Body Corporate 198072 v Bank of New Zealand HC Auckland Civ-2010-404-2932
[2011] NZHC 2122
•30 May 2011
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2010-404-2932
BETWEEN BODY CORPORATE 198072
Applicant
ANDTY MAWR INVESTMENTS LIMITED Second Applicant
ANDBANK OF NEW ZEALAND First Respondent
ANDAUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED
Second Respondent
ANDASB BANK LIMITED Third Respondent
ANDWESTPAC BANKING CORPORATION Fourth Respondent
ANDNATIONAL BANK OF NEW ZEALAND CUSTODIANS LIMITED
Fifth Respondent
ANDMORTGAGE HOLDING TRUST COMPANY LIMITED
Sixth Respondent
ANDTHE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED Seventh Respondent
ANDMETROPOLITAN LIFE ASSURANCE COMPANY OF NEW ZEALAND LIMITED
Eighth Respondent
ANDCRAIG LEISHMAN Ninth Respondent
ANDVANESSA SMITH Tenth Respondent
BODY CORPORATE 198072 V BANK OF NEW ZEALAND HC AK CIV 2010-404-2932
ANDVAUGHAN SHEPHERD AND SHANE WHITE
Eleventh Respondent
CIV 2010-404-4834
AND BETWEEN BODY CORPORATE 202546
Applicant
AND
EARL BUNTING Second Applicant
AND
ASB BANK LIMITED First Respondent
AND
WESTPAC NEW ZEALAND LIMITED Second Respondent
AND
BANK OF NEW ZEALAND LIMITED Third Respondent
AND
ANZ NATIONAL BANK LIMITED Fourth Respondent
AND
KIWIBANK LIMITED Fifth Respondent
AND
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED Sixth Respondent
Hearing:
9-11 November 2010
Appearances: D R Bigio, T J Rainey and G C Brunton for applicants
M V Robinson, N E Montgomery for Westpac Banking Corporation
J A McKay and L K Hsin (Bank Respondents except Westpac)C Leishman (9th respondent in Columbia Apartments application) in person
V Smith (10th respondent in Columbia Apartments application) in person
V S Shepherd and S A White (11th respondents in Columbia
Apartments application) in person
Judgment: 30 May 2011
JUDGMENT OF ALLAN J
In accordance with r 11.5 I direct that the Registrar endorse this judgment with the delivery time of 10 am on Monday 30 May 2011
Solicitors: [email protected] [email protected]
Chapman Tripp, Auckland, [email protected]
Rainey Law, Auckland [email protected] [email protected]
Index
Introduction Paragraph
01
Enforcement issues 09 The Cotesmore Way Scheme 48 The Columbia Apartments Scheme 53 Columbia Apartments – which rules apply? 61 Columbia Apartments – costs allocation 70 Columbia Apartments – further issues 105 Peer Review 107 Tenders 108 Vacation of the building 110 Building committee 112 Definition of repairs 118 Insurance 120 Legal Status of levies 121 Enforcement and funding issues 122 Governance issues 123 Paragraph 4 of the amended Scheme 126 Additional matters 129 Summary 131 Costs 133
Introduction
[1] These are separate applications by two Bodies Corporate for orders under s 48 of the Unit Titles Act 1972 (the Act) approving schemes designed to facilitate the remediation of damage caused by water ingress.
[2] Body Corporate 198072 is concerned with an apartment block located at
50 Nelson Street, Central Auckland, known as Columbia Apartments. It comprises
87 apartments situated within a four storey complex.
[3] Body Corporate 202546 is concerned with a 41 unit residential development known as Cotesmore Way, located at 1/41 Cotesmore Way, Parnell.
[4] The applications were heard together because a common issue arises in each, namely a question as to whether it is legitimate for a scheme under s 48 of the Act to make provision for an application to the Court by the Body Corporate for directions as to the sale of the unit of a defaulting proprietor, including directions as to the entitlements of mortgagees. It is this last feature which has attracted strong opposition from mortgagees of units in each of the apartment complexes.
[5] That is the only question which arises in the Cotesmore Way application, which is otherwise unopposed.
[6] The same cannot be said of the Columbia application. There, several additional disputes require resolution. One concerns the validity of the Body Corporate’s rules. Another relates to cost allocations for forthcoming remedial work. There are also governance questions.
[7] Following a three day hearing in November 2010, I gave directions for the filing of additional memoranda by way of reply. The volume of material filed in accordance with those directions was unexpectedly substantial. The applicants elected to place before the Court amended schemes, which to some degree reflected the arguments presented at the hearing. References in this judgment to the respective
schemes are references to these amended schemes. Further memoranda were filed up to the Christmas vacation.
[8] It is convenient first to discuss the provisions in each scheme which would, if approved, enable each Body Corporate to seek court directions affecting the rights of mortgagees. These provisions are found in the enforcement issues section of each Scheme.
Enforcement issues
[9] As originally drafted, each Scheme made provision for additional enforcement powers in respect of unpaid levies. In Part VII each Body Corporate was empowered to serve notice of default for unpaid levies, and to apply to the Court for the following orders if the default remained unremedied:
(a) directing the sale of the whole or any part of the unit(s);
(b) that the sale be conducted by the Body Corporate or by the
Registrar;
(c) making conditions concerning all or any of the following matters: (i) The advertising of the sale;
(ii) other marketing of the mortgaged property proposed to be sold;
(iii) the conditions of sale:
(iv) the manner in which the sale is to be conducted.
(d) vesting the unit(s) in the purchaser and discharging any mortgage or other encumbrance;
(e) directing the Registrar, or, if it is more convenient appointing a person other than the Registrar, to execute or register a transfer or assignment of the property to the purchaser or a discharge of any mortgage or other encumbrance;
(f) determining the priority of mortgagee or other encumbrances over the property.
[10] Extensive provision is made for service on interested parties (including mortgagees) of default notices and Court applications. The provisions of sub- paragraphs (d)-(f) above (and indeed all associated provisions in the schemes) have
attracted stern opposition from counsel for the mortgagees. They argue that the Court has no jurisdiction to interfere with the established rights of mortgagees in the fashion contemplated by the schemes, and that accordingly, the impugned provisions are both futile and inappropriate.
[11] In memoranda filed after the hearing, counsel for the applicants maintain their argument that the Court does have jurisdiction in an appropriate case to make orders of the type for which the schemes provide, but say that if the Court comes to the contrary conclusion, the offending provisions can simply be severed from the schemes.
[12] These applications invoke s 48 of the Act, which provides:
48 Scheme following destruction or damage
(1) Where any building or other improvement comprised in any unit or on any land to which a unit plan relates is damaged or destroyed, but the unit plan is not cancelled, the Court may, on the application of the body corporate, an administrator, the proprietor or one of the proprietors of a unit, or a registered mortgagee of a unit, by order settle a scheme including provisions—
(a) For the reinstatement in whole or in part of such building or other improvement; or
(b) For the transfer of units to the proprietors of the other units so as to form part of the common property.
(2) Where an order is made under paragraph (b) of subsection (1) of this section, the provisions of section 19 of this Act shall, so far as they are applicable, but subject to any order of the Court to the contrary, thereafter apply to any such transfer.
