savings and improve living standards in retirement.

"The company has believed in the benefits of the model for over 20 years and we are pleased that the DMF model itself was upheld."

LIC shares are down almost 38 per cent at the time of writing at $4.37 - a level not seen since 2017 and signifying a $325 million loss in shareholder value today alone. Shares were trading at $12.57 prior to the ABC report in July last year.