Body Corporate 183930 v Chua
[2015] NZHC 2122
•3 September 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-000073 [2015] NZHC 2122
BETWEEN BODY CORPORATE 183930
First Applicant
AND
SYNERGISTIC INVESTMENTS LIMITED
Second Applicant
AND
MUI KEE CHUA First Respondent
AND
OTHER RESPONDENTS
As set out in Schedule One to theApplication
Hearing: 29 and 30 July 2015
14 August 2015 - submissions and further affidavit filed by applicants
21 August 2015 - joint memorandum and amended scheme filed
Appearances:
D Bigio and J M May for the First and Second Applicants
J P Wood for Second, Twenty Sixth, Twenty Seventh, Fifty Sixth, Sixty Sixth, Seventy Sixth and Eighty Third Respondents K K Kommu for Fiftieth Respondent
No appearance by or for the other respondents
Judgment:
3 September 2015
INTERIM RESERVED JUDGMENT OF WYLIE J
This judgment was delivered by Justice Wylie on 3 September 2015 at 11.30am
pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:…………………………….
BODY CORPORATE 183930 v CHUA & ORS [2015] NZHC 2122 [3 September 2015]
Introduction
[1] The applicants are respectively:
(a) The body corporate for a unit title development known as Tuscany
Towers located in Ambrico Place, New Lynn, Auckland, and
(b) The owner of one of the units in the development. The respondents are the owners of other units in the development.
[2] The development consists of 97 units constructed in 16 separate blocks. It comprises two and three storey town houses.
[3] The development has been subject to water tightness issues. These issues have been partially addressed. Remedial work on 68 units has been completed. Funding for this work came from settlement proceeds obtained following a mediation after proceedings were commenced in the Weathertight Homes Tribunal. Unfortunately the settlement proceeds were exhausted before the remedial works could be completed, and the repair project was halted on 31 May 2013 because of a lack of funds.
[4] Various resolutions were passed in 2014 authorising the body corporate to apply to settle a scheme to manage the balance of the remedial works and to raise the moneys necessary to pay for them. In anticipation the body corporate has imposed levies in accordance with the draft scheme. A large number of unit owners have already paid those levies. The repair project has resumed, and completion is due in November 2015, provided there are sufficient funds to complete the works.
[5] The body corporate and Synergistic Investments Limited now seek an order under s 74 of the Unit Titles Act 2010 to settle a scheme to manage the balance of the repair project. They have filed a draft scheme.
[6] Various aspects of the draft scheme were opposed by eight of the respondents. The opposing respondents respectively own units 2, 26, 27, 50, 56, 66,
76 and 84. Six of the eight opposing respondents have had their units repaired. None of them have paid the proposed levies.
[7] This matter was heard on 29/30 July 2015. At the Court’s invitation, on 21
August 2015 counsel for the parties filed a joint memorandum. They advised that they had reached agreement on a number of the machinery provisions which previously had divided them. An amended draft scheme incorporating these agreements was filed. The amended draft scheme, showing the tracked changes from the original draft scheme, is annexed and marked “A”. The issues in dispute have been narrowed. They are now as follows:
(a) How are the costs to complete the works required to reinstate the development to be allocated between unit owners. This involves a consideration of clause 7 of the amended draft scheme and schedule 1 to the draft scheme (annexed and marked “B”);
(b) Clause 5 dealing with delegation; and
(c) How GST refunds received by the body corporate should be allocated between unit owners.
[8] Counsel did not require that the hearing be reconvened. Rather they agreed to the Court dealing with the matter on the basis of the hearing held, and by reference to all papers filed, including those filed after the hearing.
[9] Unfortunately one of the matters on which counsel have agreed is not acceptable to the Court. I deal with this below. There are also other difficulties with the draft scheme. As a result I am not prepared to approve either the original draft or the amended draft. Later in this judgment I give an indication of changes that I would like to see in any revised scheme. This should enable the parties to confer and to file a second amended scheme, hopefully on a consent basis. This is therefore an interim judgment.
Factual background
[10] It is necessary to traverse the factual background to this application for two reasons – first, because the draft scheme purports to be retrospective and secondly, because a number of the unit holders who oppose the draft scheme claim that the applicant body corporate has not been consistent in the way in which it has levied unit owners for the costs of the remedial works carried out to date.
[11] The initial consent for the development was issued by the Waitakere City Council in February 1997. Subsequent consents were issued in stages through to November 1999 and the units were constructed between 1997 and 2001. The body corporate was constituted under the Unit Titles Act 1972 on 15 December 1997 when the first stage unit plan – plan number 183930 – was deposited.
[12] Unit owners first began to express concern about external moisture entering their units in 2002.
[13] Between 2005 and 2007 the owners of 90 units in the development applied to the Weathertight Homes Resolution Service to have their units assessed.
[14] At an Extraordinary General Meeting (“EGM”) held on 11 April 2006, it was resolved that the body corporate secretary would lodge a claim with the Weathertight Homes Tribunal for the Tuscany Towers common property. At a further EGM held on 4 July 2007, owners resolved to authorise the body corporate to bring a representative multi-unit claim under the Weathertight Homes Resolution Services Act 2006 which had come into force in December 2006.
[15] A Weathertight Homes Resolution Services report was completed for the entire complex. The assessor identified extensive damage to the exterior cladding, timber framing, internal linings and other building elements which he considered had been caused by defects in the design and construction of the units.
[16] At the body corporate’s Annual General Meeting (“AGM”) held on 6
November 2007, consulting engineers retained by the body corporate presented a further report which supported the findings of the Weathertight Homes Resolution
Services’ assessor. At the same meeting, a resolution was passed to engage the
engineers to prepare documentation for remediation tenders.
[17] During 2008, the body corporate filed proceedings in the Weathertight Homes Tribunal to recover damages from the various parties involved in the construction of the complex. In total 88 unit owners – including all of those now opposed to the draft scheme - were parties to the proceedings. The other nine unit owners either declined to become parties or withdrew from the proceedings prior to the claim being resolved.
[18] A legal firm known as Legal Vision Limited was instructed to act for the body corporate and for the unit owners involved in the proceedings. As well as assessing the liability of the respondents, Legal Vision reviewed the strength of each owner’s claim, based on documents supplied by each owner.
[19] In 2008 Babbage Consultants Limited were engaged as project manager for the remedial works project.
[20] At a relatively early stage units in the development were divided into four different types:
(a) Type M – two storey units. There are 67 such units;
(b) Type O – three storey units. There are seven such units;
(c) Type P – larger two storey units with a basement, porch and deck.
There are 16 such units; and
(d) Type Q – larger two storey units with a basement and terrace.
There are seven units in this group.
As I understand it, the categorisation was undertaken by Babbage Consultants.
[21] In early December 2008, owners who were parties to the proceedings were sent a letter by Legal Vision commenting on the strength or otherwise of their individual claims.1
[22] At an AGM held on 13 December 2008, unit owners were updated on progress with the Weathertight Homes Tribunal proceedings. There was a discussion about the distribution of any funds that might be obtained if the matter settled or if the proceedings were successful. A representative of the body corporate’s management company advised owners that they were unlikely to obtain 100 per cent of the repair costs through settlement. Various suggestions were made to owners as to how they could obtain extra moneys, in order to cover any shortfall that might eventuate.
[23] At an EGM held on 6 June 2009, Babbage Consultants advised owners about the tenders which had been received from four contractors. The contractors variously estimated the repair costs at between $9.9 million and $11.6 million. At the same meeting Legal Vision advised owners that the total amount claimed in the Weathertight Homes Tribunal proceedings would be $16 million, made up of repair costs of $10 million, plus $6 million for stigma, lost rent or alternative accommodation, and other costs.
