Body Corporate 201036 v Westpac Banking Corporation
[2015] NZHC 1524
•2 July 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-5177 [2015] NZHC 1524
UNDER the Unit Titles Act 2010 IN THE MATTER
of an applicaton to settle a Scheme under
Section 74 of the Unit Titles Act 2010BETWEEN
BODY CORPORATE 201036
ApplicantAND
WESTPAC BANKING CORPORATION First Respondent
AND
ANZ BANK NEW ZEALAND LIMITED Second Respondent
AND
ASB BANK LIMITED Third Respondent
AND
TSB BANK LIMITED Fourth Respondent
Hearing: 27 May 2015 Appearances:
J Heatlie for the Applicant
K McDonald for the Seventh RespondentJudgment:
2 July 2015
JUDGMENT OF THOMAS J
This judgment was delivered by me on 2 July 2015 at 4.30 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date:………………………….
Counsel:
Rainey Law, Auckland.Kevin McDonald & Associates, Auckland.
BODY CORPORATE 201036 v WESTPAC BANKING CORPORATION [2015] NZHC 1524 [2 July 2015]
AND BANK OF NEW ZEALAND
Fifth Respondent
AND
PEPPER NEW ZEALAND (CUSTODIANS) LIMITED Sixth Respondent
AND
CYNOTECH SECURITIES LIMITED Seventh Respondent
AND
AVANTI FINANCE LIMITED Eighth Respondent
AND
CLAUDE THOMAS SOMERS AND HEATHER LORRAINE SOMERS Ninth Respondents
Introduction
[1] The applicant, Body Corporate 201036 (Body Corporate) is the body corporate of a terraced complex known as Parnell Terraces (the Buildings). The Buildings comprise six blocks and 83 units. The Buildings are damaged because of weathertightness issues.
[2] By the decision of this Court on 12 June 2014, a scheme (Scheme) for the repair of the Buildings (Repair) was sanctioned under s 74 of the Unit Titles Act
2010 (the Act).1
[3] A levy was raised on 25 September 2014. All but five owners (the defaulting owners), including a Mrs Nuval, have paid or provided evidence of ability to pay the levy. The Body Corporate has applied for relief pursuant to s 74(7) of the Act in respect of the defaulting owners.
[4] Cynotech Securities Ltd (Cynotech) is the seventh respondent and is the only party to oppose the relief sought by the Body Corporate. Cynotech is the holder of a second mortgage registered over unit S04 which is owned by Mrs Nuval.
Background
[5] Extensive work is required to the Buildings. The estimated Repair cost is
$11.7 million. If the Crown contributes to the cost of Repair under a Financial Assistance Package (FAP), its contribution will apply to approximately 92 per cent of that sum. The owners will need to fund the balance. The Ministry of Business Innovation and Employment (the Ministry) requires evidence of the owners’ ability to pay before approving assistance pursuant to a FAP.
[6] The levy was raised in connection with the FAP application. No tender for the Repair works has been undertaken. The Extraordinary General Meeting on
10 September 2014 resolved (the Resolution) as follows:
1 Body Corporate 201036 v Westpac Banking Corp [2014] NZHC 1321.
Resolution
That a sum of $9,093,331.89 (inc GST) be raised and payable by all owners within four weeks of the repair invoice being issued. Provided however that where an individual owner shows suitable evidence of their ability to draw down the total cost of their unit repair from a New Zealand registered bank or have available sufficient funds in their New Zealand registered bank account that the levy not become due and payable at this time. That where an owner is unable to supply such confirmation within this timeframe that their levy become due and payable and that the Body Corporate then take all reasonable steps necessary to recover this outstanding debt CARRIED (5
Votes Against)
Resolution
That Rainey Law be instructed to take all necessary recovery steps and legal action required including and not limited to an application to the High Court for a writ of sale, bankruptcy, or liquidation proceedings against any owner who fails to provide suitable evidence of funds to cover their share of repairs, or otherwise payment of the full levy for repairs by the due date as shown on the levy invoice.
CARRIED (3 Votes Against/ 1 Vote Abstain)
[7] The Resolution was carried by a majority of 84 per cent. The invoices were issued by the Body Corporate on 25 September 2014.
