Body Corporate 177519 v Lai
[2014] NZHC 3381
•19 December 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-006408 [2014] NZHC 3381
BETWEEN BODY CORPORATE 177519
Plaintiff
AND
YUEN HAN LAI and ORS First Respondents
ASB BANK LIMITED Second Respondent
Respondents continued over
Hearing: 16 - 18 June 2014 Counsel:
C Baker for the Plaintiff
M K Macnab for the RespondentsJudgment:
19 December 2014
JUDGMENT OF DUFFY J
This judgment was delivered by Justice Duffy on 19 December 2014 at 4.30 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Counsel: M K Macnab, Auckland Solicitors: Price Baker Berridge, Waitakere Copies To: R P Kaur, Auckland
R S Wood, Auckland
BODY CORPORATE 177519 v LAI and ORS [2014] NZHC 3381 [19 December 2014]
ANZ BANKING GROUP (NEW ZEALAND) LIMITED Third Respondent
ANZ NATIONAL BANK LIMITED Fourth Respondent
BANK OF NEW ZEALAND Fifth Respondent
COUNTRYWIDE BANKING CORPORATION LIMITED (now trading as ANZ NATIONAL BANK LIMITED) Sixth Respondent
KOOKMIN BANK Seventh Respondent
LLOYDS TSB MERCHANT BANK LIMITED
Eighth Respondent
MORTGAGE HOLDING TRUST COMPANY LIMITED
Ninth Respondent
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED Tenth Respondent
WESTPAC NEW ZEALAND LIMITED Eleventh Respondent
ALLIED PRIME FINANCE LIMITED Twelfth Respondent
NATIONAL AUSTRALIA FINANCE (ASIA) LIMITED
Thirteenth Respondent
GERALD ANTHONY MORTIMER Fourteenth Respondent
NEW ZEALAND INSURANCE LIMITED Fifteenth Respondent
DISTRICT LAND REGISTRAR Sixteenth Respondent
[1] The plaintiff is the body corporate of Hobson Gardens, an apartment complex consisting of two tower blocks on Hobson Street in central Auckland. Hobson Gardens is what is commonly known as a leaky building. As a step in curing this problem, the body corporate has applied under s 74 of the Unit Titles Act
2010 (“the 2010 Act”) to settle a scheme following destruction or damage (“the amended scheme”) to enable repair of the defects. This is the second such scheme for Hobson Gardens. Work under a proposed scheme had commenced but then ceased when the contractor responsible for the works, Mainzeal Property and Construction Limited (“Mainzeal”), went into liquidation.
[2] One of the first respondents, Ms Lai Chun Ko, has filed a notice of opposition to the application. She became the owner of unit 3H on 2 July 2008. The other respondents have taken no part in the proceeding.
[3] Mainzeal was also responsible for building Hobson Gardens. The body corporate and the majority of unit owners were parties in proceedings that were brought against Mainzeal and other defendants (“the plaintiff owners”). At mediation, the parties to those proceedings were able to settle and Mainzeal agreed to repair the entire complex. The value of the repair work was somewhere between approximately $11.5 and $15 million, though the settlement agreement between the parties records that Mainzeal would repair the building for $1 in exchange for discontinuance of the proceedings.
[4] The plaintiff owners argue that the owners, who were not parties to the proceedings against Mainzeal (“the debtor owners”) should pay the plaintiff owners compensation for obtaining a benefit under the settlement to which they were not a party. The amended scheme provides for this compensation to be paid. Ms Ko is a debtor owner. She objects to that part of the amended scheme that would require her to pay the compensation.
[5] For the reasons given below in this judgment, I consider that the body
corporate’s argument cannot succeed.
Factual background
[6] Hobson Gardens was constructed by Mainzeal in 1995 and 1996. In early
2005, the body corporate became aware that Hobson Gardens was suffering from numerous building defects. The plaintiff owners brought proceedings in 2005 and
2006 to recover losses caused by those defects (“the liability proceedings”). The defendants were Mainzeal and other parties. The owners who took part in the liability proceedings were named as second plaintiffs. The liability proceeding also included a claim for common property repair costs for the benefit of owners who had valid claims but were not second plaintiffs. Seventy per cent of the claim in the liability proceeding related to defects of common property. Unit owners who did not take part in the liability proceedings either chose not to or were statute barred from doing so. Ms Ko is in the latter group.
