Body Corporate 207715 v McNish
[2015] NZHC 2848
•16 November 2015
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-0-001248 [2015] NZHC 2848
UNDER the Contracts (Privity) Act 1982 and the
Unit Titles Act 2010
BETWEEN
BODY CORPORATE NO. 207715
Appellant
AND
DEREK JOHN MCNISH First Respondent
MARGARET THELMA MCNISH
Second Respondent
Hearing: 6 October 2015 Counsel:
P Muir for appellant
P M Webb for respondentsJudgment:
16 November 2015
JUDGMENT OF KATZ J
This judgment was delivered by me on 16 November 2015 at 4:30pm
Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
Solicitor: Price Baker Berridge, Auckland
Denham Bramwell, Auckland
Counsel: P Muir, Auckland
P M Webb, Auckland
BODY CORPORATE NO. 207715 v DEREK JOHN MCNISH [2015] NZHC 2848 [16 November 2015]
Introduction
[1] The appellant is the body corporate of a unit title development known as the Santa Rosa apartments, located in Gulf Harbour, Whangaparaoa, Auckland (“Body Corporate”). The respondents, Derek and Margaret McNish, are the lessees of one of the apartments in the complex, Unit AQ.
[2] The lessor of Unit AQ, LVO Limited, was struck off the companies register in 2012. As a result, the Body Corporate now seeks to enforce payment of the body corporate levies directly against Mr and Mrs McNish, pursuant to a term in the McNish’s lease with LVO Limited (“Lease”). The Body Corporate claims that, although it is not a party to the Lease, it is entitled to rely on the relevant clause pursuant to s 4 of the Contracts (Privity) Act 1982.
[3] The Body Corporate’s claim was unsuccessful in the District Court before
Judge G M Harrison. It now appeals to this Court.
Factual background
[4] The factual background is somewhat sketchy. Only one, relatively short, affidavit was before me on appeal. As far as I am able to ascertain from that affidavit, the statement of claim (there appears to have been no statement of defence) and counsel’s submissions, the relevant facts are as follows.
[5] The original registered proprietor of the Santa Rosa apartment complex was the developer, Santa Rosa Developments Limited. Mr Layne Kells was the majority (or possibly the sole) shareholder of that company.
[6] In October 2001 Unit 43 (later to be known as Unit AQ) was leased to Mr and Mrs McNish, on a perpetually renewable 21 year lease, on terms set out in the Lease. It was intended that, upon completion of the development, the individual units would each be issued with a freehold stratum title. There would then be an opportunity for lessees to take advantage of a deferred land purchase scheme which provided them with a right to freehold title, for $50,000. This right could be exercised at any time prior to the expiry of the initial 21 year lease term.
[7] In June 2007 Unit AQ was transferred to LVO Limited (another company owned by Mr Kells) as registered proprietor of the freehold estate, subject to the lease to Mr and Mrs McNish. Presumably most or all of the other units had been freeholded by that time, as Unit AQ appears to have been the only unit in the development that was transferred to LVO Limited.
[8] Pursuant to the Unit Titles Act 2010, the registered proprietor of a unit title property is liable for all body corporate levies.1 Accordingly, from June 2007 onwards, LVO Limited was liable to the Body Corporate in respect of all body corporate levies, including special levies that were imposed on proprietors to remedy weathertightness issues that were identified in the apartment complex.
[9] The lease provided, however, for such costs to be passed through to the lessees, Mr and Mrs McNish. In particular, clause 4.1 of the Lease provides that:
The Lessee will during the Term punctually pay all rates taxes charges assessments and outgoings (excepting Lessor's income tax) assessed levied charged or imposed on the Land or on the Lessor or the owner or occupier in respect of the Land including (but not by way of exception) all Body Corporate levies or levies or payments imposed or payable under the Unit Titles Act 1972.2
[10] Mrs McNish’s unchallenged affidavit evidence was that the Body Corporate would send the account for body corporate levies to LVO Limited, which would periodically invoice Mr and Mrs McNish for the same. Mr and Mrs McNish would then pay the relevant invoices to LVO Limited. They would also pay ground rent (which was set at a nominal level) to LVO Limited.
[11] At some stage, however, Mr and Mrs McNish stopped paying Body Corporate levies. Mrs McNish says that this was after “LVO Limited was struck off in December 2006”. LVO Limited was not, however, put into liquidation until
16 March 2012. The Body Corporate’s statement of claim seeks payment of levies
for the period 28 November 2009 to 22 June 2013, totalling $79,554.81, together
1 Sections 121, 124 and 128.
2 The transition from the Unit Titles Act 1972 to the Unit Titles Act 2010 did not affect this obligation.
with interest at the rate of 10 per cent on the sum, pursuant to s 128 of the Unit Titles
Act 2010.