[8] The Body Corporate’s case is that the levied amount is debt due and owing to the Body Corporate. It seeks the following orders:
(a) judgment be entered against the defaulting owners in respect of the unpaid levy;
(b)the right to levy such further amounts as may be due by such unit owners for repairs in due course be reserved and that it be entitled to approach the court for such further relief as may be required in due course;
(c) the ownership interests of the defaulting owners be charged the amount of the unpaid levies together with interest at 10 per cent and such further amounts as may be incurred obtaining the orders sought;
(d)the Sheriff be authorised to seize and sell the defaulting owners’ ownership interests in satisfaction of their indebtedness and to hold such further monies in trust pending completion of the repairs; and
(e) to the extent necessary, the Scheme be varied or amended.
[9] Cynotech does not oppose the first two orders because it does not have standing to do so. It opposes orders (c) to (e).
[10] Mrs Nuval took no part in the proceedings, presumably on the basis that she is unable to pay the levy. That inference is supported by information given to the Court that she had sought to increase the mortgage over her unit. None of the other four defaulting owners appear to have taken any steps in the proceedings. The Court will not, however, automatically grant the relief sought. It must be satisfied it is proper to do so.
Issues
[11] The issues to be addressed are:
(a) Should judgment be entered against the defaulting owners?
(b)Should the Body Corporate’s application for charging and sale orders be granted?
(c) Should the Scheme be varied or amended?
Relevant law
[12] The Body Corporate’s application relies on the Scheme. It is therefore necessary to consider s 74 of the Act and the purpose of schemes approved pursuant to it.
[13] Section 74 provides:
74 Scheme following destruction or damage
(1) This section applies if any building or other improvement comprised in any unit or on the base land is damaged or destroyed, but the unit plan is not cancelled.
(2) The High Court may, by order, settle a scheme on the application of—
(a) the body corporate; or
(b) if the unit title development is in a layered unit title development, the body corporate of the head unit title development or any subsidiary unit title development in that layered unit title development; or
(c) an administrator; or
(d) the owner or one of the owners of a unit; or
(e) a registered mortgagee of a unit.
(3) A scheme under subsection (2) may include provisions—
(a) for the reinstatement in whole or in part of the building or other improvement; or
(b) for the transfer of units to the body corporate so as to form part of the common property.
(4) If an order is made under subsection (3)(b), sections 58(1)(c) and 59 apply to the transfer, so far as applicable, but subject to any order of the High Court to the contrary.
(5) A notice of any application made under subsection (2) must be lodged with the Registrar who must enter on the supplementary record sheet a notification that the application has been made.
(6) On any application to the High Court under subsection (2), the following persons have the right to appear and be heard:
(a) any person having or claiming to have any estate or interest in any unit or in the whole or part of the base land; or
(b) any insurer who has effected insurance on the buildings or other improvements comprised in any unit or in the whole or part of the base land.
(7) In the exercise of its powers under subsections (2) and (3), the High Court may make any orders that it considers expedient or necessary for giving effect to the scheme, including orders—
(a) directing the application of any insurance money; or
(b) directing payment of money by or to the body corporate or by or to any person; or
(c) directing the deposit of an appropriate new unit plan; or
(d) imposing any terms and conditions that it thinks fit.
(8) The High Court may cancel, vary, modify, or discharge any order made by it under this section.
(9) The High Court may make any order for payment of costs that it thinks fit.
[14] Section 74 applies if any building or other improvement comprised in any unit or on the base land is damaged or destroyed. Pursuant to s 74(3), a scheme may include provisions for the reinstatement of the building or other improvement or transfer of units to the body corporate so as to form part of the common property.
[15] Section 74(7) allows the High Court to make any orders it considers expedient or necessary for giving effect to the scheme, including directing payment of money by or to the body corporate or by or to any person.