[7] Mainzeal was prepared to defend the claim against it. However, it also tendered to carry out the remedial work. The tender amount was $11,416,449, excluding GST. The liability proceedings were settled at a mediation on 26 May
2011. Mainzeal agreed to repair the buildings in return for the discontinuance of the proceedings. In order to repair adequately the defects suffered by the plaintiff owners, Mainzeal had to repair the entire complex’s defects, including defects of property that was either owned by the debtor owners, or was common property in which all owners, including the debtor owners held an interest. This was due to the extensive nature of the defects and the impossibility of carrying out remedial work on defects that only related to property of the plaintiff owners, or was property in which only those owners or the common property claimants had an interest. A construction contract setting out the agreed remedial work was signed on 8 June
2011 (“construction contract”). The scope of the work to be completed was that contained in the original tender with some amendments.
[8] In order to ascertain the market value of the remedial work under the contract agreement, the body corporate engaged a surveying company. Darin Bayer, a quantity surveyor, deposed that he assessed the total value of the repairs under the construction contract to be $13,369,578 (excluding GST), or $15,375,014 (including
GST). However, the actual consideration agreed to under the construction contract was $1.
[9] The original scheme provided for the plaintiff owners to recover compensation from the debtor owners. Before this scheme was approved by the Court, work under the construction contract commenced.
[10] Then, on 6 February 2013, Mainzeal was placed into liquidation and all work relating to the construction contract was stopped. By then Mainzeal had completed approximately 70 per cent of the remedial works (“the partial repairs”).
[11] In the amended scheme, the body corporate proposes that the cost of completing the balance of the remedial works will be levied amongst all unit owners in accordance with their utility interest. My understanding from comments made by her counsel at the hearing is that Ms Ko does not oppose this aspect of the amended scheme, though her position in this regard was not made clear in the notice of opposition that she filed, or in her written submissions.
[12] As regards the partial repairs, the amended scheme provides for the debtor owners to pay compensation to the plaintiff owners. The scheme provides that payments from debtor owners will be distributed pro rata to the other owners in proportion to their unit entitlement.
Provisions of the scheme
[13] It is necessary to set out certain provisions of the amended scheme that is attached to the amended originating application dated 13 December 2013. The amended scheme states:
J. This scheme provides for compensation for the Partial repairs, and levying amongst all owners for the completion of the necessary remaining repairs. …
K. The value of the Partial Repairs provided by the Second Plaintiffs and the Common Property Claimants is assessed at $10,685,054.00 including GST, and this scheme provides for compensation from owners of units in the Body Corporate who do not have an ownership interest in the Partial Repairs by Mainzeal and are not
entitled to it, but benefit from it (“the Debtor Owners” who are set
out in Schedule 3 hereto).
L. The payments due from the Debtor Owners to the Second Plaintiffs and the Common Property Claimants are subject to a credit for costs already paid towards consultants’ and legal fees, and the resulting sums due from the Debtor Owners to the second plaintiffs and the Common Property Claimants is set out in Schedule 4 hereto.
M. As payments are received by Debtor Owners, it is intended that those payments will be distributed pro rata according to the scheme to the Second Plaintiffs and the Common Property Claimants in proportion to their utility interest shares thereof.
[14] The “Levies” section of the amended scheme expands on the above paragraphs:
5. Levies
5.1In recognition of the matters set out in the preamble hereto, the Partial Repairs have been funded by the provision of the Repair of the Buildings by Mainzeal in accordance with the construction contract entered into between the Body Corporate and Mainzeal, such provision being made in its entirety by the second plaintiffs and the Common Property Claimants.
5.2To reimburse the second plaintiffs and the Common Property Claimants, the Body Corporate shall recover from the Debtor Owners the sums described and set out in Schedule 4 hereto as if each sum set out and described therein owning by the Debtor Owners were a levy issued under s 121 of the Unit Titles Act 2010. Upon recovery of each levy from each debtor owner, sums recovered will be paid compensation to the second plaintiffs and the Common Property Claimants pro rated in proportions to their unit entitlement share thereof described in Schedule 5 hereto.
5.3Without limiting the generality of the above the Body Corporate has the authority:
(a) To demand payment of the Levy from each Debtor Owner the sums set out in Schedule 4 hereto from the date the Order sanctioning this Scheme is sealed.
(b) To sue for and take such other steps as the Body Corporate deems advisable to recover from any Owner who fails to pay such Levies.
