Body Corporate 208203 v ANZ Bank New Zealand

[2015] NZHC 378

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-002735 [2015] NZHC 378

UNDER	the Unit Title Acts 2010
BETWEEN	BODY CORPORATE 208203 Applicant
AND	ANZ BANK NEW ZEALAND AND SIXTY FIVE OTHER RESPONDENTS Respondents

Hearing:	4 March 2015
Appearances:	Jonathan Wood for the Applicant No appearance for the Respondents
Judgment:	6 March 2015

RESERVED JUDGMENT OF MOORE J

This judgment was delivered by  on 6 March 2015 at 4:30pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar

Date:

Solicitors:

Rainey Law, Auckland

BODY CORPORATE 208203 v ANZ BANK NEW ZEALAND & ORS [2015] NZHC 378 [6 March 2015]

Introduction

[1]      The applicant is a body corporate under the Unit Titles Act 2010 (“the Act”). It has 59 units arranged in four blocks known as the Pueblo Apartments.   The buildings which comprise the Pueblo Apartments were built with defects relating to its  weathertighteness.     The  buildings  have  deteriorated  and  will  continue  to deteriorate over time if the defects are not remedied.

[2]      The owners, by a significant majority, have approved a scheme of repair and now apply to this Court for an order to settle that scheme under s 74 of the Act.

[3]      The applicant has served all of those who it is required to serve, namely: (a)  the owners of the units;

(b)      those with an interest in the units (being mortgagees); and

(c)       insurers of the building.

[4]      At an EGM called by the owners to approve the scheme an overwhelming majority of 42 to 1 voted in favour.  It is noteworthy that none of the owners who voted against the scheme have elected to formally oppose it. The scheme does not affect the security of the any of the mortgagees.  As at the date of the hearing the only respondent to take steps has been Westpac who, as a matter of courtesy to the Court, conveyed it will take no steps.

[5]      Notwithstanding the lack of opposition the applicant still carries the burden of satisfying this Court that its jurisdiction to order a scheme has been triggered and, if it has jurisdiction, it should grant the scheme as filed.

[6]      In general terms, the approval of a scheme under s 74 of the Act requires the

Court to be satisfied that:

(a)       a building comprised in any unit has been damaged or destroyed;

(b)the scheme is necessary and should be granted in order to effect the repair; and

(c)       the terms of the scheme are such that the Court can impose and fairly balance the interests of the unit owners.

[7]      The relevant principles were summarised by the Court of Appeal in Tisch v Body Corporate 318596.1   Although that decision related to the previous legislation, the section in question was materially identical to s 74.

[8]      The Court of Appeal observed:

First, a scheme with a 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 a minority …

Secondly, the scheme should be appropriately detailed.  The more detailed a scheme, the less cope for later misunderstanding and argument about it.

Thirdly, 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 …

Fourthly, work should normally be done to the same stand and at the same

time …

Fifthly … the terms of the s 48 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 Corporate rules remain relevant considerations.  An exception to this fifth guiding principle is a scheme unanimously agreed to by all unit owners.

[9]      Mr Wood for the applicant has filed an affidavit from the chairman of the body corporate, Mr Watts, in which he sets out the history of how the defects were discovered and the circumstances surrounding the decision by the body corporate to

obtain a scheme of repair.

1 Tisch v Body Corporate 318596 [2011] NZCA 420, 3 NZLR 679 at [45]-[49].

[10]     Also before the Court is an affidavit from Mr Hill, a building surveyor, who has investigated the cause and scope of the defects and formed an opinion on the necessity of repair.

[11]     The body corporate has begun the first stage of repairs.  It has raised money for this stage from those owners and the owners of the subsequent stages have made arrangements for their contributions.

[12]     I am  satisfied  that  s  74  is  triggered.    The  evidence  that  the  building  is damaged is plain.   Furthermore, the damage is more than minor.   It affects every building.  A remedial plan is being designed and the repair works are estimated to exceed $4m.

[13]     Mr Hall summarised the defects as follows:

(a)       inadequately weatherproofed control joints;

(b)      inadequately weatherproofed horizontal surfaces;

(c)       inadequately constructed cladding-base detail including insufficient cladding clearances;

(d)      inadequately weatherproofed window and door joinery; (e)     cracking and movement of the fibre cement cladding;

(f)       inadequately weatherproofed balconies; and

(g)      inadequately weatherproofed roof-to-wall junctions.

[14]     The next question is whether a scheme is required.  Under the present Act the powers of the body corporate have been expanded by introducing a new concept of building elements comprehensively defined in s 5 of the Act.  A body corporate is charged with the obligation to maintain the building elements under s 138 which,

relevantly, provides that the body corporate has a duty to repair and maintain any building elements and infrastructure that relate to or serve more than one unit.2

[15]     The duty in s 138(1)(d) is compensated with the power to recoup the cost of exercising the duty either:

(a)       whether  work  takes  place  wholly or  within  one  principal  unit  by levying that owner;3 or

(b)whether work substantially benefits one unit or some of the owners more than others, by levying those owners.4

[16]     I am satisfied that a scheme of repair is required in terms of the obligations imposed by the Act and, in particular, s 138.

[17]     Next I must ask whether a scheme should be imposed and, if so, should it be imposed on the terms proposed.

[18]     Given the widespread nature of the defects and the extent of the deterioration, the integrity of the whole building cannot be maintained without a full and comprehensive repair. This is plainly evidence from Mr Hill’s affidavit.

[19]     The scheme proposed provides that the money for the repairs is levied in a manner which reflects the anticipated cost to each unit based on the relative damage to the unit rather than utility interest.