[24] A Conduct and Distribution Agreement was presented at the meeting. A recital to the agreement recorded that the intention was that the Body Corporate would undertake the remedial works, that all unit owners would be levied for their share of the cost of the works in accordance with their unit entitlements, and that any moneys obtained as a result of the proceedings would either be applied to the remedial works or distributed to participating unit owners in accordance with the agreement. The agreement:
(a) Appointed an entity known as Body Corporate Specialists Limited to manage the conduct of the proceedings;
1 Mr Chilluvuri, a member of the Body Corporate Committee annexes a copy of the letter which was sent to him to his affidavit in reply. He deposes to his belief that all other unit owners who were potential parties to the proceedings received a similar letter. This has not been disputed by those respondents who oppose the draft scheme.
(b)Authorised Legal Vision to act as legal counsel for the unit proprietors;
(c) Specified that costs and expenses incurred during the proceedings would be paid for by the unit proprietors in proportion to their unit entitlements;
(d)Set out the terms for the establishment of a committee to represent unit proprietors;
(e) Authorised the committee to settle the proceedings through mediation or negotiation;
(f) Required the committee to call a meeting following any settlement to agree on the distribution of any settlement moneys. Any distribution was only to be made with the agreement of at least 75 per cent of the participating unit owners. There was a default provision if a 75 per cent majority could not be obtained. Any balance was to be paid to the participating unit owners in shares proportionate to the recovery obtained by each unit owner in any settlement “or in the final analysis of recovery as set out by Legal Vision at the conclusion of the proceedings”;
(g)Set out the procedures for distribution of the balance of settlement moneys (if any) following the repair of the development; and
(h)Set out a procedure should owners not be able to reach agreement as to the distribution of the balance of any settlement funds.
Mr Cui (the owner of unit 84) has deposed that all unit owners who were parties to the proceedings signed this agreement.
[25] At an EGM held on 7 August 2010, a Mr Bates of Legal Vision advised that that firm had assessed the merits of each participating owner’s claim where sufficient documentation had been provided to enable it to do so. It had concluded that 21 per
cent of the owners had weak claims with a possibility of no recovery, 34 per cent of the owners had claims with a moderate chance of success, and 45 per cent of the owners had good claims with a good chance of success. Based on their assessment of the strength of individual owners’ claims, Legal Vision estimated that the best possible result would be a settlement of around $8.6 million. They also advised that the total claim figure had been revised. It was $14.4 million, with repair costs estimated at $11.4 million, and with an additional $3 million for associated costs. Legal Vision advised unit owners that the final division of any settlement funds would be determined by the terms of the Conduct and the Distribution Agreement, and that any distribution would be finalised once any settlement figure was known.
[26] Mediation occurred over two days on 4 and 5 October 2010. Matters were not resolved at mediation, but the parties to the proceedings subsequently finalised a settlement agreement on 29 October 2010. Pursuant to that agreement, the respondents to the claim paid in total $8.015 million. The bulk of the settlement proceeds came from those parties involved in the construction of the development. In some case parties associated with an individual owner’s claim contributed towards the settlement figure. For example in Mr Tang’s case (the owner of unit 50), his vendor and his building inspector each contributed $17,250 to the settlement.
[27] The settlement agreement required that the settlement funds were to be used to repair the 88 units owned by those unit owners who were parties to the settlement (“the settlement unit owners”).
[28] Unit owners were given details of the settlement achieved at the body corporate’s 2010 AGM, which was held on 30 October 2010. The body corporate’s chairman updated unit owners on the way in which he expected the repair process to proceed. He advised:
(a) That the average repair cost per unit was estimated to be $108,000 (initially it had been estimated at $92,000);
(b)That settlement unit owners would be required to fund an additional $16,000 on average, and that those owners who had not
been parties to the proceedings (the “non-settlement unit owners”)
would be required to pay the full $108,000 on average;
(c) Units belonging to non-settlement unit owners would be included in the repair project as the repairs had to be uniform, and meet Council standards;
(d) That the complex could be repaired for a lot less than Babbage
Consultants had proposed, and
(e) That unnecessary items, such as cleaning, should be removed from the specification and that new tenders should be sought.
The chairman expressed the hope that, with a modified scope of works and new tenders, no additional contributions would be required from unit owners.
[29] At an EGM held on 5 February 2011, the body corporate discussed further tenders which had been received for the remediation project. The most competitive tender estimated the repair costs at $8.45 million, with an allowance of $500,000 for associated professional fees. The following resolutions were passed:
(a) To empower the body corporate committee to instruct Babbage Consultants to proceed with an application for building consent for the repair of a number of the units;
(b)To empower the body corporate committee to enter into a contract on behalf of the body corporate with the most competitive tenderer for the remedial works required to repair those units;
(c) To raise levies from all owners for an average of $92,000 each (on a unit entitlement basis) for the repair of the units. The settlement unit owners were to have their levies accounted for from the settlement funds. The non-settlement owners were required to pay levies in full before any remedial work was undertaken on their units;
(d)To take the necessary court action against any unit owner who did not provide access to the contractor so that repairs could be carried out, or who did not pay his or her levy;
(e) That the committee had full authority to engage solicitors to bring any necessary court action and to instruct those solicitors accordingly.
The minutes recorded that the committee was reasonably confident that there would not be a budget blow out, but that if that occurred, another EGM would be held to raise extra money. Some unit holders questioned the committee’s approach to the raising of levies and the proposed distribution of the settlement funds. They suggested that it did not take into account the actual cost of repairs to individual units, or the contributory negligence of some owners who had caused the final settlement sum to be reduced. To provide clarity in relation to the application of settlement funds, Legal Vision was instructed to draft a Remedial Works Agreement dealing with these issues, and other related matters.
[30] On 18 May 2011, Legal Vision sent a letter to all unit owners attaching a Remedial Works Agreement that had been drafted in conjunction with the body corporate committee. The letter sought to explain the difference in position between settlement and non-settlement unit owners regarding the funding of repairs. It recorded the estimated average repair cost per unit. Settlement unit owners were to share the costs of the remedial works based on their unit entitlements, and were to have credited to them their proportion of the settlement moneys, also based upon their unit entitlement. It was only if the cost of the works went over budget, that they would be asked to pay additional amounts and “at this juncture the contributory negligence deductions allocated at mediation would come into play”. Non settlement unit owners were told that they would be expected to pay the actual costs to repair their individual units. They were to be levied for an averaged amount, then refunded or required to top up, depending on the final cost.
[31] Sections 9.1 to 9.5 of the Remedial Works Agreement covered the funding of the remedial works. In summary those sections:
(a) Acknowledged each proprietor’s obligation under the Unit Titles Act 2010 to contribute to the cost of remedial works on common property, and to pay for remedial works on his or her unit;
(b)Acknowledged that the estimated cost of the work was subject to change;
(c) Recorded the obligation to apply the settlement moneys to the remedial works;
(d)Made provision for any shortfall in funding for the project – see clause 9.4 in the next paragraph; and
(e) Provided for the refund of any surplus on completion of the remediation project.