5.4The Body Corporate shall levy owners by utility interest for cost of the balance of the work necessary to complete the Repairs.
[15] Under Schedule 4, the amount that Ms Ko is liable to pay to the body corporate under cl 5.4 is $83,287. My understanding is that she has already paid the levy that has been struck under cl 5.4.
Relevant law
[16] At the time Hobson Gardens was built, the Unit Titles Act 1972 was in force. However, the 2010 Act now applies by virtue of ss 218, 220 and 221. By the time the amended scheme was filed, the transitional period in the 2010 Act had passed.
[17] The members of a body corporate are the unit owners of all the units in the unit plan: see s 76(1) of the 2010 Act. The body corporate is the owner of the common property: s 54(1). It has duties in respect of the repair and maintenance of the common property, any assets used in connection with the common property, other assets owned by the body corporate and “any building elements and infrastructure that relate to or serve more than 1 unit”: s 138(1). “Building elements” are defined broadly to include components such as the roof, balconies, decks, cladding, walls etcetera.
[18] Given the discretionary nature of s 74, and the different factual circumstances pertaining to the applications for approval of s 74 schemes that have come before the courts, each application will inevitably turn on the facts relating to the application: see Tisch v Body Corporate No 318956 [2011] NZCA 420, [2011] 3 NZLR 679 at [66]. However, from the relevant case law, some common principles have emerged that are to be applied to these applications.
[19] The general rule under the 2010 Act is that the body corporate may only undertake tasks associated with common property and other assets or building elements set out in s 138. However, Tisch recognised that the s 74 exception justifies departure from the general rule and the scheme of the 2010 Act if it is necessary to achieve what is fair as between unit owners in the circumstances: see [30]-[31]. The scheme of the Act as a whole and the body corporate rules are relevant considerations under s 74 applications.
[20] Section 74 of the 2010 Act provides:
74 Scheme following destruction or damage
(1) This section applies if any building or other improvement comprised in any unit or on the base land is damaged or destroyed, but the unit plan is not cancelled.
(2) The High Court may, by order, settle a scheme on the application of
(a) the body corporate; or
(b) if the unit title development is in a layered unit title development, the body corporate of the head unit title development or any subsidiary unit title development in that layered unit title development; or
(c) an administrator; or
(d) the owner or one of the owners of a unit; or
(e) a registered mortgagee of a unit.
(3) A scheme under subsection (2) may include provisions—
(a) for the reinstatement in whole or in part of the building or other improvement; or
(b) for the transfer of units to the body corporate so as to form part of the common property.
(4) If an order is made under subsection (3)(b), sections 58(1)(c) and 59 apply to the transfer, so far as applicable, but subject to any order of the High Court to the contrary.
(5) A notice of any application made under subsection (2) must be lodged with the Registrar who must enter on the supplementary record sheet a notification that the application has been made.
(6) On any application to the High Court under subsection (2), the following persons have the right to appear and be heard:
(a) any person having or claiming to have any estate or interest in any unit or in the whole or part of the base land; or
(b) any insurer who has effected insurance on the buildings or other improvements comprised in any unit or in the whole or part of the base land.
(7) In the exercise of its powers under subsections (2) and (3), the High Court may make any orders that it considers expedient or necessary for giving effect to the scheme, including orders—
(a) directing the application of any insurance money; or
(b) directing payment of money by or to the body corporate or by or to any person; or
(c) directing the deposit of an appropriate new unit plan;
or
(d) imposing any terms and conditions that it thinks fit. (8) The High Court may cancel, vary, modify, or discharge any order
made by it under this section.
(9) The High Court may make any order for payment of costs that it thinks fit.
[21] In Fraser v Body Corporate S63621 (2009) 10 NZCPR 674 (HC), Heath J referred to such schemes as “a remedy of last resort”: [97]. The reason for that conclusion is that it is preferable for proprietors in a unit title community to reach agreement on a proposal to remedy damage in the building without recourse to the Court. Further, there is additional incentive to reach agreement in order to maintain good personal relationships between other unit proprietors. Only if there is no consensus should an application be made to the Court under s 74: see discussion in Fraser at [96]-[97].
[22] The Court of Appeal in Tisch stated that s 74 of the 2010 Act is the same in effect as s 48 of the Unit Titles Act 1972. At [26], the Court said:
[26] In the Unit Titles Act 2010, which replaced the 1972 Act with effect from 20 June 2011, s 74 is essentially the equivalent of s 48. So the way in which s 48 had been employed up to the passing of the 2010 Act did not prompt Parliament to make any change.
