Body Corporate 396711 v Sentinel Management Ltd
[2012] NZHC 1957
•8 August 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2010-404-007754 [2012] NZHC 1957
UNDER the Declaratory Judgements Act 1908
IN THE MATTER OF the Unit Titles Act 2010
BETWEEN BODY CORPORATE 396711
First Plaintiff
ANDDENNIS JOHN ANSLEY Second Plaintiff
ANDSENTINEL MANAGEMENT LIMITED Defendant
Hearing: 3 and 5 October 2011
Counsel: T J Rainey and J P Wood for Plaintiffs
N R Campbell for Defendant
Judgment: 8 August 2012
RESERVED JUDGMENT OF WOOLFORD J
This judgment was delivered by me on Wednesday, 8 August 2012 at 11:00 am pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors/Counsel:
Rainey Law, Solicitors, Auckland
Alexander Dorrington, Solicitors, Auckland
BODY CORPORATE 396711 & OR V SENTINEL MANAGEMENT LIMITED HC AK CIV 2010-404-007754 [8 August 2012]
Contents
Introduction ..........................................................................................................[1] Factual background .............................................................................................[7] The Pleadings......................................................................................................[19] Statutory Framework ........................................................................................[22] UTA 1972 – title ...................................................................................................[24] UTA 1972 –governance........................................................................................[27] UTA 2010 – title ...................................................................................................[30] UTA 2010–governance.........................................................................................[32] First Cause of Action – validity of the amended rules ....................................[33] Counsels’ submissions .........................................................................................[34] Legal Principles – amendment .............................................................................[36] Application – Schedule 2 rules.............................................................................[47] Application – Schedule 3 rules.............................................................................[56] Conclusion............................................................................................................[61] Second Cause of Action – ultra vires UTA 1972 ..............................................[62] Counsels’ submissions .........................................................................................[63] Legal Principles – ultra vires...............................................................................[65] Ultra vires the UTA 1972 .....................................................................................[69] Ultra vires the rules .............................................................................................[73] Framing the legal arguments in this case ............................................................[75] Legal principles – severance................................................................................[79] Application – ultra vires.......................................................................................[83] The Letting Service...............................................................................................[84] The Real Estate Sale Service ..............................................................................[100] The Sentinel Residents Service ...........................................................................[102] The Management Service ...................................................................................[103] Conclusions – ultra vires terms..........................................................................[114] Application – severance .....................................................................................[115] Conclusion – second cause of action .................................................................[121] Third Cause of Action – breach of vendor’s duties ......................................[122] Counsels’ submissions .......................................................................................[124] Legal principles – vendor’s duties to purchaser ................................................[126] Legal principles – Dishonest assistance ............................................................[134] Legal principles – relief .....................................................................................[137] Legal principles – affirmation............................................................................[139] Application – vendor’s duties to purchaser .......................................................[140] Application – dishonest assistance.....................................................................[149] Application – relief.............................................................................................[156] Application – affirmation ...................................................................................[159] Conclusion..........................................................................................................[160] Fourth Cause of Action – breach of promoter’s duties ................................[161] Counsels’ submissions .......................................................................................[162] Legal principles – promoter’s duties .................................................................[164] Legal principles - remedy...................................................................................[176] Legal Principles – affirmation ...........................................................................[181] Application – promoter’s duties.........................................................................[182] Application – dishonest assistance.....................................................................[198] Application - remedy ..........................................................................................[199]
Conclusion..........................................................................................................[202] Fifth Cause of Action – unconscionable bargain...........................................[203] Counsels’ submissions .......................................................................................[204] Legal principles – unconscionable bargain .......................................................[206] Application – unconscionable bargain ..............................................................[207] Conclusion..........................................................................................................[201] Sixth Cause of Action – Section 140 UTA 2010 .............................................[211] Counsels’ submissions .......................................................................................[212] Legal principles – section 140 UTA 2010 ..........................................................[214] Legislative History .............................................................................................[215] Comparable statutory provisions .......................................................................[216] Interpretation .....................................................................................................[219] Comparable legal standards: harsh and unconscionable .................................[221] Comparable legal standards: oppressiveness....................................................[222] Comparable legal standards: unconscionability ...............................................[225] Application – time period ...................................................................................[232] Application – harsh and unconscionable ...........................................................[246] Conclusion..........................................................................................................[267] Result .................................................................................................................[269] Relief ..................................................................................................................[270] Costs ..................................................................................................................[272]
Introduction
[1] The Sentinel is a 30 storey residential complex containing 117 apartments and a number of retail shops situated in Takapuna on Auckland’s North Shore. It is a unit title development.