[32] Clause 9.4 has assumed some significance in the dispute between the parties. It provided as follows:
It is intended that the settlement monies more fully set out in clause 9.3 above will be sufficient to meet the shared costs of the Settlement Unit Owners pursuant to clause 9.11 together with the cost of Remedial Works to repair their units, plus their proportion of common property, however in the unlikely event that there is a shortfall, then this will be met by those Settlement Unit Owners who have a contributory negligence allocated against their claim as is more fully set out in Schedule 3, in proportions based on the pro rata percentage of contributory negligence allocated against their claim, which will be levied as a Special Levy by the Body Corporate against those Settlement Unit Owners. However in order to place a limit upon the additional levies that Settlement Unit Owners with a contributory negligence deduction allocated to them need to pay, no Settlement Unit Owners are to receive more than what they were entitled to receive from the Settlement Monies. Any additional levies required from Settlement Unit Owners will be sought by way of a Special Resolution passed at an EGM which is called by the Body Corporate in accordance with the Body Corporate Rules/Unit Titles Act 2010.
[33] Contributory negligence percentages had been finalised by Legal Vision following on from the mediation process, taking into account the views expressed by the defendants in the Weathertight Homes Tribunal proceedings at the mediation, as those views influenced the level at which the defendants were willing to settle. The
contributory negligence percentages on a unit by unit basis were set out in a schedule
– schedule 3 - to the Remedial Works Agreement.
[34] It was envisaged that each unit owner would sign the Remedial Works Agreement. There is however nothing in the evidence filed on behalf of the applicants to suggest that all signed. One of the opposing unit owners, Mr Cui, has deposed that all signed, but he also annexes to his affidavit an email from a Mr Levie, an expert for the applicants, which records that all “but a couple of owners signed”. This email is dated April 2015. It is clear that Mr Cui signed. So did Mr Tang. The other respondents opposing the application have filed brief affidavits endorsing Mr Cui’s affidavit, but they do not individually state whether or not they signed the Remedial Works Agreement. There is a further complication. It appears that there was a different version of the agreement, and in particular schedule 3, which was circulated and that the owners of units 12, 43, 70 and 74 signed this different version.
[35] At an EGM held on 18 June 2011, Mr Bates spoke to the body corporate about the Remedial Works Agreement. Mr Bates indicated that although the expectation was that the remedial work would be completed for the amount received on settlement, it was necessary to provide for the possibility of the works going over budget. Unit owners were told that, in that event, extra costs would be apportioned according to schedule 3 of the Remedial Works Agreement, which set out each settlement unit owner’s contributory negligence deduction. The chair of the body corporate told owners that a scheme under, what was then, s 48 of the Unit Titles Act
1972 was unnecessary, because the body corporate could adopt the Remedial Works Agreement by special resolution, and impose the conditions of the agreement upon any unit owner who objected. The committee also advised unit owners that, due to delays in the consenting process and subsequent tender of the remedial project, a new firm – Reclad Solutions Limited – was now the preferred contractor. The body corporate resolved to authorise the committee to enter into a contract on behalf of the body corporate with Reclad Solutions Limited for the building work.
[36] Reclad Solutions Limited was contracted, and the remedial works commenced in July 2011. The work was to be completed in six stages, each contracted separately.
[37] At an EGM held on 8 October 2011, the chairman reported that the anticipated repair cost had increased from $8.98 million to $9.136 million. The body corporate nevertheless resolved to approve Reclad Solutions Limited for the repair of the rest of the complex, subject to quotes for each new stage being approved by the committee.
[38] At an EGM held on 28 April 2012, the chairperson informed unit owners that the project costs were anticipated to rise to $10.25 million. This exceeded the available settlement moneys, and he explained how extra funds might be raised. It was proposed that top up payments from unit owners would be calculated in accordance with the Remedial Works Agreement, and would take into account each unit owner’s contributory negligence deduction. It was proposed that those owners who had been assessed as being contributorily negligent would need to fund the shortfall, and that those who had strong claims would not be required to do so, unless the repair costs for their individual units exceeded the sums they were entitled to receive from the settlement moneys.
[39] At an EGM held on 16 June 2012 some unit owners objected to the proposed top up levies being collected from those who had been assessed as being guilty of contributory negligence, and questioned why the top up levies were not based on unit entitlements. Mr Bates responded, advising that clause 9.4 of the Remedial Works Agreement contemplated that any cost shortfall would be met by levying settlement unit owners in proportion to the contributory negligence allocations recorded in schedule 3 to the agreement.
[40] On 5 July 2012, in response to a letter sent by one of the unit owners (a Ms Gao – the owner of unit 56), Legal Vision wrote to all owners addressing the provision in the Remedial Works Agreement for raising repair funds in excess of the settlement amount. The letter had a schedule attached to it, detailing the contributory negligence percentages allocated to each settlement unit owner.
Unfortunately there were differences between this schedule and schedule 3 in the Remedial Works Agreement. Some of the differences were quite significant. There is no satisfactory explanation for these discrepancies. It is simply asserted that the changes came about after Mr Bates accounted for settlement contributions associated with individual owners. I do not understand what is meant by this assertion and there is no explanatory affidavit from Mr Bates.
[41] A further EGM was held on 7 July 2012. By this stage the estimated repair costs had risen to $11.5 million and there had been a considerable deterioration in the relationships between unit owners. A number were dissatisfied with the way in which the settlement funds had been distributed, and with the proposal to collect top up levies from those owners assessed as being contributorily negligent.
[42] At an EGM held on 10 November 2012, unit owners were informed that the building contractor would cease the remedial works upon completion of stage four, unless further funds could be raised. It was noted that this would leave 26 units in stages five and six unrepaired. The body corporate resolved that the committee should come up with a new top up levy proposal to present to unit owners.
[43] On 31 May 2013, all work stopped on the units due to a lack of funds. At this point three units in stage four were still to be repaired, along with 26 units in stages five and six. In addition some finishing work had not been completed on a number of the units in stage four of the repair programme.
[44] At an EGM on 8 June 2013, a new top up levy proposal was presented to owners. After discussion a motion was put to owners to approve the proposal. The motion was defeated, as it did not gain the 75 per cent support required for a special resolution.
[45] As no agreement had been reached, the matter was referred to mediation as required by the Remedial Works Agreement. Mediation occurred on 17 November
2013. It was followed immediately by an EGM intended to pass any resolutions required as a result of any agreement reached at the mediation. At the EGM, a
further special resolution was put to owners. Again the motion failed, as it did not gain the 75 per cent support required.
[46] The EGM was attended by Mr Levie. He is the chief executive of The Home Owners and Buyers Association of New Zealand Inc (“Hobanz”). He suggested that the committee should work together with professionals to come up with an approach which might be acceptable to all. This was put forward as an alternative to bringing proceedings to try and resolve the dispute. This suggestion was unanimously endorsed.
[47] At an EGM on 30 November 2013, the body corporate appointed a working group of unit owners to further revise the top up levy proposal and to work towards a binding solution.
[48] In January 2014, the body corporate committee engaged Mr Levie’s firm, Hobanz Consulting Limited, to provide guidance to the committee and the working group, and to help resolve the impasse.
[49] Throughout the first half of 2014 the committee and the working group met on a regular basis. The meetings were facilitated by Mr Levie. He also undertook a review of the project, and provided guidance on the way in which to structure the remainder of the remedial works required. After several meetings, it became obvious that the unit owners were not going to be able to reach a consensus on the way forward. A proposal was therefore advanced to develop multiple options, which could be voted on by owners at an EGM. It was intended that the option which achieved the greatest level of support would then be the subject of an application under s 74 of the Unit Titles Act.
[50] At a meeting of the committee and working group on 4 June 2014, Mr Levie tabled various options for apportioning the repair costs amongst owners. Those owners who did not see merit in any of the proposed options were asked to come up with their own option or options which could also be presented to owners to vote on.