[12] After LVO Limited was put into liquidation, its liquidators offered to sell the freehold interest in Unit AQ to Mr and Mrs McNish. They declined to purchase it, however. Presumably they saw little value in the freehold interest given that by then it had become apparent that the complex had significant weathertightness issues. In the absence of any other purchaser, the liquidators disclaimed the company’s interest in Unit AQ on 20 December 2012. LVO Limited was subsequently removed from the companies register on 11 July 2014.
[13] The current position, therefore, is that the freehold estate in Unit AQ has vested in the Crown as bona vacantia. The Crown’s position, as relayed to me by counsel for the appellant, is that it has no liability for the body corporate levies, under the Unit Titles Act or otherwise. The Body Corporate appears to accept that position as being correct.
[14] Meanwhile, from 2013 onwards, the Body Corporate started seeking payment of its levies direct from Mr and Mrs McNish, as lessees of Unit AQ. Mr and Mrs McNish dispute any liability to pay those levies. Their position is that the Body Corporate cannot levy them directly as lessees. Rather, their only liability is to the lessor, in terms of the Lease. The lessor, however, has now ceased to exist and the land is bona vacantia.
[15] The Body Corporate considered various legal avenues, but ultimately concluded that the most straightforward and cost effective means of recovering the outstanding levies would be to issue proceedings under the Contracts (Privity) Act. In particular, the Body Corporate claims that clause 4.1 of the lease (set out at [8] above) contains a promise intended to confer a benefit on it, which it is entitled to enforce by direct action, pursuant to s 4 of the Contracts Privity Act.
Relevant legal principles – Contracts (Privity) Act 1982
[16] The common law doctrine of privity of contract provides that no-one may be entitled to, or bound by, the terms of a contract to which they are not a party.3 There are two limbs to the doctrine. First, where a contract confers a benefit on a third party, that party cannot sue to enforce that benefit. Second, a third party cannot be liable in respect of obligations that may be purportedly imposed on them in a contract between others.
[17] The doctrine of privity of contract has the potential to give rise to serious injustice in some cases. As a result, the courts developed a number of exceptions. Other exceptions (for example in the area of insurance law) were developed by statute. Concerns with the operation of the doctrine continued, however. These were ultimately addressed by Parliament with the enactment of the Contracts (Privity) Act.
[18] The Act substantially alters the “benefit” limb of the privity rule, but does not affect the “burden” limb. Section 4 of the Act provides that:
4 Deeds or contracts for the benefit of third parties
Where a promise contained in a deed or contract confers, or purports to confer, a benefit on a person, designated by name, description, or reference to a class, who is not a party to the deed or contract (whether or not the person is in existence at the time when the deed or contract is made), the promisor shall be under an obligation, enforceable at the suit of that person, to perform that promise:
provided that this section shall not apply to a promise which, on the proper construction of the deed or contract, is not intended to create, in respect of the benefit, an obligation enforceable at the suit of that person.
[19] A benefit includes (amongst other things) any advantage or a right affecting any person (other than a party to the deed or contract).4 The promise of the benefit
may be made by implication, as with an implied term of a contract,5 but there must
3 Price v Easton (1833) 4 B & Ad 433, (1833) 110 ER 518; Tweddle v Atkinson (1861) 1 B & S
393, (1861) 121 ER 762 (QB).
4 Contracts (Privity) Act 1982, s 2.
5 New Zealand Guardian Trust Co Ltd v Peat Marwick (1991) 5 NZCLC 67, 129 (HC).
be an intention to confer a benefit.6 Section 4 will accordingly apply where there is a contractual promise to confer a benefit on a sufficiently designated third party, provided that the relevant contract, on its proper construction, intended to create on obligation enforceable by the third party.
Does the Body Corporate fall within the scope of section 4 of the Contracts
(Privity) Act?
[20] As the learned authors of Privity of Contract observe, there are many practical situations where A and B make a contract, the proper performance of which will confer a benefit on C but where no-one would imagine that C has any legal rights against A or B.7 As an example, they note that millions, perhaps billions, have enjoyed Ingrid Bergman’s performance in ‘Casablanca’ without thinking in terms of her contract with the studio. A more prosaic example would be where, in an
employment contract, an employer agrees to provide the employee with a Mercedes car. Mercedes Benz Limited would benefit from such a contract, but no-one would suggest that it would be entitled to sue the employer in respect of the lost sale if the specified vehicle was not provided to the employee.