[2] The first plaintiff, Body Corporate 396711 (the Body Corporate), is the
building’s body corporate initially constituted under the Unit Titles Act 1972 (UTA
1972). The second plaintiff, Dennis John Ansley, owns one of the apartments in the building. The defendant, Sentinel Management Limited (SML), is the building manager and a party to a long-term management agreement with the Body Corporate which was entered into when both parties were controlled by the sole director and shareholder of the development company.
[3] According to the plaintiffs, although the management agreement ostensibly relates to the management of the common property in the building, in substance it confers valuable rights on SML which have significantly reduced the Body Corporate’s ability to manage the building within the democratic framework created by the Unit Titles Act 2010 (UTA 2010), the successor statute to the UTA 1972.
[4] The plaintiffs’ case is that the management agreement is invalid and unenforceable. They say there are several alternative grounds on which the Court can reach that conclusion. The first and most orthodox ground is that several provisions of the management agreement are ultra vires the UTA 1972 and, because these provisions cannot be severed from the remainder of the provisions, the agreement is wholly void. A related issue is the validity of amended rules for the Body Corporate which were deposited with the District Land Registrar on
14 February 2008. It is said that the rules were not amended in accordance with s 37 of the UTA 1972 and accordingly the amended rules have not been validly adopted.
[5] The second ground relates to the circumstances in which the Body Corporate agreed to enter into the management agreement with SML. A large number of apartments had been conditionally sold prior to completion of the building and it is
said that the development company held title to those apartments as constructive trustee for the purchasers as at the date of the management agreement. By exercising the development company’s power as the sole member of the Body Corporate to enter into the agreement, it is said that the sole director and shareholder breached his fiduciary duty to those purchasers. Alternatively, it is said the development company was in a position analogous to a promoter and owed the Body Corporate fiduciary duties, including the duty not to allow its own interests to conflict with the interests of the Body Corporate. Finally, it is said that as at the date of the agreement the Body Corporate was acting under a disability and unable to act in its own best interests because it was under the complete control of the sole director and shareholder of the development company. The agreement was therefore an unconscionable bargain.
[6] The third ground is an express statutory right of cancellation of agreements entered into by developers which was introduced by s 140 of the UTA 2010. This allows “the appropriate decision maker” to cancel a service contract entered into during the “control period” if the contract is harsh or unconscionable.
Factual background
[7] At all material times the land on which the Sentinel was built was owned by Takapuna Village Limited (TVL). TVL was the developer of the Sentinel and as such was the initial owner of each of the apartments when the unit plan for the development was deposited and the titles to the units issued. The sole director and shareholder of TVL was Richard John Martin.
[8] The second plaintiff, Mr Ansley, entered into a written agreement with TVL on 15 December 2003 to purchase an apartment in the building. The sale and purchase agreement was conditional on:
(a) TVL obtaining a minimum level of sales of apartments by
30 November 2005;
(b)TVL being satisfied it would obtain all necessary building, subdivision and other consents by 30 April 2006;
(c) Practical completion of the apartment; and
(d) Title to the unit being issued.
The initial conditions in the sale and purchase agreement were met and the development proceeded. The Sentinel was essentially completed in early 2008.
[9] On 7 February 2008, a unit plan for the Sentinel was deposited with the District Land Registrar. Upon deposit of the unit plan, the Body Corporate was incorporated under the provisions of the UTA 1972 and the titles to the apartments were issued to TVL, which became the sole registered proprietor of the apartments and sole member of the Body Corporate.
[10] On its incorporation the Body Corporate was governed by the default rules provided in Schedules 2 and 3 of the UTA 1972.
[11] On 13 February 2008, Mr Martin signed a Notice of Change of Rules for the Body Corporate which stated that on that day, 13 February 2008, the rules for the Body Corporate were amended by the adoption of the rules annexed to the notice and furthermore that the amended rules had been duly authorised and approved by unanimous resolution of the all the proprietors who constituted the Body Corporate. The amended rules were received by the District Land Registrar on 14 February
2008. On 15 February 2008 the amended rules were recorded on the supplementary record sheet for the Body Corporate.
[12] On 14 February 2008, with practical completion of his apartment and the issue of title to it, the sale and purchase agreement between Mr Ansley and TVL became unconditional and Mr Ansley became the equitable owner of his apartment.