[51] There had been disagreements on what was or was not common property. A surveyor was engaged. He prepared a report which disclosed that the majority of the exterior weather-proofing fabric at ground and basement floor levels was within unit property, but that the majority of the exterior weather-proofing fabric at first and second floor levels, including all roofs, was common property. He concluded that approximately 58 per cent of the exterior water-proofing fabric (excluding roofs which did not require repair) was within unit property, and 42 per cent was common property.
[52] In preparation for the EGM, a summary of the three proposals which had been developed was distributed to all owners. In addition owners were provided with a background paper prepared by Mr Levie.
[53] At the EGM held on 9 August 2014, owners voted via secret ballot to adopt what was known as Proposal B. They did not however get to vote on all three schemes. Rather a method of voting known as “cascade voting” was adopted, despite objection from some unit owners present at the meeting. Proposal A attracted limited support (22 for and 47 against with some abstentions). Proposal B was supported by a majority of owners present – 47 for and 25 against with 1 abstention. There was no vote on Proposal C. The owners also passed a series of resolutions to assist with the collection of levies and the restart of the remedial works. A resolution was passed which gave authority to the body corporate to draft a s 74 scheme.
[54] In accordance with the resolutions, the body corporate invoiced owners in accordance with the mechanism detailed in Proposal B. It re-engaged Babbage Consultants and Reclad Solutions Limited. The majority of owners paid their required contributions by the due date, and the project was restarted on 3 November
2014. As at 4 June 2015, there were only 11 owners who had failed to pay the required contributions – the eight owners in opposition to the draft scheme and three others.
[55] The body corporate drafted a scheme in accordance with Proposal B. That scheme was circulated to owners with an explanatory memorandum prior to an EGM
that was held on 8 November 2014. At the EGM owners voted unanimously to proceed with the present application.
The amended draft scheme
[56] The provisions of the amended draft scheme – which the applicants ask the Court to settle are annexed – annexure A. They speak for themselves and they do not require summary.
[57] Clause 7 is however important. It deals with owners’ contributions to the reinstatement project. Contributions are to be calculated in accordance with schedule 1 attached to the draft scheme – annexure B. Once the reinstatement project is complete, a cost reconciliation is to be undertaken by a consultant engaged by the Body Corporate. If necessary, adjustments will then be made to reflect the intent of clause 7.1.
[58] This is followed up by clause 8, dealing with the raising of the funds to pay for repairs. The Body Corporate is to levy contributions from owners in accordance with clause 7 of the draft scheme using the best estimates available to the Body Corporate when the levy is struck. Where the Body Corporate becomes aware that the contributions raised are insufficient to cover the overall cost, the Body Corporate is to immediately cause its consultants to undertake a reassessment of the overall costs and calculate the additional contribution required from each owner. These amounts are then to be raised in accordance with the draft scheme. Any funds determined by the Body Corporate to be surplus to requirements at any time throughout the reinstatement project will be refunded to owners in the same proportion as they were collected less any unpaid contributions and accrued interest. Any additional works requested by an owner and undertaken in accordance with clause 4.8 are to be paid for by that owner.
[59] Schedule 1 to the draft scheme details how it is proposed that the levies payable by each unit owner should be fixed. Some of its provisions are not so obvious and I explain the schedule as follows:
(a) Column A is self explanatory.
(b)Column B records each unit type. This is the categorisation given to each unit by Babbage Consultants, as noted in para [20] above. Four units – units 4 to 7 inclusive, are noted as being “M*”. This records a minor difference in type M units which Mr Bigio, appearing for the applicants, advised me is not material for present purposes.
(c) Column C indicates whether or not each unit has been repaired.
(d)Column D gives the ownership interest of each unit. As can be seen, there is no great difference between the units. No unit has an ownership interest above 1.108 per cent, and no unit has an ownership interest below 0.998 per cent.
(e) Column E is the projected average repair cost by unit type. With the exception of units 4 to 7, each unit in each of the four types has been allocated the same average repair cost. That cost is the re- assessed average cost to repair units of each type, based on the average cost of repairing the first 68 units, plus the estimated balance needed to repair the final units. The average costs were assessed by a quantity surveyor employed by the contractor. They have been allocated over all units, to ensure that those unit owners whose units have already been repaired do not get a windfall, and to avoid the situation which could otherwise arise, namely that all additional costs would be met by the 29 unit owners whose units still require repair. The averaging is intended to ensure that those unit owners whose units have already been repaired still have to pay a percentage of the additional costs required to complete the repair of all units.
(f) Column F details professional fees and administration costs. These have been allocated on a unit entitlement basis.
(g)Column G sets out the estimated contingency sums per unit. The contingency sums have been allocated in proportion to the total of the projected average repair cost by unit type plus the professional fees and administration costs. In other words, if a unit has a higher projected average repair cost, and the proportion of professional fees payable by a unit holder is higher, then so is the share of the contingency sum allocated to that unit.
(h) Column H is the projected overall cost allocated to each unit –
being the total of columns E, F and G. The total in column H is
$12.7 million. This sum has been assessed by the contractor’s quantity surveyor as being the amount required to complete all remedial works.
(i)Column I is the estimated repair cost for each settlement unit owner, which was sought in the claim brought before the Weathertight Homes Tribunal. Where there is a blank in column I, that owner was not a party to the Weathertight Homes Tribunal proceedings – i.e. a non-settlement unit owner.
(j)Column J is the contributory negligence assessment attributed to each unit owner who has been assessed as having been contributorily negligent. The figures have been taken from the schedule to the letter dated 5 July 2012 (see above at [40]), sent by Mr Bates of Legal Vision to all unit owners. They have not been taken from schedule 3 to the Remedial Works Agreement.
(k)Column K details each unit owner’s entitlement to the settlement funds. The figure is column I, minus column J. The total for column I is $8,015,618 – i.e. the total settlement funds received.
(l)Column L shows how the total of the settlement funds – i.e. the amount received on settlement, together with accrued interest – has been allocated to unit owners. It is only those owners who have
been assessed as being contributorily negligent who have received the benefit of the interest accrued. The applicants take the view that this is consistent with clause 9.4 of the Remedial Works Agreement. By way of example, the owner of unit 7 does not receive any of the interest earned, because he/she has not been assessed as being contributorily negligent.
(m)Column M shows the total share of settlement funds attributable to each unit owner - that is, column K plus column L. The total figure is $8,518,301, being the settlement funds, together with accrued interest.
(n)Column N is the assessed shortfall per unit – namely column H – the projected cost allocated to each unit less the total share of settlement funds allocated to each unit – column M. It shows the assessed shortfall before GST refunds have been taken into account.
(o)Column O deals with the first of the two GST refunds received by the body corporate – a refund of $438,565. That refund has been allocated across all settlement unit owners proportionately to each unit owner’s shortfall, to give relief to those who have the biggest shortfall. This was seen to be fair, and the best way of implementing clause 9.4 of the Remedial Works Agreement. Otherwise, some unit owners would get a “windfall” credit.
(p)Column P is the balance including the first GST deduction - namely column N, the assessed shortfall before the first GST refund was allocated, less column O – the first GST refund received.
(q)Column Q deals with the second GST refund received by the body corporate. It has been applied in proportion to all owners’ required contributions, whether they are settlement owners or non-
settlement owners. It arises from moneys paid in by all. It was therefore thought appropriate that all should benefit from the credit. Again the credit has been allocated proportionately to the shortfall owing by each unit owner. Notwithstanding that clause
9.4 of the Remedial Works Agreement applies only to the settlement unit owners, it was considered appropriate to apply the same approach to all owners.
(r) Column R is the total share of settlement funds and GST refunds attributed to each owner. It is the total of columns M, O and Q.