[16] The Court of Appeal decision of Tisch v Body Corporate No 318596 is the leading authority on s 74.2 The case concerned the approval of a scheme under s 48 of the Unit Titles Act 1972. The Court said that s 74 of the Act is the equivalent of s
48 in the 1972 Act. Therefore, the Court’s observations (as well as other authorities
under the 1972 Act) still stand under the Act.3
[17] The Court observed that s 48, within the Act, “sits alone”:4
Section 48 is not expressly linked to any other section in the Act. In particular, it contains no reference to ss 15 and 16 which prescribe the duties and powers of the body corporate. The duties subject to the provisions of the Act include those imposed on the body corporate by its rules. The repairs, control, management and administration duties of the body corporate relate to “the common property”. There is no cross-reference to s 33, which enables the body corporate to recover money it expends on repairs and other work. There is no indication in s 33 or in s 48 as to when the one section, rather than the other, is appropriately employed.
[18] Hansard does not provide any guidance as to Parliament’s intention in
enacting s 48.5 The genesis of s 48 is in Australian legislation, in particular, the
2 Tisch v Body Corporate No 318596 [2011] NZCA 420, [2011] 3 NZLR 679.
3 At [26].
4 At [25] (footnotes omitted). Although unlike s 48, s 74 does not sit under the heading of “Miscellaneous provisions”. It has its own heading, titled “Scheme following destruction or damage” under Subpart 10 – Redevelopments.
5 At [24].
Victorian Strata Titles Act 1967, the commentary to which does not provide assistance either.
[19] One of the reasons why the court is to settle a scheme under s 48 is to remove uncertainty. Most importantly, a scheme which is settled by the court has the purpose of avoiding potential ultra vires issues by enabling a body corporate to repair both common and unit property and to do so to the same standard and at the same time.6
[20] The Court held that if the High Court has decided a scheme is appropriate, it should exercise its discretion to make such orders as it considers expedient or necessary for giving effect to the scheme. The Court explained:7
The aim should be to balance the interests of each unit holder in a way that imposes terms that achieve the outcome fairest to all unit holders. Although we do not preclude other considerations relevant in the particular case, at least five guiding principles emerge from the case law.
[21] The five guiding principles identified by the Court in order to achieve the outcome fairest to all unit holders are:8
(a) A scheme with broad support is to be preferred. The greater the level of support from owners for the proposed scheme, the more likely it is that the scheme does justice between owners. This will not invariably be so, because a majority of owners may support a scheme that is unfair to the minority.
(b) The scheme should be appropriately detailed. The more detailed a scheme, the less scope for later misunderstanding and argument about it.
(c) Providing that what has been done by the body corporate before the s 48 scheme is actually approved is in accordance with the scheme, the order has retrospective effect.
(d) Work should normally be done to the same standard and at the same time.
(e) The terms of the scheme should depart from the scheme of the Act and from the body corporate rules no more than is reasonably necessary to achieve what is fair as between unit owners in the circumstances. Thus, the Act and the body
6 At [34].
7 At [44].
8 At [45]–[49].
corporate rules remain relevant considerations. An exception to this fifth guiding principle is a scheme unanimously agreed to by all unit owners.
[Emphasis added]
[22] Given the discretionary nature of s 74, it is inevitable that each application under s 74 will turn on its factual circumstances.9
Analysis
[23] I turn now to consider the Scheme itself.
[24] The preamble to the Scheme states:
The cost of the Repairs, subject to the determination of the cost of the Latent Damage, will shortly be determined by a tender process and it will be necessary to raise funds to pay for the Repairs from each of the registered proprietors of the units in the Body Corporate (“the Owners”).
[25] The Scheme provides that the Body Corporate is to reinstate all of the Buildings and the Body Corporate’s powers to do so are set out in part III of the Scheme. Those powers include:
… such other power and authority as may be necessary to enable the Body Corporate to fully and properly carry out the Repairs and its obligations under this Scheme.
[26] The Body Corporate is given the power to borrow funds to pay for the Repair and in relation to an application for an FAP:
… to assure the Ministry of Business Innovation and Employment that all owners will be able to contribute to the Repairs collectively and complete them even if a particular owner is unable to provide their share.
[27] Furthermore:
9. Where the Body Corporate exercises the power under 5(i) to fund any short-fall in required funds arising from the non-payment of levies by the owner(s) of any unit, the Body Corporate shall be entitled to levy the owner of that unit for all costs and expenses associated with borrowing those funds (including any interest paid by the Body Corporate).