Therefore, cases decided under the now repealed s 48 are still applicable.
[23] At [35], the Court of Appeal in Tisch set out the three step process to apply to such applications:
[35] We consider the Act imposes a three step process on a Court considering an application to settle a scheme under s 48:
· Step 1: the Court must be satisfied that the building has been damaged or destroyed.
· Step 2: if so satisfied, the Court must decide whether to settle a scheme.
That is, the Court must decide whether a scheme is appropriate in the circumstances.
· Step 3: if the Court decides a scheme is appropriate, it must then decide what the terms of the scheme should be.
[24] Regarding step 2, the Court cautioned the use of s 74 schemes:
[37] Step 2 arises because s 48(1) provides that the Court “may … by order settle a scheme …”. Hopefully, a scheme will not be needed for most “leaky buildings” or other cases where substantial repair work is required. The risks and costs of applying to the Court and the desirability of maintaining harmony between people living in the same building or complex surely call for a determined effort to achieve agreement between owners on
the carrying out of the required repairs. We endorse Heath J‟s observation in
Fraser that “s 48 should be a remedy of last resort”.
…
[43] Whatever the particular situation, settling a scheme should always be the best option for the unit holders as a whole.
[25] The aim of step 3 was said to be “to balance the interests of each unit holder in a way that imposes terms that achieve the outcome fairest to all unit holders”: [44]. At least five guiding principles were identified to help achieve this aim. They are:
(a) a scheme with broad support is preferable; (b) the scheme should be appropriately detailed;
(c) that providing what has been done by the body corporate before a scheme is actually approved is in accordance with the scheme, the order has retrospective effect;
(d)work should normally be done to the same standard and at the same time; and
(e) the terms of the scheme should depart from the scheme of the Act and from the body corporate rules no more than is reasonably necessary to achieve what is fair as between unit owners in the circumstances.
[26] An exception to the fifth guiding principle is if the scheme is unanimously agreed to by all unit owners: Tisch at [49]. This is not the case here.
Body corporate’s submissions
[27] The body corporate submits that the amended scheme is more or less
“standard”, compared to similar schemes that have been approved by this Court.
[28] The body corporate submits that the guidelines set out by Tisch should apply to this s 74 application. It submits that under step 2, the amended scheme is appropriate in the circumstances as 70 per cent of the waterproofing fabric of the building is common property and that it is desirable for remedial work to take place under one remedial solution.
[29] Under step 3, the body corporate submits that the amended scheme has the support of the owners of 101 out of 102 units. Further, the body corporate submits that the scheme is appropriately detailed and that the amended scheme departs from the Act and the body corporate rules no more than is reasonably necessary. The body corporate says that the financial clauses of the amended scheme allow the body corporate and owners to benefit fairly from the construction contract that is “‘owned’ by most, but not all, of unit holders in the body corporate”.
[30] The body corporate acknowledges that the construction contract with Mainzeal involved consideration of $1. However, it says that the contract settled all of the claims of the second plaintiffs and contributories which were valued at significantly more than $1, and that the actual amount for which those parties were suing Mainzeal and others should be taken into account.
[31] The body corporate relies on an affidavit of Mr Traill dated 1 September 2011 where he deposes that the benefit of the settlement agreement was limited to those owners who were parties to the liability proceeding. Therefore, the second plaintiffs and the common property claimants “own the right to have Hobson Gardens repaired by Mainzeal. The market value of this right is estimated to be $15,375,000”: [32]. In a later affidavit dated 11 December 2013, Mr Traill reduced this figure due to the fact that Mainzeal only completed 70 per cent of the repairs.
[32] In the earlier affidavit, Mr Traill explained the rationale behind the amended scheme and the basis of the calculations:
33. The rationale behind the proposed scheme effectively is that the second plaintiffs and those owners who had common property claims “sell” the rights to the repair under the Contract Agreement to the Body Corporate for the benefit of all the owners of Hobson Gardens. Those owners who were not part of the proceedings compensate those who were (the second plaintiffs and those owners who had common property claims) for their share of the repair (by unit entitlement) and in receipt they get a fixed building.