(s)Column S is column P less column Q. It sets out the balance to be paid by each unit owner.
(t) Column T is self explanatory. It repeats Column A.
(u)The final column, gives the percentage of the estimated total project cost allocated to each unit (column H) to be paid by each owner, after adjustments have been made. It shows how the adjustments have diminished the impact on those owners who have been assessed as being contributorily negligent. For example, the owner of unit 2 was assessed as being contributorily negligent to the extent of 50 per cent. That owner’s contributory negligence has been reduced to approximately 27 per cent, as a result of the adjustments.
Objections by unit owners opposed to the scheme
[60] Those unit holders who oppose the draft scheme suggest that schedule 1 is unfair. They say that the body corporate has changed its approach to the collection of levies, and that as a result any scheme cannot be retrospective. They argue that the draft scheme ignores the fact that 42 per cent of the repairs required are to common property which is owned by unit owners collectively. They query why the average cost of repair has been estimated on the basis of unit type. They dispute what is meant by clause 9.4 in the Remedial Works Agreement, and query whether it
has been accurately applied in allocating the top up costs. They suggest that it has been left to a minority of owners to shoulder the additional costs, because some of the claims that were put before the Weathertight Homes Tribunal were thought to be relatively weak. They argue that the strength of the various claims has never been properly analysed.
[61] The opposing owners take issue not only with clause 7 – the proposed allocation of top up levies - but also with the delegation of powers and duties provision, clause 5.
[62] One of the opposing owners – Mr Tang – takes issue with the way in which the GST refunds have been treated in schedule 1.
Legal principles relating to scheme approvals
[63] Relevantly, section 74 of the Unit Titles Act 2010 provides as follows:
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
…
(d) the owner or one of the owners of a unit; or
…
(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
…
(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
…
(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—
…
(b) directing payment of money by or to the body corporate or by or to any person; 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.
[64] The leading authority on the operation of the section is the decision of the Court of Appeal in Tisch v Body Corporate 318596.2 It was decided under an earlier provision in the 1972 Act, which has since been essentially replicated by s 74 in the
2010 Act. In all material respects the Court of Appeal’s observations in Tisch apply to s 74 of the 2010 Act.
[65] The Court in Tisch considered that the legislation imposes a three step process on a court considering an application to settle a scheme, as follows:3
·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 that a scheme is appropriate, it must be then decide what the terms of the scheme should be.
2 Tisch v Body Corporate 318596 [2011] NZCA 420, [2011] 3 NZLR 679; St John’s College Trust
Board v Body Corporate 197230 [2013] NZCA 35, (2013) 14 NZCPR 56.
3 Tisch, above n 2, at [35].
[66] Here it is common ground that steps 1 and 2 have been met. All agree that there are defects in the design and the construction of the buildings comprising the development and that there has been moisture ingress into the buildings which has caused significant damage. They agree that the damage sustained requires the re- cladding of all buildings and incidental repairs to, e.g. roofs and gutters, at an estimated total price of some $12.7 million. Further, all agree that a scheme should be settled. Repairs have proceeded to the point where all moneys received in settlement have been exhausted. The body corporate is at an impasse. It cannot raise all of the further funds needed to complete the remedial works without a scheme. Indeed, I suspect that all regret that a scheme was not put in place at a very much earlier stage.
[67] Turning to step 3, again there was no disagreement. All accepted that s 74 confers a discretion. It is broad and unfettered, although the Court must of course act judicially and not arbitrarily or capriciously, and it enables the Court to do justice to the parties to address the problem that has brought the application before the Court.4
[68] In discussing step 3, the Court of Appeal in Tisch identified five factors which need to be taken into account when considering the terms of any proposed scheme. I summarise those factors as follows:5
(a) A scheme with broad support is to be preferred. The greater the support for a scheme, the more likely it is that the scheme does justice between owners. This is not however an invariable rule, because a majority of owners may support a scheme that is unfair to a minority;
(b) A scheme should be appropriately detailed;
4 Body Corporate 172108 v Meader (2011) 12 NZCPR 101 (HC) at [25]; Fraser v Body
Corporate S63621 (2009) 10 NZCPR 674 (HC) at [91].
5 Tisch, above n 2, at [45]-[49].
(c) Providing that what has been done by the body corporate before the scheme is approved is in accordance with the proposed scheme, any order has retrospective effect;
(d)Work on units should normally be done to the same standard and at the same time; and
(e) The terms of a 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 between unit owners in the circumstances.
[69] In appropriate cases, a scheme may be approved which involves an element of cross subsidisation, for example, where by reason of the configuration of a building, an inequitable burden would otherwise be thrown on certain owners. A relevant consideration is that it is in the overall interests of all unit owners to ensure that the building as a whole is properly maintained, even though the body corporate expenditure might go to the repair or maintenance of an individual unit. A departure from a cost sharing regime mandated by the rules of a body corporate should not
however be approved as a matter of routine.6
[70] The scheme of the Act and rules should be departed from no more than is reasonably necessary.7 As a consequence there is a presumption that payments for body corporate work should be on a unit entitlement basis.8 This presumption can however be displaced in appropriate cases. The purpose of the Act is to provide for the management of unit developments on a socially and economically sustainable
basis and to establish a flexible and responsible regime.9
6 Body Corporate 198072 v Bank of New Zealand [2011] 3 NZLR 249 (HC) at [83]-[89].
7 Tisch, above n 2, at [49]; LV Trust Holdings Ltd v Body Corporate 114424 [2012] NZHC 3578, [2012] 14 NZCPR 344 at [62]; affirmed on appeal Body Corporate 114424 v LV Trust Holdings Ltd [2014] NZCA 21, (2014) 15 NZCPR 375.
8 LV Trust Holdings Ltd v Body Corporate 114424 at [65].
9 Unit Titles Act 2010, s 3(c).
Analysis
[71] I now turn to consider the proposed scheme by reference to the factors identified in Tisch and related authorities. In so doing I will address the principle matters raised by those opposed to the draft scheme.
Support from unit owners
[72] Proposal B, which forms the basis for the draft scheme, received support from 47 of the 97 unit owners. Twenty five were against it, and there was one abstention. The owners of 71 of the 97 units were present at the meeting. In addition there were postal votes from a further nine owners. There is no explanation for the fact that less votes were cast than were available. Presumably some owners did not vote, but did not record an abstention.
[73] Mr Tang – the owner of unit 50 and one of those opposed to the draft scheme
- complains that Proposal C was not voted on. He is correct but at this stage, I am not sure that much turns on this. The Court has been asked to settle a scheme which is based on proposal B. It is that scheme which falls for consideration, and not other proposals which have not matured into schemes and been the subject of application
to the Court.10
[74] Mr Wood, appearing on behalf of the opposing respondents other than Mr Tang, noted that there are 67 type M units, and that under the proposed scheme, the owners of those units will be responsible for 54.5 per cent of the total repair costs. He asserted that if the repair costs were allocated by ownership interest, the owners of type M units would have to meet 67.8 per cent of the total repair costs. He suggested that as a result, little weight should be placed on the voting which occurred, because the result favours the majority of owners. Mr Bigio did not take issue with Mr Wood’s assertion. I accept that this criticism detracts from the fact
that the draft scheme enjoys majority support.
10 For much the same reason the alternative schemes proposed by the opposing owners do not fall for consideration. They have not been put before unit owners and there is no application pursuant to s 74(2) in relation to them.
[75] I also note that the scheme does not enjoy broad support from unit owners. Support from 47 owners out of 97 entitled to vote is not particularly convincing. I have proceeded on this basis, and except as noted below in relation to the GST issue, I have made no assumptions about the justice of the scheme as between unit owners based on the voting numbers alone.