(3) A notice of any application made under subsection (1) of this section shall be served on the Registrar who shall thereupon enter on the supplementary record sheet a notification that application has been so made.
(4) On any application to the Court under subsection (1) of this section, any person having or claiming to have any estate or interest in any unit or in the land or in any part of the land or any insurer who has effected insurance on the buildings or other improvements comprised in any unit or in the land or any part thereof shall have the right to appear and be heard.
(5) In the exercise of its powers under subsection (1) of this section, the Court may make such orders as it considers expedient or necessary for giving effect to the scheme, including orders—
(a) Directing the application of any insurance money;
(b) Directing payment of money by or to the body corporate or by or to any person;
(c) Directing the deposit of an appropriate new unit plan; or
(d) Imposing such terms and conditions as it thinks fit.
(6) The Court may from time to time cancel, vary, modify, or discharge any order made by it under this section.
(7) On any application under this section the Court may make such order for payment of costs as it thinks fit.
[13] The scope of the section was usefully discussed by Heath J in Fraser v Body
Corporate S63621:1
[88] Section 48 of the principal Act is set out at para [82] above. The Court is given a wide discretion to settle a scheme which allows for a damaged or destroyed building (or other improvement) to be reinstated. Alternatively, the scheme may provide for the transfer of units to the remaining proprietors, to form part of the common property.
[89] Section 48(3) and (4) require notice of an application to be served on both the District Land Registrar and any insurer who has effected insurance on the buildings or other improvements comprised in any unit or in the land.
[90] In exercising powers under s 48(1), the Court may make ―such orders as it considers expedient or necessary for giving effect to the scheme‖. By way of non-exhaustive examples, s 48(5) empowers the Court to direct the application of any insurance money, to direct payment of money by or to the Body Corporate or any other person, to direct the deposit of an appropriate new unit plan or to impose such terms and conditions as it thinks fit. From time to time, any order made under s 48(1) may be cancelled, varied, modified or discharged.
[91] These provisions suggest that the Court is given a wide discretion to do justice among all proprietors in a manner that will best resolve the particular problem that has led to the application. There is no fetter on the Court’s discretion, which is designed to meet a vast array of circumstances that could not have occurred to the drafters of s 48. The only absolute requirement is that the Court exercise its discretion judicially, not arbitrarily or capriciously.
[14] The intention of the Legislature in enacting s 48 was plainly to give the Court broad discretionary power to make such orders as may be appropriate in any given
1 Fraser v Body Corporate S63621 (2009) 10 NZCPR 674.
case. Moreover, it is clear that Parliament contemplated that the rights of mortgagees might be affected by applications under s 48, and for that reason, it conferred upon mortgagees an entitlement to make an application for a s 48 order, and to appear and be heard on any application made under the section.
[15] In passing, it is interesting to note that s 48 remains in virtually unaltered form in the Unit Titles Act 2010, which is not yet in force.2
[16] Counsel for the mortgagees accept that a Body Corporate must be able to raise levies to finance obligations imposed on it under the Act, and that it is therefore appropriate for the schemes to make proper provision for the collection of levies. But the present applications endeavour to streamline the enforcement process in respect of defaulting unit owners, by permitting the Body Corporate to apply for a Court order for the sale of the unit of any such owner, without the need first to obtain judgment and an order for sale, enforcing that judgment. In so doing, the applicants seek to reserve the right to apply for orders which may affect the rights of mortgagees. It is these provisions that have attracted particular mortgagee opposition.
[17] The applicants rely, by way of analogy, on s 200 of the Property Law Act
2007, and seek to put themselves in effectively the same position as they would be in if they held unregistered mortgages over the unit of a defaulting proprietor.
[18] Section 200 provides:
200 Sale by mortgagee through court
(1) A mortgagee who is entitled to sell mortgaged property may apply to a court for assistance—
(a) in exercising the power of sale; or
(b) in completing the transfer of the property to the purchaser (if the property has already been sold by the mortgagee).
(2) The court may make all or any of the orders specified in subsection
(3) if it is satisfied that—
2 Unit Titles Act 2010, s 72,
(a) there has been a default that has not been remedied or, in the case of personal property, the property is at risk; and
(b) the mortgagee has become entitled under the mortgage and subpart 5 to exercise a power of sale in respect of the mortgaged property.
(3) The orders are as follows:
(a) an order directing the sale of the whole or any part of the mortgaged property:
(b) an order that the sale be conducted by the mortgagee or by the Registrar:
(c) an order making conditions concerning all or any of the following matters:
(i) the advertising of the sale:
(ii) other marketing of the mortgaged property proposed to be sold:
(iii) the conditions of sale:
(iv) the manner in which the sale is to be conducted:
(d) an order permitting the mortgagee to become the purchaser at the sale otherwise than under section 196:
(e) an order permitting the current mortgagor or any other person entitled to redeem the mortgaged property to redeem it otherwise than under subpart 4 or section 195:
(f) an order vesting the property, for any estate or interest that the court thinks fit, in the purchaser (including the mortgagee if the mortgagee is the purchaser) or discharging any mortgage or other encumbrance:
(g) an order directing the Registrar, or, if it is more convenient, appointing a person other than the Registrar, to execute or register a transfer or assignment of the property to the purchaser (including the mortgagee if the mortgagee is the purchaser) or a discharge of any mortgage or other encumbrance:
(h) an order determining the priority of mortgages or other encumbrances over the property.
(4) An order under subsection (3)(f), or a transfer, assignment, or discharge executed or registered under subsection (3)(g), has the same effect as a transfer or assignment instrument for the mortgaged property executed or registered by a mortgagee under section 183, or a mortgage discharge instrument for a mortgage duly executed or registered in accordance with section 83, as the case may be.
[19] Counsel for the applicants argue that the two schemes do no more than replicate the entitlement of a mortgagee to apply to the Court for orders of the type set out in s 200. The Bodies Corporate would not seek to advance themselves in order of priority over registered mortgagees. The principal intention would be to utilise the relevant provisions of the scheme where it was in the best interests of the relevant Body Corporate to effect a sale for whatever could be achieved. The mortgagees would be entitled to the net proceeds of sale in their usual order of priority.
[20] It is to be noted, however, that if the sale proceeds were insufficient to repay the mortgages, the mortgagees would become unsecured creditors of the defaulting owner. Meanwhile, the relevant Body Corporate would be able to look to a purchaser of the relevant unit for payment of outstanding levies, because it could refrain from issuing a certificate under s 147(3)(b) of the Unit Titles Act 2010 until levies were brought up to date.
[21] In a similar vein, both s 124 of the Unit Titles Act 2010 and s 32 of the current Act impose liability for outstanding levies upon the unit owner who incurred the levy, and upon the unit owner at the time proceedings for recovery are instituted.
[22] Counsel for the applicants submit that, although the power to apply to the Court would be utilised only rarely, the disputed provisions should nevertheless remain in the schemes unless counsel for the mortgagees can show that the Court would never under any circumstances direct a sale of the unit over the objections of the first mortgagee.