…
37. So, the parties entitled to the benefit of the repair under the settlement make up 76.2838% of unit entitlement. These owners will “sell” the rights to the repairs under the Contract Agreement to the Body Corporate. The remaining 23.7162% of the repair value will be levied on the basis of unit entitlement as detailed below and will be distributed to the second plaintiffs and common property claims (70%). This amounts to
$3,646,364.
…
40. In addition, the non-plaintiffs have paid levies towards the legal expenses incurred in bringing the proceedings. The non-plaintiffs will be credited in full for the legal levies. The legal levies will be credited against the repair levy.
Respondent’s submissions
[33] The essence of Ms Ko’s submission is that the contract price with Mainzeal was $1 and that there is no jurisdiction under the Act to claim a commercial value when a contract price had been agreed. Ms Ko argues that it is unfair that she paid levies to fund the liability proceeding and yet does not obtain a benefit under the settlement agreement. Ms Ko asserts that as the settlement settled all claims, the current proceeding is contrary to that position and enables the other owners to gain an unjust enrichment.
[34] Ms Ko further opposes the amended scheme on the basis that there is no distinction between private and common property costs in the amended scheme and that the amended scheme provides too great an allowance towards common property costs. Here she says that Mainzeal did not undertake repair work on level 3 where her unit is based; therefore, she is charged for repairs that she has no liability to pay. As a result, the scheme is unbalanced and is in breach of Tisch.
[35] Ms Ko submits that all unit owners financially supported the liability proceedings, despite some not being included as plaintiffs to the proceeding. Further, the settlement committee agreed to negotiate a resolution on behalf of all owners. Therefore, she claims that the current scheme should not be unfair to the minority unit owners.
[36] I now turn to the three-step analysis under Tisch.
Analysis
Step 1: Is the building damaged or destroyed?
[37] The parties are in agreement that the building is damaged to a sufficient extent and that this first step is satisfied.
Step 2: Is a scheme appropriate in the circumstances?
[38] A scheme is appropriate in the circumstances to generate funds to repair the remainder of the building. However, I do not consider that the terms of the current scheme as proposed are appropriate in the circumstances. Therefore, my focus will be on the discussion under step 3.
Step 3: What should the terms of the scheme be?
[39] This case is unique as the body corporate wishes to obtain “compensation”
from the unit owners who were not parties to the liability proceedings.
[40] The first major problem that I see with the amended scheme is that it is unfair on the “debtor owners”, defined in the amended scheme as owners who “do not have an ownership interest in the partial repairs by Mainzeal and are not entitled to it, but benefit from it”.
[41] First, Ms Ko contributed to the funding of the liability proceedings and the subsequent mediation and settlement, despite her being statute barred from taking part in the proceeding. It is my impression that all the owners helped to fund the
proceedings, although there is no evidence of this. Ms Ko’s affirmation states that she was under the impression that as she consistently paid her levies and as the body corporate itself was the first plaintiff to the liability proceedings, that her interests would be represented and protected.
[42] The body corporate argues that only the plaintiff parties to the liability proceedings are “entitled” to the benefit of the repair under the settlement agreement and that those owners who were not plaintiffs in the liability proceedings should compensate those who were. I am unable to understand why this position should be the case.
[43] First, as I have already stated, Ms Ko was up to date with her levy payments and funded the litigation in much the same way as the plaintiff owners.
[44] Secondly, the benefit to all owners that resulted from the settlement and the partial repairs performed under the construction contract came about through a full and final settlement of the liability proceedings with Mainzeal agreeing to repair the defects of the entire complex and not just the defects of property owned by the plaintiff owners. The practical impossibility of remediating the property of the plaintiff owners without at the same time remediating the property of the debtor owners meant that for Mainzeal to avoid the liability proceedings it had to agree to repair all building defects at Hobson Gardens. So for Mainzeal, settlement of the liability proceedings came at a premium: namely, it accepted the responsibility of remediating the entire complex rather than just property owned by the plaintiff owners. That Mainzeal was willing to pay this premium does not necessarily entail an obligation on the part of the debtor owners to pay the plaintiff owners for the right to enjoy this premium.
[45] Thirdly, the body corporate and the plaintiff parties are treating their situation as if the plaintiff owners had paid market price to Mainzeal for the repairs. Had the plaintiff owners had to pay Mainzeal for the repair work to the entire complex and had that work exceeded the cost of repairs of their property interests, it would follow that the additional repair costs could be recovered from those who had profited
therefrom: namely, the debtor owners. Without such recovery, the debtor owners would obtain a windfall benefit. But this is not the case here.