Appropriate detail
[76] I am satisfied that the draft scheme includes appropriate detail sufficient to prevent, or at least minimise, misunderstandings and further arguments.
[77] The dissenting unit owners – with the exception of Mr Tang – took issue with clause 5 dealing with the delegation of powers. They noted that delegation under the
2010 Act normally requires a special resolution and written notice.11 They observed
that the scheme will facilitate the single largest and most important undertaking to date by the body corporate, and submitted that all major decisions involved in implementing the scheme should be put before the body corporate in general meeting.
[78] I am not persuaded by these arguments. In my view, requiring that all major decisions be put before all owners at a general meeting would simply open up the process to interminable objection by disgruntled unit owners. There would be arguments about what constitutes a major decision. Even if this could be resolved, when there are 97 owners involved, it is likely that one or two will dissent from any proposal, notwithstanding that it might have obvious benefits for the vast majority of unit owners. To give all owners a say in major decisions is, in my judgment, the antithesis of a good s 74 scheme, and to do so could frustrate the process.
[79] In this case, it is also unnecessary. Much remediation work has already been done. Owners know what further works are required. They know who will be doing that work. They know the anticipated likely cost. All unit owners have been served with details of the draft scheme. All know what is proposed. In my view, it is in the interests of the unit owners as a whole to ensure that there are effective delegation
provisions, to ensure that the body corporate committee can get on and implement the scheme promptly and efficiently once it is settled. I reject the arguments made by Mr Wood on behalf of the Second, Twenty Sixth, Twenty Seventh, Fifty Sixth, Sixty Sixth, Seventy Sixth and Eighty Third respondents in this regard.
[80] There is a further but related difficulty. As can be seen from the tracked changes in annexure A, in the amended draft scheme filed on 21 August 2015, counsel agreed to the deletion of the mediation and arbitration provisions. In the joint memorandum, it was recorded that the applicants were prepared to agree to the deletions for the sake of expediency, rather than make further submissions on whether or not the original clauses proposed were ideal.
[81] I do not consider that the proposed clause 16.2 in the amended draft scheme is appropriate.
[82] The Court is charged with settling the scheme. The Court is not however responsible for the day to day administration of the scheme. To allow all disputes to come before the Court without any effective filter would be a wasteful use of valuable public resources – namely judicial time and limited Court resources. The Court could be swamped with petty disputes between the body corporate and aggrieved unit owners. In my judgment, disputes between owners should properly go, in the first instance, to a mediator, and then to a sole arbitrator for determination. If there is a deep seated concern, the scheme could record that unit owners have the right to seek leave to appeal to the Court against any arbitral award under the relevant provisions contained in the Arbitration Act 1996. That would give the parties a long-stop opportunity to seek relief from the Court, in sufficiently egregious
cases.12
Retrospectivity
[83] The owners represented by Mr Wood complain that the scheme is retrospective, because it encompasses the entire works programme, notwithstanding that the works are in large part completed.
[84] Retrospectivity is not necessarily a problem. As was noted in Tisch, an order approving a scheme can have retrospective effect, provided that what has been done by the body corporate before the scheme is approved is in accordance with the scheme.13
[85] Mr Wood argued that “until the wheels fell off” there was little attention paid, when implementing the repairs, to the allocation of costs, except as between settlement unit owners who had access to the settlement funds, and non-settlement unit owners who were expected to fully fund their own repairs. He argued that the draft scheme has been conceived of post the completion of the majority of the repairs, and then applied to all repairs as if it had been the intention of the body corporate to make the proposed arrangements from the start. He argued that the body corporate’s decision re-allocates the settlement moneys and undoes previous levies.
[86] Mr Tang complained that he has been misled. Mr Kommu on his behalf referred in particular to the recital in the Conduct and Distribution Agreement noted at [24] above, and to the minutes of various EGMs and AGMs where contribution issues were discussed. He also referred to advice which was given to the meeting from time to time by the chair of the body corporate, and to letters sent by Legal Vision to owners, and in particular the letter dated 18 May 2011 – see [30] above. He argued that prior to that letter, Mr Tang had not been advised that it was intended that contributory negligence percentages would be allocated to each unit owner assessed to have been contributorily negligent.
[87] I accept the base submission made by both Mr Wood and Mr Kommu, namely that there have from time to time been inconsistencies in approach by the body corporate, and in statements made by the chair of the body corporate, or by Legal Vision, or by others. Nevertheless, I do not consider that Mr Tang or anyone else has been misled. Moreover, it is my view that, taken as a whole, the body corporate’s actions have been broadly consistent in regard to most matters in dispute,
particularly since the Remedial Works Agreement was entered into. Where there
13 Tisch v Body Corporate 318596, above n 2, at [47]; Re Body Corporate 304209 HC Wellington
CIV-2009-485-1104, 23 March 2010 at [22].
have been inconsistencies, the parties adversely affected by the same have not complained. I refer to the following:
(a) In December 2008, all owners party to the proceedings were sent a letter by Legal Vision commenting on the strength of their claims – see [21] above. In other words owners knew that some had stronger claims than others.
(b)The Conduct and Distribution Agreement signed by all settlement unit owners before settlement referred to the balance of any settlement moneys – after payment of fees and other costs – being paid to settlement unit owners in shares proportionate to the recovery obtained by each unit owner in any settlement, or on a final analysis to be undertaken by Legal Vision – see [24](f) above. This clause, recognised that unit owners might not necessarily participate equally in any settlement funds.
(c) On a number of occasions, the body corporate, through Legal Vision, advised unit owners that it had assessed the merits of each settlement unit owner’s claim, and that the likelihood of recovery varied from unit owner to unit owner – see e.g. [25], [29] and [30].
(d)The Remedial Works Agreement expressly recorded that contributory negligence by settlement unit owners would be taken into account if there was a shortfall – see [31] and [32].
(e) The body corporate’s actions since that date have been broadly
consistent with clause 9.4.
[88] The Remedial Works Agreement was signed by most, if not all, owners. There are two versions of the agreement, and relevantly of schedule 3, assessing the contributory negligence percentages for affected owners. It seems that the owners of units 12, 43, 70 and 74 signed a different version than other owners. However none of those owners are opposing the draft scheme. For present purposes, and in relation
to the other parties to the application, the agreement is a binding document. It overtakes what has gone before.
[89] The majority of owners could complain that schedule 1 to the draft scheme adversely affects them, because adjustments have been made to ameliorate the consequences which might otherwise attach to those settlement unit owners who have been assessed as being contributorily negligent. To their credit the majority of owners do not raise this issue. Rather they are collectively prepared to act altruistically to try and achieve a result which all can live with. It is only those owners who benefit from this altruism who now complain – essentially because they want to allocate the costs on a unit entitlement basis and because they resist being required to pay higher allocations on the basis of assessed contributory negligence. Both those issues were clearly signalled by the body corporate from an early stage and I do not see any significant inconsistency between schedule 1 in the draft scheme and clause 9.4 of the Remedial Works Agreement.
[90] I am not persuaded that what has been done to date by the body corporate, at least since the Remedial Works Agreement was signed, is not in accordance with the draft scheme. Accordingly, I am of the view that the draft scheme can be settled notwithstanding that it will have retrospective effect.
Work to be done to the same standard and at the same time
[91] This goes without saying, and it is clearly highly desirable. The repair works on the remaining 29 units must be undertaken to the same standard as the repair works which had been completed on the other units. No-one suggests otherwise. Ideally the repair works should have been done at the same time. That has not proved possible but it is imperative that the balance of the works be undertaken as soon as is reasonably practicable so as to disadvantage the unit holders awaiting repair of their units as little as is possible.