[23] Counsel for the mortgagees argue that this issue has effectively already been heard and determined in favour of the mortgagees by Keane J in Body Corporate
322588 v K Mitchell Investments Ltd.3 There, the Body Corporate sought to include
a condition which imposed upon mortgagees liability to pay outstanding levies where the mortgagor was in default. In that case, the Body Corporate assumed that levies paid by mortgagees would constitute a further advance under the mortgage of
the defaulting owner.
3 Body Corporate 322588 v K Mitchell Investments Ltd (2009) 10 NZCPR 611..
[24] Keane J rejected the proposed conditions, holding that the Act:4
… does not confer, directly or indirectly, any ability to trench upon the relationship in contract between mortgagor and mortgagee, between banker and customer, in the manner proposed. Indeed if such terms could be imposed they would alter radically that relationship and in ways that could work to the great disadvantage, not just of lenders, but of unit title proprietors seeking finance.
[25] The implications of the impugned provisions must be considered in the light of the established rights of mortgagees. A modern analysis of the respective rights of mortgagee and mortgagor is to be found in the judgment of the English Court of Appeal in Silven Properties Ltd v Royal Bank of Scotland plc.5 There, the Court confirmed that a mortgagee is entitled to sell the mortgaged property as it is, and is under no obligation to improve it or increase its value.6 Further, the mortgagee is free to investigate whether and how it can unlock the potential for an increase in the value of the property, but is not bound to do so. It is likewise free at any time to halt its efforts to proceed immediately with a sale.7
[26] Most importantly for present purposes, a mortgagee is under no duty of care to the mortgagor in respect of the timing of a sale and can act in its own interests in deciding whether and when it should exercise its power of sale.8 These principles
are well established and are not in dispute.9
[27] The challenged portion of the present schemes would tend to cut across the long established rights of a mortgagee. It is difficult to see how a Court could entertain an application by a Body Corporate for an order directing the sale of the unit property, the discharge of mortgages and the payment of the net proceeds to the first mortgagee, (leaving the latter to sue for any shortfall) in the light of the well established principle that it is for a mortgagee to determine whether and when a
power of sale ought to be exercised. As Mr McKay submits, the Legislature takes
4 Ibid at [66].
5 Silven Properties Ltd v Royal Bank of Scotland plc [2003] EWCA Civ 1409.
6 Ibid, at [16].
7 Ibid, at [17].
8 Ibid, at [15].9 See eg, Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295 at 312 (PC) and
Commercial Receivables Ltd v Thwaites (2008) 9 NZCPR 865 (HC).
care to express itself clearly when over-riding a mortgagee’s right to remain
passive.10
[28] Moreover, the proposed provisions are inconsistent with the basic entitlement of a party to look to the Court for enforcement of his or her contractual rights.11 The need for commercial certainty in contractual relationships is also engaged.12
[29] The related concept of freedom of contract is likewise under attack here, in that the proposed rules derogate from the rights of the mortgagee freely negotiated between itself and its mortgagor.13
[30] The foregoing considerations provide a somewhat unpromising context for an argument that, for ease of administration, the Body Corporate ought to be entitled to ask the Court to direct a sale of mortgaged property in order to facilitate the recovery of unpaid levies. A registered mortgage creates an indefeasible interest as mortgagee. The latter is entitled to recourse against the land in order to recover all
principal, interest and expenses in the event of default under the mortgage.14 A
mortgagor is entitled to redeem the mortgage only upon payment of all amounts properly owing under the security.15
[31] Other provisions in the Property Law Act 2007 are also inconsistent with the proposed provisions. For example, s 176 imposes a duty on a mortgagee exercising the power of sale only in relation to the mortgagor, a covenanter, or other security holders. Moreover, the right to apply for a sale pursuant to s 107 of the Property Law Act 2007 is confined to a current or former mortgagor, any covenanter, and any other person entitled to redeem the mortgaged property.
[32] In Mitchell Keane J observed that:16
10 See eg Property Law Act 2007 s 151, which makes a mortgagee in possession of land liable for waste; and the Local Government (Rating) Act 2002 s 62(1)(c) which entitles a local authority to recover outstanding rates from a first mortgagee in certain circumstances.
11 Fender v Mildmay [1937] 3 All ER 402 (HL) at 423.
12 Harrison v Harrison [2004] 2 NZLR 638 (HC) at [128]; Rolls-Royce New Zealand Ltd v Carter
Holt Harvey Ltd [2005] 1 NZLR 324 (CA) at [118].
13 Amaltal Corporation Ltd v Marhuia (NZ) Corporation Ltd [2004] 2 NZLR 614 (CA) at [56].
14 Property Law Act 2007, s 87.
15 Ibid, s 97.
16 Mitchell fn 3.
The meaning the Body Corporate contends for must be set against the common law as it concerns freedom of contract, the relationship between banker and customer, and the nature of a mortgage security, which is also to be found partly in the Properly Law Act 2007.
[33] I agree. In my view the challenged provisions are liable to transfer any risk of proprietor default from the Body Corporate to the mortgagee.
[34] If the proposed provisions remain in the schemes, the applicants will be entitled to apply to the Court for an order directing the sale of a defaulting owner’s unit. If the Court makes an order and the property concerned is sold, the Body Corporate would receive payment of the outstanding levies from the purchaser, who would no doubt take into account the obligation to make good the outstanding levies in calculating the purchase price.
[35] While the Body Corporate would no doubt benefit accordingly, the mortgagee would not only have suffered the loss of its security, but would also rank as an ordinary secured creditor for the shortfall owing by its mortgagor. In other words, the making of an order would reverse the respective positions of Body Corporate and mortgagee. Prior to the making of an order, the Body Corporate would have been an unsecured creditor in respect of unpaid levies, while the mortgagee would have been fully secured.
[36] Counsel for the applicants argue this is justified because it represents a convenient procedural solution, in circumstance where much time and expense can be involved in pursuing a defaulting owner for unpaid levies. Counsel for the applicants accepts that ordinary summary judgment procedures and post-judgment remedies are available, but argues that the rights of the banks as mortgagees ought to be subordinated to the efficient remediation of buildings, given what is said to be the plain meaning of s 48 and its broad remedial purpose. It is further argued that the mortgagees must be taken to have understood that they faced the risk of a s 48 application when they took security and made their advances. In other words, there are risks inherent in lending to owners of unit titles that do not arise where the security is a freehold title. Counsel refers to the Court of Appeal judgment in Byron
Avenue,17 to the effect that the fruit must accompany the rind; the mortgagees, having chosen to lend on the security of a unit title, do so in the knowledge that they may face a s 48 scheme which impinges upon their securities.
[37] I do not accept that the applicants are entitled to subordinate the interests of the mortgagees in the manner envisaged by these schemes. As I understand it, the basis for this aspect of the applications is that remediation ought to be facilitated by orders made under s 48, that ordinary debt recovery procedures are cumbersome, expensive and time consuming, and that the Body Corporate ought to be armed with the right to make application to the Court to sell up the property of a defaulting owner in order to recover outstanding levies. The timely recovery of levies would tend to prevent the domino effect which has occurred in some unit title developments, where there are insufficient solvent owners to carry forward remediation schemes.