[46] Clauses 5.2 and 5.3 of the amended scheme are no more than an attempt by the plaintiff owners and the body corporate on behalf of the common property claimants to compel the debtor owners to purchase a share of the repair rights that were secured by the settlement agreement.
[47] I note that the body corporate itself and the parties to the liability proceeding entered into a body corporate mediation agreement. That agreement dealt with how settlement proceeds would be distributed:
3. Settlement Proceedings
3.1The distribution of the settlement proceeds will be subject to the terms of the settlement agreement with the defendants.
3.2Any outstanding legal and expert costs incurred by the Body Corporate and/or Proprietors in relation to the Proceeding shall be paid from the settlement proceeds.
3.3 The balance of the settlement proceeds shall be distributed to the
Proprietors in proportion to unit entitlement, as follows:
(a) Current Proprietors (including units where an assignee of the claim is a current Proprietor) shall be paid in proportion to unit entitlement by way of credit to the Proprietor’s Body Corporate account, and the Body Corporate shall apply such funds to pay for the remedial work costs levied on the Proprietors’ unit, and if there is any excess at the conclusion of the remedial work the excess shall be paid to the Proprietor
…
[48] Ms Ko was not a party to this mediation agreement. Therefore, had the mediation resulted in a large monetary payment to the body corporate, the body corporate would have put out tenders for the repair work. Pursuant to cl 3.3(a), the settlement proceeds were to be applied to repair costs and if there was any excess, then it was to be paid to the owners that were parties to the mediation agreement. Therefore, had the outcome of the mediation been different, and cl 3 of the mediation agreement engaged, prima facie Ms Ko would not receive a share of the proceeds as she was not a party to the liability proceeding. Further, it is likely that any financial
payment from Mainzeal would have been discounted to exclude the repair costs of the debtor owners as they were not parties to the litigation.
[49] However, in the present circumstances, I consider it inappropriate to treat the market value of the construction contract as settlement proceeds that resulted from a successful mediation. The additional value that results from the construction contract covering all remedial works to the complex has imposed an additional burden on Mainzeal. The value of its settlement consideration has gone beyond what the plaintiff owners would have been legally able to recover by way of damages. The fact that this commercial deal benefited the debtor owners does not mean that the plaintiff owners ought to be compensated. It is Mainzeal and not the plaintiff owners that has suffered as a result of the debtor owners enjoying this benefit.
[50] The issue of “compensation” in a s 74 scheme also arose in LV Trust Holdings Ltd v Body Corporate 114424 [2012] NZHC 3578, (2012) 14 NZCPR 344. In that case, the applicants of the scheme sought compensation for the loss of their unit over 18 months during the building repair period. All other unit owners lost the use of their unit for no more than six weeks.
[51] On this issue, Asher J noted that:
[80] The Act is silent on the issue of compensation, and so are the rules and regulations. There is no case to which I have been referred in which a compensation order has been made. There is, however, s 48(5) of the 1972
Act and s 74(7) of the 2010 Act giving the Court the power to order the payment of a sum of money by the Body Corporate to any person.
[52] He concluded that the applicants ought to receive compensation as they had lost their home for the common benefit and for a much longer period than other unit owners. This was based upon the reasoning that:
[84] A scheme must do equity between unit owners. A gross inequity should not be tolerated. In my view it would have been a gross inequity to have required the applicants to give up possession of unit P for a period that exceeded the loss of use of other units by approximately 17 months, and to have not provided compensation.
[86] … Where it is patent that compensation is necessary to do equity
between unit owners, then such compensation can and should be part of this
scheme. Given the scale of the loss to the applicants, it follows that I find for them on this point.
[53] Applying this reasoning, the current scheme as proposed does not do equity between unit owners. In contrast to LV Trust Holdings Ltd, the terms of the amended scheme causes gross inequity, rather than alleviating inequity. Ms Ko has contributed, through levies paid by her, to the funding of litigation that she could not, because of limitation restraints, participate in. In LV Trust Holdings Ltd, the applicants had suffered detriment for the benefit of the body corporate as a whole. In this case, the majority plaintiff owners of Hobson Gardens settled their claim. All owners benefited from the settlement and any detriment was alleviated. Here, compensation is unnecessary to do equity between the unit owners. Ms Ko paid her share of the litigation costs, although not a plaintiff. The plaintiff owners are not out of pocket.