Departure from the scheme of the Act/the rules – what is fair between unit owners?
[92] The rules of a body corporate constitute a contract between unit owners. Further purchasers who buy into unit title developments agree to abide by the obligations imposed by the Unit Titles Act.14 The rules and the Act are the common denominator to which all unit owners are irreducibly bound. For this reason they are the starting point in considering any proposed scheme.
[93] The body corporate rules were attached as a schedule to the Remedial Works Agreement. They have been exhibited by Mr Cui. They recognise the duty of each unit owner to permit the body corporate to enter his or her unit to maintain, repair or renew common property (rule 1(a)(iii)), and to repair and maintain his or her unit and to keep it in good order, repair and condition (rule (1)(e)). The body corporate is required to repair and maintain all chattels, fixtures and fittings used in connection with common property (rule 2(a)) and the body corporate committee can employ people to manage and administer common property (rule 11(b)). Broadly the rules recognise that the body corporate is responsible for common property and that unit owners are responsible for their own units.
[94] Under the Act a unit owner must maintain his or her own unit and he or she is responsible for the costs of doing so. Common property is owned by the body corporate. The owners of all units are beneficially entitled to a share in the common property, notwithstanding that it is owned by the body corporate. Each owner’s share is proportional to his or her ownership interest.15 The body corporate is
required to repair and maintain common property.16 Any costs incurred by the body
corporate that relate to repairs, to or the maintenance of, building elements and infrastructure contained in a principal unit are recoverable by the body corporate
from the owner of the unit.17
14 Body Corporate 162791 v Gilbert [2015] NZCA 185 at [45]; Tisch v Body Corporate 318596, above n 2, at [31]; St John’s College Trust Board v Body Corporate 197230, above n 2, at [20].
15 Unit Titles Act 2010, ss 54, 79(b).
16 Section 138(1)(a).
17 Section 138(4).
[95] The body corporate can establish and maintain an operating account, to meet expenses, including those relating to the management of the unit title development.18
It must establish a long term maintenance plan and a long term maintenance fund.19
It may have a contingency fund for unbudgeted expenditure.20 The body corporate can determine from time to time the amounts to be raised for each fund, and impose levies on the owners of principle units to establish and maintain each fund.21 The levies must be calculated, in the case of the operating account, the long term maintenance fund, and any contingency fund, in proportion to each unit owner’s utility interest.22
[96] The Court, when settling a scheme under s 74, can impose orders directing the payment of money by or to the body corporate, or by or to any person, and otherwise imposing any terms or conditions that it thinks fit. The Court is not constrained by the levy and contribution provisions contained in the rules or the Act. Nevertheless, it should seek to depart as little as is reasonably practicable from them.
[97] Here schedule 1 to the draft scheme ignores common property. It is based on the estimated costs of repairing each unit irrespective of whether common property is involved.
[98] As noted above at [51], the body corporate obtained expert advice on the extent of common property and unit property in the development. A Mr O’Sullivan, an expert who has filed an affidavit on behalf of those opposed to the draft scheme, has analysed the situation. It is his opinion that the failure to account for common property in the draft scheme creates an imbalance. He suggests that owners with significant damage to the exterior of their units will be significantly disadvantaged, even though the damage is to common property. He suggests that common property
ought to be paid for all owners, in accordance with their ownership interests.
18 Section 115(1).
19 Sections 116 and 117.
20 Section 118.
21 Section 121.
22 Utility interest is an interest assigned to each unit under ss 39 and 40 of the Act. It will
frequently be the same as an owner’s ownership interest, fixed pursuant to s 38(2) of the Act.
[99] The Unit Titles Act requires that the repair of common property be paid for by all owners in proportion to their entitlements. In the Tuscany Towers development the spread of unit entitlements is narrow – 0.998 per cent to 1.108 per cent. If the cost of repairs to common property is allocated on a unit entitlement basis, the smaller type M units will be required to contribute more, and the larger type O, P and Q units will contribute less.
[100] A scheme taking into account common property was put before unit owners at the EGM held on 9 August 2014. It was proposal A, and it was rejected by a majority of owners present.
[101] Mr Levie has calculated that under proposal B (the basis for the draft scheme) the estimated repair costs for type M unit owner are $106,000. Under proposal A, they are $115,000. For a type O unit owner, the costs drop from $193,000 under proposal B, to $168,000 under proposal A. For type unit P owners, the drop is from
$188,000 to $167,000, and for type Q owners, the drop is from $169,000 to
$152,000.
[102] I accept Mr O’Sullivan’s analysis. In my view the departure from the rules and the Act, by ignoring common property, and treating all property as unit property, is wrong in principle. There is no good reason for departing from the scheme in the rules and in the Act, with which all have agreed. To do so creates an injustice as between unit owners. It defeats their expectations under the rules and the Act. It would be preferable if the draft scheme allowed for common property, and imposed an obligation on all owners to pay for the costs of repairing common property, by reference to their respective unit entitlements.
[103] Those opposed to the draft scheme also take issue with the fact that schedule
1 allocates the costs of repair by reference to unit type, and not ownership interest.
[104] I do not consider that there is any difficulty with the approach which has been adopted by the applicants in this regard.
[105] First the units were categorised at an early stage. There is nothing to suggest that any unit owner has ever challenged the categorisation except at this late stage.
[106] Secondly, it is Mr Levie’s evidence that there are significant differences between units, which justify categorising them into different types. For example, unit 84 – owned by Mr Cui - is a three storey unit. It is one of four units in a separate block. It has been categorised as type O. So has unit 81 in the same block of four units. Units 82 and 83 lie between units 81 and 84 in the block. They are two storey units, which have been categorised as type M units. The wall area requiring re-cladding on each of the type M units is approximately 75 square metres. The wall area requiring re-cladding on each of the type O units is approximately 180 square metres. The unit entitlement of unit 81 is 1.101 per cent and of unit 84 is
1.097 percent. The unit entitlements of units 82 and 83 are both 0.998 per cent. If unit entitlements were used to allocate repair costs, the owners of units 81 and 84 would only pay around 10 per cent more than the owners of units 82 and 83, despite the significant amount of extra work required to repair their larger units. This would not, in my judgment, be fair.
[107] Nor is the result contended for by the opposing owners required by the rules or the Act. Indeed the Act recognises that the costs of doing work which substantially benefits one or some unit owners, can be recovered from that owner or those owners – s 126. That section is not directly in point in the present case, but the categorisation which the applicants have undertaken is consistent with this aspect of the statutory scheme. I do not consider that there is any injustice in the categorisation which has taken place. Indeed it seems to me that it is the only sensible way to proceed when dealing with a large development such as that here in issue.
[108] The respondents who object to the draft scheme also take issue with the way in which contributory negligence has been taken into account in schedule 1.
[109] In total 43 of the 88 settlement unit owners have been assessed as being contributorily negligent, each to a greater or lesser extent. The respondents opposing the draft scheme complain that the shortfall between the amount the settlement unit
owners received to settle their claim ($8.015 million) and the actual costs of repair has been absorbed primarily by those owners having been assessed as having weak claims in the proceedings. The difference between the settlement amount and the actual cost of repairs is now approximately $4.5 million. The respondents opposed to the draft scheme argue that the increased costs have come about primarily because of an escalation in the cost of building. They say that the draft scheme seeks to put much of that burden on the 43 unit owners who have been assessed as being contributorily negligent.