[38] But in advancing the present schemes, the applicants seek the right to apply to the Court for orders which, if granted, would override the long established and inviolable rights of mortgagees. The timely recovery of outstanding levies by the Body Corporate would be matched by the loss of a security by the mortgagee, coupled with relegation to unsecured status for the outstanding balance owed by the mortgagor.
[39] It is no answer to distinguish, as counsel for the applicants seeks to do, between the loan advance on the one hand and the security on the other. They are intertwined for present purposes. In my view, the analogy with s 200 of the Property Law Act 2007 is inapt. That section does not operate to enable a subsequent mortgagee to obtain an order for sale in defiance of the wishes of the first mortgagee. In particular, it does not operate to disturb the established priorities as between security holders. The clear purpose of s 200 is to facilitate the discharge of mortgage where, for one reason or another, ordinary mortgagee sale procedures cannot be carried into effect. In particular, s 200(3)(f) is subject to s 200(4) which, via
s 183(4), preserves mortgage priorities.
17 Byron Avenue [2010] NZCA 65.
[40] Even if the present provisions were approved as part of the Schemes, it is impossible to envisage any circumstance in which the Court would entertain an application by a Body Corporate which had the effect of relegating a mortgagee to the status of unsecured creditor, simply to enable a Body Corporate to recover outstanding levies from a mortgagor proprietor.
[41] Mr Robinson submits a mortgagee’s legal right to full repayment before discharge is fundamental to the legal relationship between mortgagor and mortgagee.18 I accept that submission. There is no warrant for placing upon mortgagees the risk that their priority status may be lost simply by reason of the nature of the security.
[42] Instead, persons who purchase unit title properties and so become participants in Bodies Corporate must be taken to have assumed the risk that, from time to time, some owners will default in the payment of levies. The cost of funding the Body Corporate then falls on those proprietors who do pay levies..
[43] The Court is told that there are no outstanding levies in the case of either of the applicants, and so there is no compelling case at a practical level for approval of the challenged provisions in any event.
[44] Counsel for the applicants submits that, even if I should conclude (as I have), that the Court has no jurisdiction to approve a scheme which might lead to a derogation of the rights of mortgagees, the Schemes ought nevertheless to remain largely unamended. Counsel argues that it will be sufficient to delete sub-paragraphs (d), (e) and (f) of the relevant portion of each application which can be severed from the rest of the Scheme.19 The sub-paragraphs concerned deal with authority to execute the necessary documents, and the determination of the priority of mortgages and other encumbrances.
[45] I am not persuaded that it is necessary or desirable to retain in either scheme those provisions which empower the Body Corporate to apply to the Court for an
18 Jackson Mews Management Ltd v Menere [2010] 2 NZLR 347 (CA) at [43].
19 As reproduced in [9] above.
order directing the sale of a unit. The relevant clauses appear as paragraphs 18-21 inclusive in the amended scheme for Columbia Apartments, and as paragraphs 17-20 in the amended scheme for Cotesmore Way.
[46] The ordinary enforcement procedures of the Court (involving a summary judgment application and subsequent execution) are available to each Body Corporate. In virtually every case where an owner is in arrears in payment of levies, the relevant unit will carry one or more mortgages. It is impossible to conceive of a situation in which a Court would order the sale of a unit over the objection of a mortgagee, given that any such order would be largely futile. No discharge would be forthcoming from a mortgagee until everything secured by the mortgage was paid. On the other hand, if the mortgagee agreed that the unit ought to be sold, then the appropriate course would be for that mortgagee to conduct a mortgagee sale in the usual way.
[47] Therefore, it cannot be said to be necessary or expedient for either scheme to contain provisions which would empower the Body Corporate to apply to the Court for the sale of a unit for non-payment of levies.
The Cotesmore Way Scheme
[48] The Cotemore Way Scheme is otherwise unopposed. All of the owners agree that a scheme for the purpose of facilitating the remediation of the building should be settled under s 48 of the Act, . In a report dated 1 May 2009 and prepared by Babbage Consultants Ltd, the Body Corporate was advised that extensive repairs were required to the units and to common property, to remedy moisture damage. The scope of the required works will only become fully apparent when remedial works actually commence. Babbage Consultants Ltd has prepared plans and specifications for the proposed remedial works, together with any works required to repair any latent damage. All of that work is intended to be governed by the scheme. The owners agree that the work ought to be undertaken as a single project, covering both common property and private units.
[49] The scheme empowers the Body Corporate to carry out the repairs, irrespective of whether they are to common property or to principal or accessory units. The scheme will be undertaken by the Body Corporate in accordance with its existing rules, but also in accordance with the Unit Titles Act 2010 from the date upon which that Act comes into force. All major decisions in connection with the scheme are to be made by the Body Corporate at a general meeting called for the purpose and not by the committee of the Body Corporate. The scheme contains a definition of major decisions. There is extensive provision for the raising of levies which are to be calculated in accordance with unit entitlements for each unit, irrespective of whether the repairs are to common property or otherwise.
[50] As to that, I am satisfied that where there is no opposition, a Body Corporate may in a given case ask the Court to approve a scheme which provides for the sharing of all costs on a unit entitlement basis, even though the result may be that the cost of repairs to individual units may be borne disproportionately. I discuss this issue below.
[51] Express provision is made for the filing of a memorandum with the Court, seeking to discharge the scheme once repairs have been concluded. I see no objection to that course.
[52] I am satisfied that, save for the provisions of clauses 17-20 of the Cotemore Way scheme, it is appropriate to approve the scheme in the amended form attached to the memorandum of counsel for the applicant dated 19 November 2010.
The Columbia Apartments Scheme
[53] All unit owners agree that, by reason of water ingress, significant work is needed by way of remediation. There is no opposition to the application in principle. A report prepared by Alexander & Co Ltd, dated 31 August 2007, identified remedial works required to repair the buildings. Again however, the scope of the required work will become fully apparent only when remedial works actually commence. Alexander & Co Ltd have prepared plans and specifications for the remediation of known damage. It is intended that the scheme also cover works required by reason
of latent damage discovered after remediation has commenced. The cost of the work will exceed $5 million. The required work will cover both common property and all of the units, including principal and accessory units.
[54] Again, it is agreed that the repairs ought to be conducted as part of a single project, and the scheme is intended to ensure that repairs proceed in a co-ordinated manner. At an early stage, the Body Corporate, and 78 of some 87 unit owners, agreed that the Body Corporate would carry out the remedial works. But that proposal did not proceed because some owners did not, or would not, sign the remedial works agreement. There was doubt as to whether the Body Corporate had power to carry out the works in the absence of consent of all owners. Moreover, the Body Corporate may not have the power to raise levies under s 15(2) of the Act in those circumstances.
[55] Mr Leishman, Ms Smith, and Mr Shepherd and Mr White jointly oppose the Columbia Apartment Scheme. All appeared at the hearing in person. Mr Leishman and Ms Smith raise a significant range of objections. Mr Shepherd and Mr White are principally concerned with cost allocation issues.
[56] The principal areas of disagreement relate to cost sharing between unit owners. An associated question is as to the validity of the amended rules of the Body Corporate. A number of other detailed objections were considered at the hearing.