9 Body Corporate 177519 v Lai [2014] NZHC 3381 at [18].
[28] Part V deals with the decision to enter into the construction contract for the
Repair and relevantly provides:
13.Once a tendered price for the remedial works has been obtained (but before the Body Corporate has entered into an unconditional contract to proceed with the Repairs) the Body Corporate shall raise the levies to meet its obligations under the proposed contract(s) for the Repairs in accordance with Section VI below.
14.The dates for payment of the levies so raised (or any part thereof) may be set to meet the expected work schedule and the Body Corporate’s obligations to pay contractor(s) for the remedial works.
15.Within 30 days of the date that the levies for the Repairs are raised under clause 10 [sic] above, all Owners will be required to either:
(a) Supply confirmation of ability to pay estimated Repair Levies by either supply of evidence of funds held in a NZ bank account in the owner’s name, or ability of the owner to borrow sufficient funds from a NZ bank in their own name; or
(b) pay the full amount of the levies raised under clause 10 (sic) above to the Body Corporate.
[29] Part VI specifically addresses levies and the Body Corporate’s authorisation to raise a levy to meet its obligations pursuant to the Scheme. It provides that, with the exception of any additional levies raised to meet a shortfall caused by any defaulting owner, the costs are borne in proportion to an owner’s utility interest. Paragraph 21 specifically recognises that there may be additional levies as a result of a failure of one or more owners to pay the levies raised and gives the Body Corporate power to borrow funds to meet any shortfall and to recover the cost from the defaulting order or to raise a levy to meet that shortfall.
Should judgment be entered against the defaulting owners?
[30] The Body Corporate issued invoices to all owners claiming the repair levy attributable to the particular unit and stating:
This levy is due and payable by 24-Oct-14 unless written confirmation from a recognised financial institute shows that the unit owner has the ability to drawdown sufficient funds for their levy, or the owner shows they hold sufficient funds on hand to cover those costs.
[31] The invoice noted the Body Corporate was entitled to charge interest at
10 per cent on unpaid balances.
[32] On the basis that the invoices remain outstanding or unsatisfied, the Body
Corporate seeks judgment against the defaulting owners.
[33] Ms Heatlie, for the Body Corporate, candidly acknowledges that the Body Corporate is seeking to use the Scheme as a vehicle for debt collection and whether it could do so is the real issue in this case.10
Was the levy validly raised?
[34] Cynotech’s position is that the levy giving rise to the alleged debt is ultra vires because the Body Corporate did not obtain the resolution pursuant to the Scheme. The Scheme provides for the levy to be raised once a tendered price for the Repair has been received but before an unconditional building contract is entered into. The Body Corporate therefore cannot invoke s 74(7)(b) to seek to enforce payment of the levy because it was raised outside of the provisions set out in the Scheme.
[35] Ms Heatlie points out that it is not unusual for a body corporate to levy based on estimates rather than as a result of a tender process. That no tender has been undertaken, as envisaged by the Scheme, does not impact the finding that the repair levy issued by the Body Corporate is valid and binding, Ms Heatlie submits. The Body Corporate obtained an indication of the Repair costs from its building consultant. It was not practical or prudent for the Body Corporate to finalise the scope and design of the Repair prior to approval of the FAP application. Since that approval has not yet been granted, it would be premature to embark on a tender process based on a scope of work and design that may change, Ms Heatlie submits. To do so would involve unnecessary and further cost to the Body Corporate and unit
owners generally.
10 Ms Heatlie also points out that none of the defaulting owners had applied for minority relief pursuant to s 210 of the Act.
[36] The application is made on the basis that the Body Corporate requires the orders sought in order to implement the Scheme. It is implicit in the application that the Body Corporate is seeking retrospective approval for the levy because it is seeking to enforce the levy as if it were part of the Scheme at the time it was raised.
[37] The Scheme contains provisions for raising levies for the Repair. The levy was not raised in accordance with those provisions. The Scheme was approved by the Court as a result of an application by the Body Corporate. It contains the process the Body Corporate elected to follow. However, the Body Corporate has followed a different process.