[20]     I now turn to the question of apportionment.   As might be expected, the design of the complex has lead to some units being more adversely affected than others.  For example, in the two level units, the evidence indicates that these have suffered greater damage than the lower units.  The reasons for this are canvassed in

Mr Hill’s affidavit.

2 Unit Titles Act 2010, s 138(1)(d).

3 Unit Titles Act 2010, s 138(4).

4 Unit Titles Act 2010, s 126.

[21]     The body corporate was alive to this disparity at an early stage.  After almost a year of discussion it was decided to quarantine or “silo” each design type so that each block was responsible for the total cost to that block split rateably amongst the owners by utility interest.  To this was added an equal share of the costs of repairs to common property, such as the gymnasium.

[22]     At the EGM where the scheme was approved, in a separate resolution the body corporate also approved the means of apportionment by 27 to 7.   Mr Wood advised me that the difference in cost between the individual versus the more global/ rateable approach was minimal and measured in just a few hundred dollars.

[23]     Attached to this judgment is the proposed scheme.   Nonetheless, I set out

below a précis of the scheme’s provisions:

(a)      the preamble sets out brief history of the events that have led the body corporate  to  apply  for  the  scheme  and  attaches  Prendos’ concept plans;

(b)clauses 1 and 2 provide the broad and central power to undertake all and any repairs to carry out the repairs;

(c)      clause  3  specifies  that  this  power  is  a  general  power  to  do  all necessary to undertake the repairs and obtain a code compliance certificate. It provides that the body corporate should have any power incidental to the power to repair in order to carry out its duties;

(d)clauses 4 and 7 provide for the scheme to apply retrospectively to the work already carried out;

(e)      clause 5 particularises aspects of the general power.   Primarily the sub-clauses iterate that it has the power to engage the persons necessary to design and carry out the repairs;

(f)       subclause 5(i) responds to the body corporate’s concern regarding a

continuity of funding.  It provides that, where there is a shortfall due

to the default of an owner, the body corporate may borrow those funds and when it does so clause 6 makes clear that the cost of doing so is not carried by the other owners but by the defaulting owner.   The defaulting owner’s obligations to pay for its share is not extinguished;

(g)      clauses 8 and 9 preserve the general scheme of governance under the

2010 Act, though it in effect carves out a further class of powers that may not be delegated to the committee;

(h)clauses 10 to 12 detail the decision to engage the contractor and the implication that has for raising levies and the timing of those levies. It left the decision to proceed with the contract in the hands of the committee given the knowledge it would have of the amount of levies raised;

(i)       there was an error in the scheme as submitted it referred to paragraph

20 where it should have referred to paragraph 10.   This has been changed in the attached scheme;

(j)clauses 13 to 17 clarify the position of levies raised pursuant to this scheme:

(i)they are identical in effect to ordinary levies raised pursuant to s 121, they are a debt due and owing when raised;

(ii)clause 15 in effect deletes the provisions under the Act that deal with the recovery of money for repairs as the purpose of

this scheme is to create a special code for these repairs;5

5  Sections 126 and 138 discussed at paragraphs 18 and 19 of the applicant’s submissions dated 25

February 2015. Section 127 allows for recovery where a unit owner is at fault.

(iii)clause 16 allows for the body corporate to raise further levies to make up for any shortfall.  While these levies will be levied in the same manner as before, there is a recognition that if there is a shortfall because of a default, the fresh levies needs to cater for the likelihood of further default by those owners when setting the level of those levies;

(iv)clause 17 stems from the issue that, in the ordinary case, a body corporate holds property, including funds, for the benefit of the owners for the time being.  Where there is no change in ownership   the   right   to   any   surplus   is   unconventional. However, it is possible that the complex will be repaired, a unit  sold  and  subsequent  to  this  the  body  corporate  may receive monies such as a GST refund that is referable to the payment of repairs.  This clause clarifies that the person who made  the  payment  remains  entitled  to  a  proportion  of  the refund regardless of whether they have remained an owner.  It may be that this clause is obsolete.  On 6 June 2014 the Inland Revenue Department made an announcement that it intended to remove the requirement for bodies corporate under the Act to register for GST.   This is a policy decision aimed at preventing bodies corporate being eligible for GST refunds when they undertake repairs.   This will require a legislative change but the Inland Revenue Department has also indicated its expectation is that this change will be backdate to the date of the announcement;

(k)      clause 19 of the scheme as submitted erroneously refers to paragraph

20 when it should refer to paragraph 18.  This has been corrected in the scheme attached;

(l)clauses 18 to 20 provide for accounts to be kept.  Outside the scheme, in the ordinary course of business, a body corporate’s accounts would need to be audited unless there was a special resolution dispensing

with the audit.  The scheme’s provisions have been drafted to mirror

the case with ordinary accounts;

(m)clauses 21 to 23 provide for regular reporting.   Such information would not ordinarily be information an owner would be entitled to receive as of right under s 206 of the Act;

(n)clause 24 allows for the possibility that this scheme may need to be varied or extended and may return to this Court for further orders;

(o)clause 25 provides for an indemnity to those in the body corporate who need to take active roles in ensuring the scheme is carried out; and

(p)the applicant submits that the scheme described varies no more than necessary from the Act in order to carry out the repairs. It deals fairly with the members as it retains them in the decision making process, provides for them to be informed and allows them the power to return to this Court.

[24]     I reach the following conclusions:

(a)     the  buildings  at  Pueblo  Apartments  suffer  from  serious weathertightness failures and are damaged;

(b)all unit holders either actively support the proposed scheme or do not oppose it;

(c)       adequate steps have been taken to serve all interested parties;

(d)      the proposed provisions in the draft scheme are sufficiently detailed.

[25]     For  these  reasons  I  order  that  the  scheme  attached  to  this  judgment  is

approved by this Court and thereby settled.

Moore J