[57] In its application, the Body Corporate sought a declaration as to the validity of its rules. In the context of the proposed scheme, it is important for a Body Corporate to know which rules govern its affairs. As the argument progressed however, counsel for the Body Corporate suggested that the rule validity question might conveniently be set aside for the time being. It was not thought by counsel to impinge upon any other question the Court is called upon to decide.
[58] It appears from subsequent memoranda that counsel for the applicant believed the rule validity question was adjourned by me during the course of the hearing. That was not the case. My direction (as recorded in my own notes), was
that argument as to the validity of the rules could be postponed until after the Court had heard argument on the costs allocation question. But the application for a declaration as to the validity of the applicant’s rules was never formally adjourned.
[59] I consider it appropriate to deal with the issue in this judgment. I accept, as is submitted by Mr Leishman, that it does indeed bear upon other issues. In particular, there has been a governance dispute (touched upon below), in which the composition of the committee of the Body Corporate has been determined by reference to amended rules which restrict the maximum number of committee members. Given the tasks that lie ahead of this Body Corporate, it is important, in my view, that all unit owners know where they stand in respect of the applicable rules. Moreover, the amended rules impose on the Body Corporate the responsibility for maintaining exterior walls, albeit that most exterior walls are part of individual units, so the validity of the amended rules is relevant to cost allocation issues as well.
[60] I therefore turn to deal with that question as a threshold issue.
Columbia Apartments – which rules apply?
[61] Schedules 2 and 3 of the Act contain rules which may be added to, or amended, or repealed, by unanimous resolution of the proprietors, or by resolution of the Body Corporate at a general meeting.20
[62] A proprietor is the person for the time being registered as proprietor of the stratum estate in a unit.21 A stratum estate is not created until the deposit of the unit plan.22 Importantly, the Body Corporate itself does not come into existence until the date of that deposit.23 Accordingly, until the unit plan is deposited, there are no proprietors and no Body Corporate with the ability to amend the rules under s 37(3)
or (4).
20 Unit Titles Act 1972, s 37(3) and (4).
21 Ibid, s 2.
22 Ibid, s 4.23 Ibid, s 12(1).
[63] Ms Amy Edwards, the current chairperson of the Body Corporate, has sworn an affidavit in support of the Columbia Apartments’ application. She says that Unit Plan 198072, relating to the Columbia Apartments, was deposited on 19 October
1999. Prior to that, on 30 September 1999, the Body Corporate purported to adopt a resolution approving amended rules. From time to time the Body Corporate has conducted its affairs in accordance with those amended rules.
[64] But until the unit plan was deposited, the Body Corporate did not exist and there were no proprietors. The purported amendment to the rules on 30 September
1999 was therefore a nullity.24 Accordingly, the applicable rules for the Columbia
Apartments Body Corporate are those set out in Schedules 2 and 3 to the Act. There will be a declaration to that effect.
[65] As earlier noted, r 2.2(c) of the (invalid) amended rules provided that the Body Corporate was under a duty to repair, maintain and renew the exterior walls, windows and roof of the building. Under the default rules, it is for a proprietor to
―repair and maintain his unit …‖ In the present case, it is common ground that much of the exterior walls form part of the individual units and are not, for the most part, common property.
[66] It seems clear that members of the Body Corporate were on notice as to the possible invalidity of the amended rules as long ago as 22 January 2008. The minutes of a committee meeting held on that date noted that the validity of the rules might be brought into question, and resolved that in the event that they were challenged, the committee would act in accordance with the Second Schedule (default) rules in the Act.
[67] The rules have never been validly amended, and the default rules accordingly apply to the Body Corporate’s affairs. Individual proprietors are therefore responsible for the maintenance of exterior walls which form part of their units.
[68] Against that background, I turn to the topic upon which the level of dissension was greatest, namely, the manner in which repair costs ought to be borne,
24 See Fifer Residential Ltd v Gieseg HC Auckland CIV 2004-404-2189, 15 June 2005 at [51].
as between individual proprietors on the one hand, and the Body Corporate on the other.
[69] Before doing so, it is relevant to note that at an extraordinary general meeting of the Body Corporate conducted on 9 December 2010 (that is, after the date of the hearing) members of the Body Corporate passed a resolution (by 24 votes to five) further amending the draft scheme. This amendment requires the Body Corporate to make all decisions in furtherance of the Scheme in accordance with ss 75-137 (inclusive) of the Unit Titles Act 2010, notwithstanding that as at the date of the Scheme, that Act was not in force and did not directly apply to the Body Corporate. This was of course an amendment only to the Scheme. It did not purport to constitute an amendment to the rules.
Columbia Apartments – costs allocation
[70] Members of the Body Corporate have known since at least 2007 that significant remediation work would be requires to the Columbia Apartments. The Body Corporate had been in receipt of legal advice for a considerable period prior to the filing of the present application.
[71] An important meeting of Body Corporate proprietors was held on
25 February 2010 in order to discuss aspects of the proposed Scheme. Twenty-five proprietors attended; there were proxies from four more. An important aspect of the discussions at that meeting was the basis upon which proprietors were to share in remediation costs. The applicant’s solicitors and counsel were present and gave detailed advice to the meeting. Some proprietors favoured a unit entitlement approach to all costs. Others considered that there ought to be a clear distinction between repairs for which the Body Corporate was responsible under the rules, and those which were the legal responsibility of individual proprietors. That was a matter of significant importance, considering that most exterior walls formed part of individual units, and were not common property.
[72] Ultimately, near the end of the meeting, Mr Leishman proposed a compromise formula that took into account the unit entitlement approach which
would ordinarily govern common property repairs, and also the estimated cost of repairs to individual units. The meeting adopted that approach, and resolved that:
… the Body Corporate engage Rawlinsons to undertake a quantity surveying assessment as to the percentage on a unit by unit basis of cost of repairs to that unit; and that this be aggregated with unit entitlement percentages to give our share of a compromised average figure.
[73] The effect of the resolution was to produce a formula which blended the unit entitlement approach with an assessment of the cost of repairs to individual units (including repairs to exterior walls where they formed part of individual units).
[74] Subsequently, Mr Higham of Rawlinsons estimated the relative exterior wall area for each unit, and has prepared a list of comparative percentages. The resulting percentages have been incorporated in the draft scheme. More recently the percentages have been re-estimated, with the result that certain owners are now faced with a greater overall share of the costs, and other owners are faced with less.
[75] Given the diametrically opposed positions of Mr Leishman and Ms Smith on the one hand, and Mr Shepherd and Mr White on the other, and their respective opposition to this aspect of the Scheme, it is necessary to refer to evidence of what occurred following the resolution of 25 February 2010.
[76] Mr Grocott is a unit proprietor who is a member of the committee of the Body Corporate. Although unable to attend the 25 February meeting, he was charged with responsibility of instructing Rawlinsons to prepare the necessary calculations. He says that he reviewed the minutes to ensure that the resolution was properly conveyed to Rawlinsons. On 6 April 2010 he contacted Mr Higham, and confirms that there was an exchange of e-mails in which Rawlinsons were asked to advise as to the best method for establishing the repair cost for each unit. By affidavit Mr Higham explained his approach in this way.