[21] These types of benefits are sometimes referred to as “incidental” benefits, with the relevant beneficiary being an “incidental beneficiary”. Incidental beneficiaries can be contrasted with “intended” beneficiaries, who are the types of beneficiaries the Contracts (Privity) Act is intended to capture.
[22] The District Court Judge accepted Mr and Mrs McNish’s submission that clause 4 of the Lease does not contain a promise on their part in favour of the Body Corporate. Rather, it only reflects a covenant as between the lessor and lessee.
[23] The Body Corporate submitted, on the other hand, that clause 4.1 confers a direct benefit on it. The nature of that benefit was described as being “the direct
benefit of having Unit AQ occupied by a lessee who is obligated to pay body
6 Coxhead v Newmans Tours Ltd (1993) 6 TCLR 1 (CA); Etablissement Mollet et Dupont Freres SA v Bank of New Zealand Nominees Ltd (1989) 2 PRNZ 129 (HC). See also Saunders & Co v Bank of New Zealand [2002] 2 NZLR 270 (HC).
7 Michael Furmston and Gregory Tolhurst Privity of Contract (Oxford University Press, Oxford,
2015) at 273.
corporate levies, despite the body corporate not being a party to the lease”. Put another way, the benefit to the Body Corporate of clause 4.1 is that it has two entities it can look to for payment of its levies, rather than just one. On that analysis, Mr and Mrs McNish’s position (vis-à-vis the Body Corporate) is somewhat similar to that of a guarantor of LVO Limited. If LVO Limited fails to meet its statutory obligations to pay the Body Corporate levies, then the Body Corporate can look directly to Mr and Mrs McNish for payment.
[24] I have concluded, however, that the Judge did not err in finding that clause 4.1 of the Lease does not contain an enforceable promise in favour of the Body Corporate, but rather is simply a covenant by the lessee in favour of the lessor. The intended beneficiary of Mr and Mrs McNish’s “promise” is LVO Limited, which itself has a statutory responsibility to meet the relevant charges. At best, the Body Corporate (to the extent it receives any benefit at all) is an incidental beneficiary.
[25] This case bears some similarity to Malyon v New Zealand Methodist Trust Association.8 In that case the Methodist Trust owned retail shop premises in Parnell Road, Auckland, which it leased to a Mr Curran. Mr Curran assigned the lease to Cottage Garden (Implants) Ltd, who further assigned it to Hangovers Retail Limited. In the deed of assignment between Cottage Gardens and Hangovers, Ms Malyon guaranteed Hangover’s obligations under the lease. When Hangovers defaulted, the
landlord, Methodist Trust, brought proceedings against Ms Malyon as guarantor.
[26] The High Court found in favour of the Methodist Trust. The Court of Appeal, however, reversed that finding. It found that the Methodist Trust was not entitled to enforce the guarantee under s 4 of the Contracts (Privity) Act. The guarantee was to provide security to the assignor, Cottage Gardens, against the failure of the assignee, Hangovers, to pay rent. Such a failure could lead to a claim by the Methodist Trust against Cottage Gardens, in which event Cottage Gardens would be able to pursue Ms Malyon under her guarantee. There was no intention in the deed of assignment to create an obligation directly enforceable by the Methodist
Trust against Ms Malyon. The proviso to s 4 accordingly applied.
8 Malyon v New Zealand Methodist Trust Association [1993] 1 NZLR 137 (CA).
[27] In this case the obligation to the Body Corporate to pay levies fell squarely on LVO Limited, pursuant to the Unit Titles Act. As between LVO Limited (as lessor) and Mr and Mrs McNish (as lessee) the burden of those levies has been passed on to Mr and Mrs McNish, by virtue of a covenant in the lease between those two parties. The lessor, however, remains the party that is liable to the Body Corporate for the relevant levies. The covenant in the clause 4.1 of the Lease is for its benefit, not that of the Body Corporate.
[28] I note that clause 4.1 is a very common lease provision. Similar cost shifting clauses in relation to outgoings such as rates, body corporate levies or similar charges are routinely found in commercial leases. Such clauses clearly create enforceable obligations as between lessor and lessee. Counsel was unable to refer me to any authorities, however, that have held that such clauses also create obligations that are directly enforceable by a third party (such as a local council) named or identified in the outgoings clause.
[29] In this case, the statutory scheme adds weight to the view that, properly construed, the Lease was not intended to create an obligation on the part of Mr and Mrs McNish that was directly enforceable by the Body Corporate. In particular, while the relationship between the unit owner/lessor and the lessees of Unit AQ is governed by the Lease, the relationship between the unit owner/lessor and the Body Corporate is governed by the Unit Titles Act and body corporate rules. The Act covers how unit title developments are created and managed and, importantly, the rights and obligations of both bodies corporate and unit owners. Default body corporate rules are set out in schedules to the Act.