[38] There is nothing to prevent the Body Corporate from requesting the financial assurances it needs in order to progress the FAP application. While I appreciate the practical realities associated with the Repair and the application for a FAP, it does not alter the fact that the levy was not raised in accordance with the Scheme.
Can s 74(7) be used to obtain judgment against the defaulting owners?
[39] Leaving aside the ultra vires problem, the Body Corporate seeks to use s 74 to recover unpaid levies by having judgment entered against the defaulting owners. It is, in Ms Heatlie’s submission, expedient to do so. All parties are effectively before the Court, the defaulting owners have not opposed the application and, if it is not granted, then the Body Corporate will need to institute five new sets of proceedings to obtain the same result. In Ms Heatlie’s submission, the relief sought is consistent with the overall purpose of s 74 of the Act which is to fairly balance the interests of the unit owners.
[40] Ms Heatlie says that, since s 74(7) is expressed in very wide terms, the relief sought by the Body Corporate falls within the Court’s discretion. Specifically, s 74(7)(b) contemplates that orders may be required directing payment to the Body Corporate “in order to give effect to the Scheme”. The Body Corporate’s position is
equivalent to that of a creditor, says Ms Heatlie.11
11 Ms Heatlie made a further submission following the release of the decision of the Court of Appeal in Body Corporate 162791 v Gilbert [2015] NZCA 185 where a receiver in possession was held personally liable for rent and other payments. Ms Heatlie sought to draw analogies
[41] Mr McDonald, for Cynotech, opposes the Body Corporate’s application on the grounds that the Body Corporate is seeking to have special privileges conferred upon it. In his submission, s 74(7) permits the court to make orders “directing payment” of money to a body corporate but it does not address the enforcement of any such direction. The enforcement provisions lie in the ordinary procedures set out in the High Court Rules (Rules). There is no reason why the Body Corporate should not follow the normal procedures regarding the issuing of proceedings and the enforcement of judgment, like every other creditor, Mr McDonald says.
[42] Cynotech’s position, therefore, is that it is inappropriate as a matter of principle to grant such an exemption to the Body Corporate. To do so would have the effect of sidestepping the procedural safeguards put in place regarding the issuing of proceedings, the entry of judgment and the enforcement of judgments. The entry of judgment against Mrs Nuval, without her being served with a notice of proceedings, deprives her of important information which would enable her to understand the nature of the application and the litigation process, says Mr McDonald. Furthermore, such a fast track procedure would avoid the time limits set out in the Rules regarding the filing of such documents meaning a party like Cynotech would be denied the time normally granted to affected parties to seek legal advice and file documents in opposition.
[43] The Body Corporate does not require judgment against the defaulting owners in order to progress the FAP application. The Scheme specifically enables it to borrow money and to give the assurances required to the Ministry. Even when it is in a position to enter into a building contract, the Body Corporate is reasonably satisfied any shortfall as a result of the defaulting owners can be funded by raising additional levies or further borrowing.12
[44] The Scheme provides that the Body Corporate will not enter into a building contract for the Repair unless it is reasonably satisfied it can meet the payments due
with that decision by saying s 74(7)(c) “unquestionably [has] a similar purpose”. Gilbert is not of any assistance to the present case. The circumstances are entirely different. Gilbert did not concern a s 74 application. Unlike in Gilbert, the mortgagee in the present case is not in possession of the unit in question.
12 Affidavit of Mr Plumer, the property manager.
under the contract, and it does so in connection with the contract to be entered into as a result of the tender process. The Scheme then provides for payment of levies in relation to the expected work schedule and the Body Corporate’s obligations to pay the contractor under the building contract. Because the defaulting owners are unable to provide evidence of their ability to pay in the future, the Body Corporate is seeking judgment against them now.
[45] The effect of the Body Corporate’s application to use s 74(7) to obtain judgment against defaulting owners would be to conflate the usual procedures and obtain judgment, charging and sale orders without the need to commence proceedings in the usual way. While that might be expedient as far as the Body Corporate is concerned, it is not the proper use of s 74.