6.My colleagues and I considered two alternative methods of measurement; the floor area of each unit as a percentage of the total floor area, and the wall area of each unit as a percentage of the total external wall area for the development. Rawlinsons’ final approach was to estimate the repair costs for each unit by measuring the wall area. I consider that this is the most fair and reasonable approach to take, because the damage to the development is generally the result
of facade deficiencies. The Body Corporate then commissioned Rawlinsons to prepare the schedule described in my previous affidavit.
7.In my view, there are only two other ways to work out the repair cost for each unit. Firstly, the repair costs could be assessed by measuring the quantities of each item of work to be carried out to that unit in accordance with the plans and specifications. This option would be very expensive (between $1000 and $2000/unit) and time consuming and I cannot say that it would be any more or less accurate than the external wall area formula Rawlinsons adopted. Secondly, the actual costs of repair to each unit could be calculated, after the remedial works have been completed. Again, this option would be horribly expensive and could only take place once all the works are complete.
…
9.I confirm that we did not include the external walls on the south side of blocks 1 and 4, in the first draft of our measurement of the external wall area of each unit. A copy of this draft is annexed hereto and marked ―C‖.
10.Ric Grocott queried whether or not the walls should be included, by e-mail dated 13 April 2010. I agreed that the walls should be included in the measurement because any remedial works required should also be carried out under the scheme.
[77] The re-estimated percentages have been incorporated in the latest amended scheme lodged with the Court following the hearing.
[78] Mr Leishman and Ms Smith oppose the formula approach. While accepting that in an appropriate case the Court has jurisdiction under s 48 to depart from the cost sharing regime prescribed by the Act (with proprietors sharing the cost of repairs to common property and bearing alone costs of repairs to their own units), they argue that this is not a case in which departure is warranted.
[79] Mr Shepherd and Mr White take an entirely different line. They say that the proper outcome is for costs to be shared in accordance with the respective unit entitlements of the proprietors; that would to all intents and purposes have been the outcome had the amended rules applied. They say that they relied upon the validity of those rules when they purchased their units some years ago.
[80] Under the Act, the Body Corporate is responsible for repairs to common property, and individual proprietors are responsible for repairs to their individual
units. Levies to meet the cost of repairs to common property are to be calculated on the basis of unit entitlement.
[81] Although Mr Leishman accepts that in principle the Court has jurisdiction to depart from cost sharing arrangements mandated by the Act or by the rules, he submits that the Court has in practice done so only where a complex is of unusual configuration. He argues that no such issue arises here.
[82] I consider that the configuration of the Columbia Apartments is unusual in that, because the building is irregularly shaped, the units of some proprietors have a much greater exterior wall area than others. Moreover, respective wall areas are by no means commensurate with respective floor areas. By virtue of the unit plan, proprietors are responsible for the maintenance and upkeep of exterior walls which form part of their units, although the maintenance of those walls is clearly in the interests of all other proprietors and of the Body Corporate itself.
[83] I turn to a brief review of certain of the cases. In Young v Body Corporate
120066, Harrison J accepted that proprietors had a proper interest in ensuring that the building as a whole was kept in a state of adequate repair.25 Hence, an outcome where one or more proprietors benefited disproportionately was justified.26
[84] In Body Corporate 172108 v Meader, Heath J expressed his general agreement with Harrison J’s proposition that some proprietors may need to subsidise others, even in cases where one or more benefits disproportionately to the amount of any levy contribution. But Heath J considered that that was not a principle of
general application.27
[85] In Meader, Heath J held that the unique circumstance in that case (the Body
Corporate owned the exterior of levels 1-11 of the building, but the exterior of the
12th floor was owned by an individual proprietor) justified a different balancing of interests when apportioning costs.
25 Young v Body Corporate 120066 (2007) 8 NZCPR 932 (HC).
26 Citing Simons v Body Corporate Strata Plan No.5 181 [1980] VR (SC) at 108.
27 Body Corporate 172108 v Meader HC Auckland CIV-2009-404-6868, 3 March 2010.
[86] In Body Corporate 318596 v Bartlett (the Typhoon Investments case),28
Andrews J declined to approve a scheme which would have made unit owners responsible in part for the costs of repairs to the private property of other owners.29
She noted that no case had been cited to her in which such an outcome was approved.
[87] Mr Leishman, while opposing the formulaic approach embodied in the present scheme, accepts that in an appropriate case the Court can approve a costs allocation formula which involves cross-subsidisation, despite the reservations as to that held by Andrews J in the Typhoon Investments case.
[88] In Body Corporate 205963 v Becker, Stevens J approved a scheme, over the objection of a dissentient, which imposed on all proprietors an obligation to pay, on a unit entitlement basis, for all repairs to the building, whether common property or private property.30 Stevens J cited with approval the decision of Harrison J in Young.31
[89] The trend of the cases suggests that it will be proper, in certain instances, to approve a scheme which involves an element of cross-subsidisation. That approach will more often be justified where, by reason of the configuration of a building, a relatively inequitable burden is thrown on certain owners. I agree also with Harrison and Stevens JJ that a relevant consideration will be the over-arching interest of all proprietors in ensuring that a complex as a whole is properly maintained, even though Body Corporate expenditure may go to the repair or maintenance of an individual unit. But I endorse also the observation of Heath J to the effect that a departure from the cost sharing regime mandated by the rules of a Body Corporate is not to be approved as a matter of routine.
[90] It is relevant too, in my view, to take into account the degree of support for the application and the opposition to it among unit proprietors. That was a point
28 Body Corporate 318596 v Bartlett HC Tauranga CIV-2009-470-952, 13 May 2010.
29 At [67].
30 Body Corporate 205963 v Becker HC Auckland CIV-2009-404-6017, 21 April 2010.31 Ibid at [32].
made by Stevens J in Becker.32 Of course, the strength of support cannot, of itself, be determinative. But it is relevant to note that the remedial works agreement, to which I earlier referred, was supported by 78 out of 87 proprietors. More recently, the number of those attending meetings of the Body Corporate has dwindled somewhat; but a very substantial majority of those attending the meeting in February
2010 supported the blended formula advanced in the present application.
[91] It is noteworthy that the formula was devised by Mr Leishman himself at the meeting. He has now resiled from it, because he says it was proposed by him at the end of a long and difficult meeting by way of compromise alone, and that, on reflection, he considers the approach cannot be supported. Whilst he is entitled to change his mind, I am entitled to place some weight upon the fact that Mr Leishman (who has very considerable experience in the administration and management of bodies corporate) considered that the somewhat elaborate approach now embodied in the Scheme represented a proper resolution of the tensions between competing views at a time when proprietors were uncertain of the way forward.
[92] Ms Smith supports Mr Leishman’s argument generally for the reasons he
advanced.
[93] Mr Shepherd and Mr White, on the other hand, argue that a unit entitlement approach should be adopted in respect of all repair costs, save for interior fit-out repairs which must remain the responsibility of individual proprietors. Where there is any doubt as to where the dividing line occurs, then the assumption ought to be that the costs should be paid on a unit entitlement basis. Their unit has a much greater wall area than adjoining apartments which are of identical floor area, and so the blended formula imposes upon them a greater burden than rests upon adjoining proprietors.