[30] The statutory regime is comprehensive and provides for reciprocal or complementary rights and obligations. Bodies corporate have maintenance and repair obligations in respect of the development and may determine, from time to time, the amounts to be raised for each of various funds (long term maintenance, contingency funds and so on). Levies can be imposed on unit owners to establish and maintain each fund. As a corollary, unit owners are automatically entitled to membership of the body corporate and, in that capacity, can have input into body corporate decision making. This includes decision making in relation to the
imposition and quantum of body corporate levies. There are also statutory dispute resolution mechanisms in the event of disagreement.
[31] The effect of a finding that the Contracts (Privity) Act applied in this case would be, essentially, that the Body Corporate was able to have the “benefit” of the payment of levies directly from the lessees without the associated statutory “burden” (being the obligations it owes to unit holders under the Unit Titles Act). In particular, the Body Corporate is not statutorily required (or even entitled) to give the lessees any input into its decision making, or even to notify them of levies in a timely fashion. This is despite the fact that interest at the rate of 10 per cent is payable in respect of overdue levies. (I note that it is not clear whether LVO Limited sought payment of the relevant levies from Mr and Mrs McNish during the period
2009 to 2012. The Body Corporate only appears to have become directly involved from 2013 onwards.)
[32] All of these factors lend weight to the view that clause 4.1 of the Lease is a covenant by the lessees in favour of the unit owner/lessor that was not intended by them to create a separate and independent promise to the Body Corporate, directly enforceable by it. The proviso to s 4 of the Contracts Privity Act accordingly applies and the Body Corporate’s appeal must fail.
[33] I note, however, that although I have found that the Body Corporate’s attempt to rely on the Contracts (Privity) Act is misconceived, the underlying “merits” appear to be squarely with the Body Corporate. In practical terms, Mr and Mrs McNish’s position is that, as a consequence of their landlord becoming insolvent, they should now get a “free ride” at the expense of the other unit holders. Specifically, they claim to have the right to continue living in Unit AQ, but no commensurate obligation to contribute to the burden of maintaining or remediating the Santa Rosa development. Meanwhile, they receive the benefit of works, services and improvements that are funded by the other unit holders.
[34] The Court of Appeal’s observations in another contracts privity case, Ballance Agri-Nutrients (Kapuni) Ltd v The Gama Foundation seem apt, by way of analogy:9
It is difficult to envisage a situation in which, because of the timing of the transfer of a freehold title, legal rights will have been extinguished entirely or fallen into some large black hole. If Foundation is not the correct party in the arbitration, although it may be that procedural steps will be required to reinstate Holdings to the Companies Register, eventually the matter the parties want an answer to will be determined.
[35] In this case, although the Body Corporate may have chosen the wrong legal avenue to address the lacuna caused by LVO Limited being struck off the companies register, it is unlikely that Mr and Mrs McNish’s liability to pay body corporate levies has simply fallen into a legal “black hole”. There will almost certainly be an appropriate legal avenue for addressing the current issue that has arisen. I anticipate that the Crown, as holder of the land in bona vacantia, will likely assist in that regard, to the extent necessary.
[36] Various alternative options were canvassed (in passing) at the hearing before me, including the Body Corporate (or a group of unit owners) acquiring the freehold of Unit AQ and then enforcing the terms of the Lease against Mr and Mrs McNish. I also note that it may well be arguable that the effect of the liquidator’s disclaimer of LVO Limited’s interest in Unit AQ has operated to terminate the Lease, on the basis of the principles set out by the High Court of Australia in Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed)
(In Liq).10 In that event Mr and Mrs McNish would have no right to continue living
in Unit AQ.
[37] Ultimately, the issue of how to resolve the present impasse is a matter for another day. For present purposes I simply note that any belief on the part of Mr and Mrs McNish that they will be able to continue to reside in Unit AQ long term,
without paying body corporate levies, is likely to prove to be ill-founded. Failure to
9 Ballance Agri-Nutrients (Kapuni) Ltd v The Gama Foundation [2006] 2 NZLR 319 (CA) at [38].
10 Willmott Growers Group Inc v Willmott Forests Ltd (Receivers and Managers Appointed) (In
Liq) [2013] HCA 51, (2013) 251 CLR 592.
make any arrangements regarding ongoing body corporate levies could ultimately prove to be a high risk strategy.
Result
[38] The appeal is dismissed.
[39] Leave is reserved to file memoranda on costs. Any memorandum on behalf of the respondents is to be filed within ten working days of this judgment. Any memorandum from the appellant in response is to be filed within a further ten
working days.
Katz J
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