[46] The law has a process for debt collection. A creditor must issue a proceeding showing a cause of action in a statement of claim. These proceedings can be done relatively simply either by default judgment or summary judgment applications where a creditor considers there is no defence. The law then provides a mechanism for enforcement of judgments, with procedures in place to protect persons prejudicially affected by any such application. There is nothing in the Act to suggest that those procedures should not apply to bodies corporate.
[47] Section 74 makes no mention of enforcement provisions being included in a scheme or suggestion that a scheme affects other sections of the Act specifically dealing with the collection of unpaid levies, such as ss 124 and 126. Nor is there any mention in the Act as to whether s 74 is to prevail over ss 124 and 126. Schemes can depart from the scheme of the Act only in situations where the best interests of unit
owners warrant such a departure.13
[48] The Body Corporate’s reliance on the broad wording of s 74(7) is, in my assessment, misplaced. I am not satisfied it is intended to avoid the need to take
13 See above [20]. See also the Court of Appeal decision of Body Corporate 114424 v LV Trust Holdings Ltd [2014] NZCA 21, where it was accepted that the Court has the jurisdiction to make an order for compensation under s 74(7)(b), to the extent that it is “expedient or necessary” for giving effect to the scheme. The Court explained that the wording is put in sufficiently broad terms but the overall consideration is one of fairness. The Court said it was appropriate for the High Court Judge to make the order for compensation given the significant loss for a particular unit owner.
enforcement action for unpaid levies. Such a measure would require explicit provision. Indeed, this Court has followed ordinary enforcement procedures in the context of schemes.14 That is the correct approach.
[49] For these reasons, I decline to enter judgment against the defaulting owners.
Should the Body Corporate’s application for charging and sale orders be granted?
[50] Although my refusal to enter judgment against the defaulting owners precludes the grant of charging and sale orders, I will address this aspect of the application to dispel any misconception about the use of the court’s powers under s
74.
[51] The Body Corporate applies for charging and sale orders on the basis that the jurisdiction of the Court lies in s 74, to the extent that this Court has broad discretion to make orders as are necessary to ensure the Building is repaired. The Body Corporate’s position is that the defaulting owners’ units should be sold because the new owners would purchase the units with the knowledge that the levy must be paid. The Body Corporate’s interest is in all owners paying the levy.
[52] Ms Heatlie notes that the Rules provide for enforcement by sale of a judgment creditor’s property and Cynotech is therefore not able to prevent the sale of land by a judgment creditor. Ms Heatlie submits that it is only in the context of a voluntary sale that a mortgagee can rely upon its contractual arrangements with a mortgagor to insist on payment in full before discharging its mortgage. The Body Corporate is not a party to such a contractual arrangement.
[53] There is no doubt that the value of the units in the Buildings has significantly reduced because of the weathertightness problems. Ms Heatile says any purchaser
14 See Body Corporate 172108 v Gundry [2014] NZHC 954, which concerned an opposed application for summary judgment in respect of body corporate levies alleged to be owed by the defendants. The plaintiff was the body corporate and the defendants were the unit owners of the apartment complex which was a leaky building. The scheme was sanctioned in August 2010 under the 1972 Act. The unit owners were required to pay ordinary levies each year, as well as scheme levies. The defendants paid some but not all of the ordinary levies but no scheme levies. Andrews J held that the scheme was validly raised and enforceable. The plaintiff was entitled to summary judgment.
will take into account the cost of Repair when deciding on the purchase price. However that should not detract from purpose of a sale order which, she says, is to allow the Body Corporate to put itself in the position where it is able responsibly to proceed with the Repair. Part of that requires assurance that the Body Corporate, as a whole, will be able to meet the Repair costs as and when they fall due.
[54] In Ms Heatlie’s submission, if the Body Corporate is unable to gain the necessary assurances regarding the costs of Repair, it is the remaining unit owners who suffer the consequences. Conversely, if the relief is not given, it is the defaulting owners who stand to benefit because, upon completion of the Repair, the units will be worth significantly more.
[55] Ms Heatlie says that Cynotech’s opposition and concerns are already before the Court and there is therefore no reason why the application for charging and sale orders should not be granted. For that reason, she addresses the issue as to whether there would be any substantial miscarriage of justice if the judgment sought were enforced by orders for sale.