[94] I accept that theirs is a legitimate concern, but given my conclusions as to the applicable rules for this Body Corporate, the default alternative to the proposed scheme would (by application of the rules) be for Mr Shepherd and Mr White to
become responsible for repairs to the whole of that part of the exterior wall which
32 Ibid at [37].
forms part of their unit. That would result in an even greater financial burden for them.
[95] I consider the blended formula approach appearing in the Scheme to represent an appropriate solution in this case. The unit entitlement element of the formula reflects the proper approach to the sharing of common property repair costs between owners, while the introduction of a calculation based on the relative percentages of exterior wall area forming part of each unit reflects the underlying legal liability of each owner for those costs of repair. The two elements of the formula are weighted equally. The result is, in my view, that while there may be an element of cross subsidisation by one proprietor of another, it will be relatively limited, and it is justified by the unusual configuration of the building. In other words, the formula reflects an equitable solution to a difficult costs allocation problem.
[96] Certain proprietors will benefit from the application of the formula; others will be disadvantaged. There were allegations in the affidavits, and in submissions, to the effect that certain committee members stood to benefit significantly from the application of the formula. There is a denial of any deliberate skewing of the formula to achieve that outcome. Moreover, Mr Leishman has himself very properly disclosed to the Court that since the hearing he has acquired a further unit in the complex, and, as it now transpires, the argument he advances would, if accepted, operate against his financial interests.
[97] It would not be proper in my view, to place any weight on allegations or counter-allegations related to the position of individual proprietors. I do however, take into account the fact that Mr Leishman says that he has a number of supporters (perhaps more than a dozen by now), who consider his approach to cost allocations to be correct.
[98] The proposed blended formula represents a particularly apt solution in the present instance, because as Mr Alexander explained in his evidence, the bulk of the remedial work will involve the removal of the outer cladding, rectification of whatever damage is identified behind the exterior cladding, and then recladding once
repairs are otherwise concluded. So, the focus upon respective wall areas is appropriate rather than a simple unit entitlement approach for which Mr Shepherd contends.
[99] A question was raised about the south wall which abuts an adjoining building so closely that there is a possibility (witnesses are unable to be more precise than that) that damage to that wall may be more limited than elsewhere. There is no doubt that the wall is in need of remedial work - the doubt is as to the extent of that work. In a first calculation Mr Higham omitted the south wall, but the calculation for which approval is now sought in the amended Scheme, does take the south wall into account.
[100] I am satisfied that is the proper approach. It is consistent with the element of compromise which underpins the resolution and the Scheme itself.
[101] During the course of the hearing, significant attention was paid to the likely cost of assessing separately the cost of repairs to individual units (including exterior walls). Mr Leishman and Ms Smith argue that a better solution, complying with default rules, would be for levies to be calculated in the first instance on the basis of the estimated costs of repair to each unit, and for final levies to be adjusted in the light of actual costs when remediation is complete. They contend that the cost of undertaking an exercise of that sort would not be significant when balanced against the likely overall costs faced by the members of the Body Corporate.
[102] Mr Higham’s evidence as to the cost of that exercise has been reproduced earlier in this judgment. Although there was some evidence to suggest that the cost of separating out the cost of repairs to each individual unit might not be as expensive as Mr Higham believes, I am satisfied that there is an efficiency advantage in adopting the proposal contained in the Scheme.
[103] The Columbia Apartments complex has been in need of remedial work for a significant period. Rapid progress is required. I consider the cost sharing regime proposed in this scheme to represent an equitable solution, justified by the unusual
configuration of these apartments and the need to devise an outcome that is consistent with prior authority and does broad justice as between all the proprietors.
[104] For these reasons, I consider the cost allocation formula contained in the
Scheme to be appropriate. It will therefore be approved.
Columbia Apartments – further issues
[105] The objecting proprietors raised a number of ancillary matters during the course of their submissions. Some of them have been taken into account in the amended Scheme. They are:
(a) Including a provision in the Scheme of a provision requiring that all major decisions in connection with the Scheme be made by the Body Corporate at a general meeting, and not by the committee of the Body Corporate. The expression ―major decisions‖ is defined;
(b)Including a sub-clause in the Scheme of a sub-clause that expressly provides that the Body Corporate shall be entitled to levy a defaulting owner for legal costs on a solicitor/client basis;
(c) Drafting of the Scheme in such fashion as to ensure that costs incurred in forthcoming building defect litigation should be separate from the Scheme repair costs, to the intent that only proprietors participating in later litigation will be responsible for those costs.
[106] However, a number of additional matters require separate attention.
Peer review
[107] Mr Leishman and Ms Smith propose an independent external peer review of the proposed plans and specifications. The applicants, and Messrs Shepherd and White, oppose that suggestion. In my view, this is not a matter for the Court’s consideration, at least at the present time. Rather, it is a matter for the Body
Corporate, and in particular, for the committee of the Body Corporate. There was evidence from Mr Alexander to the effect that a proper peer review would be a very expensive process, and there is nothing as yet before the Court to suggest that in this particular case such expense is warranted. As Mr Shepherd points out, local authority requirements in respect of remediation works are stringent and could be expected to identify important issues concerning the adequacy of present plans and specifications, and the implementation of the necessary work.
Tenders
[108] Mr Leishman seeks a direction from the Court that no fewer than four contractors tender for the proposed works. I agree with Mr Bigio that this is not a matter to be addressed in the Scheme. In the first instance it is for the Body Corporate in general meeting. Part IV of the Scheme provides that the Body Corporate will make all decisions in furtherance of the Scheme in accordance with the Act, and the relevant governance provisions of the Unit Titles Act 2010.
Discretion to enter into a construction contract
[109] Mr Leishman’s point is that the Body Corporate ought not to be left to determine whether the works are ever carried out. He asks the Court to give a direction that compels the Body Corporate to do so. In my view, that is not the function of the Court on the present application. It would be for the Body Corporate in general meeting to determine whether to accept a tender, and to enter into a construction contract. That decision will no doubt be taken in the light of the funding position as it then stands. I envisage that if, by reason of funding difficulties, the works cannot proceed, the Body Corporate will seek further directions from the Court. That eventuality is expressly envisaged by the Scheme.
Vacation of the building
[110] Ms Smith takes the point that the available specification document requires that the complex be vacated while the remedial works are carried out. She argues
that it would be unnecessary and punitive for owners to vacate the building for the whole of the contract period.
[111] As to that, Mr Bigio submits that it is premature to address that question, and that the issue of whether the entire complex needs to be vacated during the remedial works, or part of that period, will be dealt with during the process of engaging a contractor. I agree.
Building committee
[112] All major decisions in connection with the Scheme are to be made by the Body Corporate at a general meeting.33 The term ―major decisions‖ includes any decision to engage a contractor and any decision significantly to alter the design of the remedial works from the plans and specifications.
[113] Mr Leishman and Ms Smith ask the Court to direct that a special building committee be established, in order to supervise repair work, and to work effectively as a sub-committee of the Body Corporate committee between general meetings.
[114] This submission arises from a want of trust between Mr Leishman and Ms Smith on the one hand, and certain members of the existing Body Corporate committee on the other. The former consider the committee to be unresponsive and insufficiently experienced. There are complaints about the committee’s past failures to keep proprietors properly advised, and to act impartially.