[110] I deal first with the argument that the escalation in costs over the life of the remedial works project is being borne disproportionately by settlement unit owners assessed as having been contributorily negligent.
[111] I do not accept this argument. As I have noted above, the estimated total repair costs have been averaged across all units – see column A in schedule 1. Mr Levie has deposed that the primary reason for doing this was to deal with cost escalations over time. I accept this evidence. As Mr Levie notes, individual unit owners had no say as to when their units were to be repaired. It would unfair to the owners of units still to be repaired if they were required to pay more than the owners of identical type units repaired at the start of the project. There is no distinction drawn between settlement unit owners assessed as being contributorily negligent, and those not so assessed. All bear a share of the increased costs.
[112] Nor can I see any departure from the rules or the Act. Rather the Act recognises that the body corporate can recover from an owner at fault the cost of doing repairs or work rendered necessary as a result of the owner’s wilful or negligent act or omission – s 127. This section is not directly in point and it is not relied on by the body corporate. It can however be said that schedule 1 – to the extent that it recognises contributory negligence - is not inconsistent with the scheme of the Act which allows fault to be attributed to individual unit owners.
[113] Nor is there anything unfair in recognising that some owners were contributorily negligent. More would have been received on settlement but for the contributory negligence. More would have been available to undertake the remedial
works, and the shortfall would have been less. I can see no good reason to relieve those owners who were contributorily negligent from the financial consequences of their negligence. Indeed, in my judgment it would be unfair to saddle those owners who sought to protect their own interests with the contributory negligence of others who did not do so. It would also be unfair to the majority of owners who have been assessed to be contributorily negligent, but who have nevertheless accepted the assessment made against them, and paid the proposed levies.
[114] Those opposing the draft scheme take issue with the assessments of contributory negligence attributed to them (and other owners). Again, I do not think there is anything in this point.
(a) At the outset Legal Vision undertook an analysis of each participating owner’s claim and each owner was sent a letter commenting on the strength or otherwise of his or her claim – see [21] above.
(b)The Conduct and Distribution Agreement recognised that ultimately Legal Vision might be required to apportion any settlement proceeds between unit owners – see [24](f).
(c) Prior to the mediation which resulted in the settlement, Mr Bates advised unit owners at an AGM about the merits of each owner’s claim and how that might impact on settlement – see [25].
(d)The Remedial Works Agreement was entered into by all now opposed to the draft scheme. It had annexed to it a schedule – schedule 3 – prepared by Mr Bates allocating a contributory negligence percentage to each settlement unit owner guilty of contributory negligence. It contained express provision – clause
9.4 – recording that that assessment would be taken into account if there was a shortfall.
(e) A covering letter sent out with the Remedial Works Agreement advised owners to take independent legal advice.
(f) Mr Bates spoke to the Remedial Works Agreement at the EGM held on 18 June 2011 – see [35]. He referred to the schedule to the Agreement and explained how it could become into play.
(g)No issue was taken with contributory negligence being allowed for, or with the individual assessments, until June 2012 – see [39]. By this stage the repair works were well underway.
In my view it is simply too late for the opposing owners to take issue with the individual assessments attributed to them. They have been aware of the same for some considerable time and they have bound themselves to them by signing the Remedial Works Agreement. They cannot now be heard to suggest that the assessments may, for some unexplained reason, be wrong.
[115] It is a matter of concern that there are differences between the figures contained in schedule 3 to the Remedial Works Agreement, and a further schedule which was annexed to Mr Bates’ letter to unit owners dated 5 July 2012 – at [40]. The draft scheme uses the figures in the schedule attached to the letter. The differences between schedule 3 of the Remedial Works Agreement, and the schedule adopted by the scheme are shown in the following table:
Unit RWA % Scheme % 4 75 55 7 67 61 12 50 0 40 50 17 50 67 41 56 75 69 68 100 75 70 100 0 71 50 45 73 25 19 83 67 62 85 50 25
As can be seen, in each case there is a reduction from the contributory negligence percentage assessed to each of the relevant unit owners in schedule 3 to the Remedial Works Agreement, and the contributory negligence percentage attributed to each of the relevant owners in the draft scheme.
[116] There is force in Mr Wood’s assertion that these changes affect not only those owners who have been given the benefit of a reduction in their contributory negligence assessments, but also the remaining owners, because the burden of the shortfall is shifted to all. Mr Bigio’s response – namely that the changes simply lessen the impact on affected owners, does not take into account the impact on those who have to pick up the tab for the resulting shortfall.
[117] No good reason has been put forward for departing from the allocations of contributory negligence contained in schedule 3 of the Remedial Works Agreement, and in my view it is not appropriate to do so. Most owners affected agreed to be bound by the schedule attached to the Remedial Works Agreement. Relevantly the owners of units 12 and 70 did not do so. They signed the version of schedule 3 which contained the figures which have been used in the draft scheme. Requiring that the scheme be amended to reflect the allocations recorded in schedule 3 to the Remedial Works Agreement will adversely impact on them. However they have elected to take no part in this hearing. Their remedy may lie elsewhere.
[118] In my judgment the draft scheme should adopt the contributory negligence percentages recorded in the schedule to the Remedial Works Agreement.
[119] That leaves outstanding the issue of GST refunds. I have explained above how these payments have been dealt with in schedule 1 – see [59](o) and (q).
[120] Seven of the eight opposing owners now agree with the way in which the draft scheme deals with GST. The only opposing owner is Mr Tang. He notes that non-settlement unit owners have been responsible for their own remedial costs, and suggests that therefore they should not be able to benefit from GST refunds prior to
20 July 2014. He argues that schedule 1 allocates the GST refund received prior to
20 July 2014 in proportion to shortfall, and that the GST refund received after 20
July 2014 has been allocated in proportion to all owners’ required contributions. He suggests that GST refunds should be allocated to reduce the overall shortfall without crediting them to owners.
[121] I am not persuaded by Mr Tang’s arguments. There are three principle
reasons for this.
(a) The GST refunds have been allocated to reduce the overall shortfall.
(b)The body corporate is registered for GST. The GST refunds strictly belong to it, and not to individual owners. The individual owners could not have obtained the GST refunds. It was therefore for the body corporate to determine how to allocate the refunds received.
(c) The body corporate allocated the GST refunds in a way which sought to reduce the impact of the application of the contributory negligence percentages on affected owners. Its treatment of the GST refunds enjoys the overwhelming support of unit owners. The support is not only from those who benefit from the way in which the GST refunds have been allocated – i.e. those assessed as having been contributorily negligent – but also the support of those arguably disadvantaged – i.e. those who were not contributorily negligent.
[122] The overwhelming support for the way in which the body corporate has dealt with the issue compels the conclusion that the treatment accorded to the GST refunds is perceived by unit holders to be fair in the circumstances as they apply to the Tuscany Towers development.
Conclusion
[123] In summary, I am not prepared to approve the draft scheme the subject of the application. In my view it requires amendment in the following respects:
(a) It should provide for common property, and require owners to meet the costs of repairing common property in accordance with their unit entitlements;
(b)Contributory negligence percentages should be in accordance with schedule 3 to the Remedial Works Agreement;
(c) The draft scheme should include mediation and arbitration provisions, and not allow disputes to come directly to the Court.
[124] As noted above, I am issuing this judgment as an interim judgment. I anticipate that the parties will be able to come back to the Court with a scheme which all support. If so, they can request consent orders. If not, they should file memoranda setting out their respective positions. It may be necessary to reconvene the hearing.
Costs
[125] I will deal with costs (if any) when the scheme has been finally settled.
Wylie J
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