[56] In Mr McDonald’s submission, the combination of automatic charging and sale orders, as sought, denies Cynotech the opportunity to contest enforcement action in the normal manner, for example, by applying for a stay of enforcement pursuant to r 17.29 of the Rules.
[57] Mr McDonald says that the application fails to recognise the rights of mortgagees. The Body Corporate is attempting to obtain priority for its alleged debt over that of a secured creditor and in doing so, it would reverse the respective positions of the Body Corporate and the mortgagee, he says. The mortgagee would bear the cost of repair by way of reduction of the unit’s sale price. Mr McDonald says that Cynotech is within its rights to delay the sale of the unit until such time as the market improves.
[58] The stark reality is that Mrs Nuval’s obligations to her first mortgagee and Cynotech exceed the market value of the unit in its unrepaired state. This is particularly so for a forced sale, in which event valuers discount the value of a
property by 50 per cent. The amount claimed by the Body Corporate is just over
$100,000. The forced sale value of the unit is approximately $90,000. Mrs Nuval owes the two mortgagees approximately $200,000. Once repaired, the estimated sale value of the unit is approximately $380,000. Therefore, once the unit is repaired, Mrs Nuval will be in a position to pay her mortgagees and the levy, with money left over.
[59] Mrs Nuval is up to date with her obligations under the two mortgages. She has applied to two banks for funding to refinance her existing mortgages and pay the levy but the banks have refused to lend the money. That is unsurprising given the value of the unit in its unrepaired state.
[60] In his affidavit, Cynotech’s director referred to the possibility it would provide some funding assistance to Ms Nuval to enable her to service reasonable repair costs. The proposal, in fact, was that the Body Corporate should advance the funds to Ms Nuval and Cynotech would assist her with a loan to service the repayments. The Body Corporate rejected the proposal.
[61] However, it may well be that, once a tender for the Repair is received thereby creating some certainty about the undertaking and timing of the Repair, Mrs Nuval will be able to raise finance to pay the cost of Repair. Indeed, this is the procedure envisaged in the Scheme.
[62] The decisions of Body Corporate 198072 v Bank of New Zealand and Body Corporate 322588 v K Mitchell Investments Ltd (Mitchell) make it clear that bodies corporate and schemes under the Act cannot interfere with the common law and contractual relationships between mortgagors and mortgagees.15 In the Mitchell decision, Keane J said:16
[66] The Unit Titles Act 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
15 Body Corporate 198072 v Bank of New Zealand [2011] 3 NZLR 249 (HC); and Body Corporate
322588 v K Mitchell Investments Ltd [Mitchell] (2009) 10 NZCPR 611 (HC).
16 Above n 17, at [66].
in ways that could work to the great disadvantage, not just of lenders, but of unit title proprietors seeking finance.
[63] I agree with the comment of Allan J in Bank of New Zealand:17
… 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… the Legislature takes care to express itself clearly when over-riding a mortgagee’s right to remain passive.
[64] And again at [46] of that decision:
The ordinary enforcement procedures of the Court (involving a summary judgment application and subsequent execution) are available to each Body Corporate… 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.
[65] Ms Heatlie sought to distinguish the Bank of New Zealand and Mitchell decisions on the basis they concerned the contractual relationship of the mortgagor/mortgagee where the Body Corporate was putting itself in the position of the mortgagee rather than a creditor or, in the case of Mitchell, requiring a mortgagee to pay a levy. She emphasises it is different in this case where the Body Corporate recognises its position as a creditor and is simply seeking enforcement of its rights.
[66] Although Ms Heatlie is right to say the circumstances of those decisions are not the same as those of the present case, the underlying principles are directly relevant. That is, a body corporate cannot put itself in a better position than a mortgagee no matter what the practical imperatives may be. As Allan J correctly
stated in the Bank of New Zealand decision:18
[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.
17 Above n 17, at [27].
18 Above n 17.
[67] The purpose of a charging order is “to preserve the ability of plaintiffs to protect their claim from the futility of pursuing asset-less defendants”.19 The risk creditors seek to address is the risk that a debtor will dispose of assets. That is obviously not a risk in this case.