[13] On 18 February 2008, the Body Corporate held its first general meeting. The only persons in attendance were Mr Martin and the Body Corporate secretary,
Mr Plummer. The minutes of the meeting record that the Body Corporate by unanimous resolution resolved that:
1.The Rules of the Body Corporate attached are to be registered in relation to Body Corporate No: 396711 and are ratified and confirmed.
...
3.That the Body Corporate enter into the Building Management Agreement with Sentinel Management Limited in the form attached to this Minute.
The minute was signed by Mr Martin. The management agreement between the Body Corporate and SML was signed by Mr Martin for the Body Corporate and Mr Martin for SML. SML was at that time wholly owned by its sole director, Mr Martin.
[14] On 22 February 2008, settlement of the units in the building which had been pre-sold began. Mr Ansley settled the purchase of his apartment on 27 February
2008.
[15] The shares in SML, which had been held by Mr Martin, were sold later that year to Freestyle Property Group Limited (Freestyle). The directors of Freestyle had been involved by Mr Martin in arranging management services for the Sentinel prior to the completion of the building.
[16] In a meeting of the Body Corporate held on 13 April 2010 the proprietors of units in the development were asked to consider the possibility of legal action to challenge the validity of the management agreement. A legal opinion was obtained by some members of the Body Corporate’s committee. A legal opinion from SML’s advisors was also presented and the directors of Freestyle addressed the meeting. The matter was put to a vote and a majority ultimately concluded that solicitors should be instructed to challenge the agreement.
[17] The management agreement consists of a core obligation, which is the provision of management services in return for the payment by the Body Corporate of the management fee. There is no challenge to the reasonableness of the
management fee itself. The term of the management agreement is an initial period of ten years and is renewable twice at the option of SML. If SML chooses to renew the agreement it will exercise management rights and provide management services to the Body Corporate for a period of 30 years.
[18] The plaintiffs allege that the provisions which dictate the length of the term and the way the management fee is set have created a further collateral benefit for SML. It created a valuable bundle of management rights that could be sold directly or passed on indirectly through the sale of shares in SML. In or around February
2010 SML valued its business (comprising the management rights under the agreement, its letting rights and real estate rights for the apartments in the Sentinel, and its office and storage unit in the building) at $1.77 million when the business was offered for sale.
The Pleadings
[19] In their amended statement of claim, the plaintiffs split up the three broad grounds of complaint identified above and claim declaratory relief in respect of six causes of action, namely:
(a) That the amended rules of the Body Corporate are invalid having been adopted in an irregular manner;
(b) That the management agreement entered into between the Body
Corporate and SML is ultra vires the UTA 1972;
(c) That the management agreement is unenforceable as it was entered into as a result of a breach of trust arising between the vendor and the purchaser which SML knowingly assisted;
(d)That the management agreement is unenforceable as it was entered into as a result of a breach of the promoter’s fiduciary duty to the Body Corporate in which SML knowingly assisted;
(e) That the management agreement is unenforceable as it constitutes an unconscionable bargain; and
(f) That the management agreement is harsh and unconscionable under s 140 UTA 2010.
[20] In reply the defendant denies the first to sixth causes of action and raises a defence of affirmation to the third to sixth causes of action. It also raises an affirmative defence, relating to jurisdiction, to the sixth cause of action in that the proceeding, having been commenced under the previous Act, is to be determined as if the UTA 2010 had not been passed.
[21] During the course of the hearing, the defendant did not pursue its defence to the sixth cause of action turning on the jurisdiction to apply the provisions of the UTA 2010. The defence of affirmation in relation to the sixth cause of action was also not maintained at trial.
Statutory Framework
[22] The UTA 1972 was enacted to provide New Zealand with a statutory scheme for interests in shared forms of real property, most often within a single building which is divided into a number of different commercial or residential units. Property lawyers had previously relied on a number of different schemes in order to share the
ownership and occupation of multi-storey buildings or flats.1 The Act provided what
is effectively a code in respect of multi-unit property arrangements.
[23] Over time deficiencies became apparent in the UTA 1972 as new situations arose. For that reason Parliament passed the UTA 2010. That provides a new system for the creation of new unit title developments as well as new rules relating to the administration and management of existing unit title developments. The commencement date of the new Act was 20 June 2011. Part 5 Subpart 5 of the UTA
2010 deals with the transition from the old Act to the new Act.
1 G W Hinde, N R Campbell and P Twist Principles of Real Property Law (LexisNexis, Wellington,
2007) at ch 14.