[115] On the material before the Court, it is quite impossible to make a determination as to the strength of these complaints. Moreover, there is no need to do so for present purposes. I have seen nothing to suggest that the committee is incapable of carrying out its proper functions in respect of the forthcoming remedial works. There is certainly no basis, as Ms Smith suggests, for the appointment of an
administrator pursuant to s 40 of the Act.
33 Part IV of the Scheme.
[116] In passing I note that Mr Shepherd contends that, at a time when Ms Smith was a member of the committee of the Body Corporate, communications with proprietors was no better than they are now.
[117] Should it prove, as time goes on, that there is a need for the appointment of a building committee, then application can be made to the Court. Leave to do so will be reserved at the end of this judgment.
Definition of repairs
[118] Mr Leishman seeks to amend the definition of the term ―repairs‖ in paragraph 3 of the Scheme, so as to differentiate between the repairs arising from building defects and those concerning consequential damage.
[119] In that regard I accept Mr Bigio’s submission that there is no legal distinction between repairs and consequential damage. The formula is intended to cover the whole of the repairs which properly fall within the Scheme. Again, this is an issue which might properly form the basis of a further application to the Court, pursuant to leave reserved, if a significant difficulty arises.
Insurance
[120] Mr Leishman seeks an additional clause in paragraph 5 of the Scheme, which would oblige the Body Corporate to apply and obtain all necessary insurance covers through the course of the works, including contractors’ all risks cover. I accept Mr Bigio’s submission that such an amendment is unnecessary. Insurance is a matter which will need to be covered between the Body Corporate and the contractor. In any event, the Body Corporate is required to insure its property under s 15(1) of the Act.
Legal status of levies
[121] Mr Leishman suggests that there should be an amendment to the Scheme to ensure that levies raised under it had the same legal status as levies raised under
s 15(2). However, levies raised under the Scheme will constitute levies under s 15(2), and therefore require no separate provision in the Scheme.
Enforcement and funding issues
[122] Mr Leishman seeks to fetter the discretion of the Body Corporate in respect of the collection of arrears from a defaulting proprietor, and the borrowing of amounts sufficient to cover a resulting shortfall. I accept Mr Bigio’s submission that these matters are essentially for the Body Corporate to determine, and in particular that decisions in respect of unpaid levies carry a personal element which is properly the subject of discussion and decision-making by the Body Corporate in general meeting.
Governance issues
[123] The amended scheme as it now stands incorporates the provisions of ss 75-
137 of the 2010 Act. An earlier version of the scheme included s 138 of that Act. Mr Leishman says that the omission of s 138 is likely to have occurred because s 138(4) provides that, where exterior maintenance is required to private property, such maintenance may be carried out by the Body Corporate, which may then recover the cost from the proprietor concerned.
[124] Mr Leishman argues that such a provision is inconsistent with the applicant’s approach and that the omission must be taken to have been deliberate. That may well be so, but the provisions in the Scheme which I have approved render that issue moot for present purposes. Mr Leishman also argues that the new governance provisions (adopting the 2010 Act in part) are unnecessary. He says that some of the
2010 Act provisions are irrelevant or inconsistent with parts of the Scheme, or the default rules. In oral argument he went through the rules in groups, explaining which he thought to be irrelevant or unnecessary. There has been no detailed response from counsel for the applicants on the point.
[125] It must be said that the decision of the members of the Body Corporate to adopt certain provisions of the 2010 Act as governance provisions for the purposes
of the Scheme has come at a very late stage, post hearing, and has added to the overall impression of general untidiness in this case. My present view is that ultimately not a great deal is likely to turn on the decision to adopt new governance rules for the purposes of the Scheme. I am anxious to ensure that the Body Corporate is placed in a position in which it can proceed promptly. Accordingly, I leave governance issues relating to the 9 December 2010 resolution to be determined following further application to the Court if necessary.
Paragraph 4 of the amended scheme
[126] In this paragraph, the Scheme sets out provisions for re-allocating costs already incurred in scoping work aimed at identifying the extent of the necessary repairs. The costs of that earlier work were allocated on a unit entitlement basis. The costs allocation regime now approved under the Scheme is different. Clause 4 of the Scheme is aimed at re-allocating the earlier costs on the basis of the approved formula, where the difference between the levies exceeds 0.5%.
[127] Mr Leishman says that clause 4 is confusing, and that, moreover, it was not the subject of any argument at the hearing.
[128] In view of my decision as to costs allocation, I accept Mr Bigio’s submission that clause 4 is appropriate in principle. It seems to me capable of working in practice, but if any difficulties arise, then again application may be made to the Court pursuant to leave reserved.
Additional matters
[129] A great many issues were raised in passing during the three day hearing, and in very lengthy memoranda filed following the hearing. I have endeavoured to deal with everything that seemed to me to be of substance, but I have not expressly referred to everything. An example is the issue of auditing, which in my view is sufficiently covered by the applicable legislation, and by the applicant’s rules.
[130] However, if I have overlooked some ancillary issue which ought ideally to be tidied up at this point, then I reserve leave for any party to apply by memorandum. The reservation of leave is not, however, to be taken by any party as an invitation to relitigate matters already determined in this judgment. Leave is reserved under this heading simply to cater for matters of minor detail that ought, desirably, to be considered and resolved at this point.
Summary
[131] In summary, my findings are:
(a) It is not appropriate to include in either Scheme a provision which enables the Body Corporate to apply to the Court for an order which may impact upon the rights of mortgagees, and in particular upon the priority enjoyed by a mortgagee;
(b)The resolution of 30 September 1990 in respect of Columbia Apartments was a nullity, and accordingly the default rules under the Act, continue to apply. I make a declaration accordingly.
(c) The formula devised and approved by members of Columbia Apartments for the purpose of fixing cost allocations in respect of proposed remedial work is appropriate in the special circumstances of this case, and is accordingly approved;
(d)There is no warrant for the making of any order which affects the governance of Columbia Apartments, and in particular, there is no present basis upon which it would be proper to interfere with the membership of the committee or the functions vested in it by the Scheme;
(e) No orders of the Court are necessary for Columbia Apartments in respect of:
(i)peer review of plans and specifications or subsequent remedial work;
(ii) the calling and acceptance of tenders; (iii) the definition of repairs;
(iv) insurance issues;
(v)issues relating to the vacation of the building during remedial work;
(vi) enforcement and funding issues.
[132] Each Scheme is accordingly approved, subject to the deletion of paragraphs
18-21 in the case of Columbia Apartments, and paragraphs 17-20 in the case of Cotesmore Way. Leave is reserved to all parties to apply for such further or other order as may be appropriate, either in the light of this judgment, or to deal with matters which may have been overlooked.
Costs
[133] Questions of costs are reserved. The parties have enjoyed varying degrees of success. Counsel for the applicants file and serve costs memoranda on or before Friday 17 June 2011. Other parties are to respond on or before Friday 8 July 2011. Any memoranda in reply by applicants are to be filed and served on or before Friday
15 July 2011.
[134] Thereafter I will deal with the question of costs on the papers unless any party seeks an oral hearing.
C J Allan J
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