[68] In accordance with the Rules, any “prejudicially affected” party under r 17.44 may apply for relief or “other persons affected” under r 17.45 may apply to set aside or vary the charging order. The application bypasses those opportunities. The outcome advocated by the Body Corporate in this case would have far reaching consequences. If bodies corporate were able to proceed in the way advocated in this case, prospective mortgagees would have to think very carefully before lending money on a unit in a unit title development.
[69] A charging order entitles the holder to apply for a sale order. The purpose of a sale order is to satisfy any judgment owed by the judgment creditor. However, as the Body Corporate knows, a sale of Ms Nuval’s unit would not satisfy the debt owing to the Body Corporate. In fact, a sale would have the effect of Cynotech bearing the cost of Repair of Ms Nuval’s unit through the reduced sale price. The real purpose of the application is not to satisfy the debt but to obtain new owners who will be able to pay the Repair levy in future. That is not the purpose a sale order is intended to serve.
[70] My analysis is supported by a consideration of whether the court would have sanctioned a scheme which included the terms effectively sought by the Body Corporate in this case. I am satisfied that, were a scheme presented to the court which included the ability for judgment to be entered immediately if an owner failed to pay a levy and authorising the charging and sale of the unit, such a scheme would not be approved.
[71] The Body Corporate is seeking to take a number of procedural shortcuts for its administrative convenience. The orders sought are draconian in nature. They seek the forced sale of five properties where the defaulting owners are not in a
position to resist. While s 74 gives the court the power to make orders “directing the
19 Conning v Martoni Ltd HC Auckland CIV-2010-404-5351, 1 July 2011 at [37].
payment of money”, it is not an enforcement mechanism. The powers which the Body Corporate would have the Court read into s 74 would need to be specifically legislated.20
Should the Scheme be amended?
[72] I have concluded that, as a matter of law, a scheme under the Act cannot provide a shortcut to obtaining judgment, charging and sale orders for unpaid levies. To the extent that the application seeks amendments to the Scheme so as to provide for judgment, charging and sale orders by simple application to the Court, it cannot be granted. There remains the issue as to whether the Scheme should be varied to approve the raising of the levy.
[73] The Court has discretion to vary any order made by it under s 74. This Court has acknowledged that “once approved, a scheme is not set in concrete. Changing circumstances can lead to the Court, from time to time, to cancel, vary, modify or discharge any order.”21 The Body Corporate is seeking to add terms to the Scheme rather than vary or amend existing terms.22
[74] The Court of Appeal in Tisch said that a scheme is capable of having retrospective effect; “Without retrospective effect the Body Corporate will be hamstrung until an order is made.”23
[75] The Tisch decision explains24 that the aim is “to balance the interests of each unit holder in a way that imposes terms that achieve the outcome fairest to all unit holders”.25 As mentioned earlier, whether a scheme has broad support is a guiding
principle. I note that the Resolution was not unanimous. Caution is required in a
20 See, for example, s 151 of the Property Law Act 2007, which makes a mortgagee in possession of land liable for waste; and s 62(1)(c) of the Local Government (Rating) Act 2002 which entitles a local authority to recover outstanding rates from a first mortgagee in certain circumstances.
21 Body Corporate 172108 v Meader (2011) 12 NZCPR 101 (HC) at [22].
22 Section 124 of the Act says that the amount of any unpaid levy is recoverable as debt due to the body corporate. It does not specify in what way it is to be recovered.
23 Above n 2, at [47]. Citing Re Body Corporate 304209 HC Wellington CIV-2009-485-1104, 23
March 2010 at [22].
24 Above n 2, at [35].
25 Mitchell, above n 17, at [43].
case where a majority of owners may support a scheme which is unfair to the minority.
[76] I am not satisfied that retrospective approval of the levy is required. As discussed above, the Scheme adequately addresses raising a levy when building costs are known and it provides measures for borrowing funds and applying for a FAP.
[77] For these reasons, the Scheme may not be varied or amended.
Result
[78] For the reasons given, the application is dismissed.
[79] Any costs issues can be addressed by a memorandum from the seventh respondent within 21 days and one from the applicant 14 days thereafter.
Thomas J
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