[54] Further, in LV Trust Holdings Ltd, the payment that Asher J ordered was directly related to the costs suffered by the registered proprietor of the affected unit. Here, the body corporate wants the Court to direct Ms Ko to pay compensation to it for the benefit of the plaintiff parties. The purpose of a s 74 scheme is to provide a means by which funds can be obtained to pay for the reinstatement of a damaged building. Here, the order for payment from Ms Ko is directed towards paying plaintiff owners for the benefit of sharing in the settlement that they achieved. Whilst s 74 is intended to permit a departure from the scheme of the Act, such a scheme must still be relevant to, and have a connection with the purpose of s 74. This provision is aimed at providing alternative means for a body corporate or unit owners to raise funds to repair destruction or damage to units in the development. A scheme that compels unit owners to take actions that are not directly related to achieving s 74’s purpose is outside the scope of s 74.
Does the scheme have broad support?
[55] The body corporate in this case has referred to the majority support for the scheme. However, I note in Tisch at [45] that:
The greater the level of support from owners for the proposed scheme, the more likely it is that the scheme does justice between owners. This will not
invariably be so, because a majority of owners may support a scheme that is unfair to the minority.
[56] This statement was endorsed by Asher J in LV Trust Holdings Ltd where the
Judge reiterated at [61] that:
When the majority of owners will financially benefit and the minority will financially suffer, the majority support may do no more than reflect that unfairness.
[57] I consider the terms of this scheme will financially benefit the majority of owners to the detriment of Ms Ko and other debtor owners. However, the exact circumstances of the other debtor owners are unknown.
Is the scheme sufficiently detailed?
[58] Ms Ko complains that the amended scheme in general does not distinguish between private and common property.
[59] The scheme provides for the remainder of the repairs to be funded through levies based upon utility interest. This approach is not objectionable in principle, but information is needed as to the proportion of common property that is still to be repaired. Levying based upon utility interest may be unfair if what remains to be repaired is mostly non-common property. However, it is unclear from the notice of opposition whether Ms Ko objects to paragraph 5.4 of the amended scheme.
Justified departure from the scheme of the Act?
[60] In terms of the powers to levy under the 2010 Act, the body corporate is required to establish an operating account and may establish a number of other accounts. Section 115 provides that the purpose of the operating account is to meet the expenses described in 115(2) relating to management, provision of services and other day to day costs. Under s 117, the body corporate may establish a long-term maintenance fund, which may only be used in relation to the long-term maintenance plan. Under s 118, a body corporate may establish one or more contingency funds for unbudgeted expenditure. Lastly, s 119 allows the body corporate to establish a capital improvement fund.
[61] For each of the above funds, a body corporate may impose levies to maintain each fund. The levies are to be calculated on either utility interest or ownership interest: s 121(2). Under s 126, if a body corporate does repair or work from which only certain units derive a substantial benefit, then that expense is recoverable as a debt.
[62] It follows that in ordinary circumstances, a body corporate can raise a levy before work is carried out through the long-term maintenance fund, contingency fund or the capital improvement fund. Section 126 expressly allows the body corporate to recover expenses after repair work has been carried out. There is nothing in these financial provisions to suggest that a levy can be issued for work that has been carried out, but for which the body corporate did not pay. As I have noted above, s 74 schemes can depart from the scheme of the 2010 Act but only in situations where the best interests of unit owners warrant such a departure. In this case, I do not consider that the proposed scheme’s departure from the scheme of the
2010 Act is warranted.
[63] Whilst the plaintiff owners may consider that Ms Ko and the other debtor owners should make some payment to the plaintiff owners for the enjoyment of the benefits of the settlement, especially as Ms Ko could not have made a claim against Mainzeal herself, any such payment is too removed from the scope of s 74 to permit me to order her and the other debtor owners to do so as part of a s 74 scheme. It follows that such a scheme cannot be a justified departure from the scheme of the
2010 Act.
Result
[64] The current scheme does not achieve what is fair between the unit owners in the circumstances. Recovery of the value of the completed partial repairs is beyond the scope of a s 74 scheme. The balance of the amended scheme (cl 5.4) is too uncertain, as no distinction is made between common property and private property for the purpose of apportioning the levy to cover the cost of the work necessary to complete the repairs.
[65] The body corporate should attempt to reach a consensus on a new scheme to complete the repairs and make a fresh s 74 application if necessary.
[66] The parties have leave to file memoranda as to costs.
Duffy J
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