UTA 1972 – title
[24] The following illustrates how a unit title development might proceed under the provisions of the UTA 1972.2
[25] A unit title development begins with the selection of a piece of land, normally held by its proprietors in a fee simple estate under the Land Transfer Act 1952,3 upon which the development will be built. The developer of the property then constructs the building or buildings which are to be divided up into units. Funding such construction up-front might not be economically feasible so a developer might put into place conditional contracts for sale of the units on completion of the development.4 The way in which the underlying estate is to be developed into units
is set out in a unit plan denoting the boundaries of units and the common property.5
[26] Prior to the plan being deposited each principal unit6 in the development is assigned a unit entitlement which determines the proportionate rights and responsibilities of the unit in relation to the development as a whole.7 Upon a plan being deposited, the original land title is cancelled and two things may occur:
(a) The District Land Registrar may issue a certificate of title covering the whole of the stratum estate in the development to the proprietor of the land;8 or
(b)The Registrar may issue a separate certificate of title in respect of each of the principal units to the registered proprietor.9
Ultimately, each unit will usually receive its own title either immediately on the deposit of the plan or prior to sale.
2 See also: Disher v Farnworth [1993] 3 NZLR 390 (CA) at 393.
3 Unit title developments on leased land are possible under the UTA 1972, Part 2.
4 Staged developments became possible under subsequent legislation (Unit Titles Amendment Act
1979).
5 UTA 1972, ss 3 and 4.
6 UTA 1972, s 2.
7 UTA 1972, s 6.
8 UTA 1972, s 8(1)(a).9 UTA 1972, s 8(2).
UTA 1972 –governance
[27] The UTA 1972 provides that once the unit plan is deposited and titles issued then the proprietor, or proprietors, of the units come together to form a body corporate.10 Some of the rights, responsibilities and powers of the body corporate are addressed directly in sections of the Act.11 In particular, the duties of the body corporate in s 15 are of key importance.
[28] Section 37 of the Act provides for the making of rules to govern body corporates.12 These rules provide an elaboration of the duties, rights and responsibilities of the body corporate and of proprietors. The default rules for body corporates are provided in Schedules 2 & 3 of the Act.13 The difference between the two sets of rules lies in the fact that the rules under Schedule 2 (Schedule 2 rules) may only be modified or revoked by a unanimous resolution of proprietors;14 those in Schedule 3 (Schedule 3 rules) may be amended or repealed by simple resolution.15
There are important limitations on the type of amendments that may be made to the rules which are to be found in s 37(5) and (6).
[29] The Schedule 2 rules might well be termed “constitutional” as they do a great deal of the work in defining the way in which the governance structures of the body corporate operate such as by defining voting rights and committee structures. The Schedule 3 rules relate largely to the quiet enjoyment of units. The body corporate must notify any changes to either set of rules to the District Land Registrar (under s 37(7)) and any such amendments do not have any effect until the notification has
been lodged.
10 UTA 1972, s 12.
11 UTA 1972, ss 13-16.
12 UTA 1972, s 37(1).
13 UTA 1972, s 37(2) & (3).
14 UTA 1972, s 37(3).15 UTA 1972, s 37(4).
UTA 2010 – title
[30] While there are substantial revisions to the process of establishing unit title developments in the UTA 2010, the process of creating new stratum titles from an original title under the new Act is much the same as under the old Act.16
[31] The UTA 2010 does, however, superimpose the concept of a “control period” on the initial management of the development. The control period is defined in the UTA 2010 and encompasses the period between the deposit of the plan and the point at which the share of votes in the body corporate held by the developer (or by
entities associated with the developer) drops below 75 per cent.17
UTA 2010–governance
[32] In a similar way to the previous Act, a body corporate is created under the UTA 2010 when the unit plan is deposited.18 Its members are the owners from time to time of the units.19 The UTA 2010 contains a more extensive definition of the rights, powers and responsibilities of the body corporate and of proprietors.20
Matters that were previously dealt with by the rules and which were therefore vulnerable to amendment are now to be found within the Act. These may still be supplemented by rules and there are now default rules prescribed in regulations.21
Amendments may now be made by an ordinary resolution.22 No rules may be made
that exceed the scope of the responsibilities defined by the primary provisions of the
UTA 2010.23
16 UTA 2010, ss 16-18.
17 UTA 2010, s 6.
18 UTA 2010, s 75.19 UTA Act 2010, s 76.
20 UTA 2010, s 77 – 86.
21 Unit Titles Regulations 2011.
22 UTA 2010, s 105 – 106.23 UTA 2010, s 106(1) & (2).
First Cause of Action – validity of the amended rules
[33] As noted above the Body Corporate rules for the Sentinel were purportedly amended by a Notice of Change of Rules signed on 13 February 2008. Both the Schedule 2 and 3 rules were replaced by modified sets of rules. The procedural validity of these amendments has been challenged.
Counsels’ submissions
[34] Mr Rainey, for the plaintiffs, submitted that the fact that the decisions were made by a sole proprietor did not dispense with the need for formality. He stressed the need for a body corporate to keep minutes of its unanimous resolutions,24 and the requirement that notices of change certify that the rules have been duly amended.25
In regard particularly to the Schedule 3 rules, Mr Rainey stressed the requirement for a general meeting to amend them and argued that this requirement was also implicit in the procedure for amending the Schedule 2 rules.26 Mr Rainey submitted, on the basis of authority,27 that the rule relating to unanimous assent had no application in this case.
[35] Mr Campbell, for the defendant, submitted that amendment of the Schedule 2 rules did not require a general meeting given the definition of unanimous resolution found in the Act.28 In regard to the Schedule 3 rules, he submitted that the wording of the section could be read non-exhaustively to allow for amendment other than at a general meeting and, particularly, by unanimous resolution. Even were there some procedural irregularity, Mr Campbell submitted that this could be cured by the
unanimous assent of the proprietors.29
24 UTA 1972, sch 2, r 12(b).
25 UTA 1972, sch 1, form 4.
26 UTA 1972, s 37(3) & (4).
27 Fifer Residential v Gieseg (2005) 6 NZCPR 306 (HC).
28 UTA 1972, s 2.29 Chambers v Strata Title Administration Ltd (2004) 5 NZCPR 299 (HC).
Legal Principles – amendment
[36] The provisions relating to the amendment of body corporate rules are found, in the first instance, in s 37 of the UTA 1972:
37 Rules
(1) Except as otherwise provided by this Act, the control, management, administration, use, and enjoyment of the units and the common property shown on a unit plan, and the activities of the body corporate that comprises the proprietors of those units, shall, while there are more proprietors than one, be regulated by the rules for the time being applicable to that body corporate.
(2) Subject to any amendment or repeal thereof or addition thereto the rules applicable to each body corporate shall be those set out in Schedules 2 and 3 to this Act.
(3) The rules in Schedule 2 to this Act and any additions thereto or amendments thereof may be added to or amended or repealed in relation to any body corporate by unanimous resolution of the proprietors and not otherwise.
(4) The rules in Schedule 3 to this Act and any additions thereto or amendments thereof may be added to, amended, or repealed in relation to any body corporate by resolution of the body corporate at a general meeting.
(5) Any amendment of or addition to any rule shall relate to the control, management, administration, use, or enjoyment of the units or the common property, or to the regulation of the body corporate, or to the powers and duties of the body corporate (other than those conferred or imposed by this Act):
Provided that no powers or duties may be conferred or imposed by the rules on the body corporate which are not incidental to the performance of the duties or powers imposed on it by this Act or which would enable the body corporate to acquire or hold any interest in land or any chattel real or to carry on business for profit.
(6) No rule or addition to or amendment or repeal of any rule shall prohibit or restrict the devolution of units, or any transfer, lease, mortgage, or other dealing therewith, or destroy or modify any right implied or created by this Act.
(7) No addition to or amendment or repeal of any rule pursuant to subsection (3) or subsection (4) of this section shall have effect until the body corporate has lodged a notification thereof in form 4 in Schedule 1 to this Act with the
Registrar, and the Registrar has recorded it appropriately on the supplementary record sheet.
[37] Unanimous resolution is defined in s 2 of the UTA 1972 as follows:
Unanimous resolution, in relation to a body corporate, means—
(a) A resolution which is passed unanimously at a general meeting of the body corporate at which every proprietor is present and votes either in person or by proxy; or
(b) A resolution which is passed unanimously at a general meeting of the body corporate by every proprietor who is present and votes either in person or by proxy, and agreed to within 28 days after the date of the meeting by every other proprietor who was entitled to be present and vote at the meeting, or by his successor in title if he has ceased to be a proprietor after the meeting; or
(c) While there is only one proprietor, a decision of that proprietor...
[38] The parties sought to rely on decisions of this Court touching on irregularities in the amendment of body corporate rules. There are two key decisions: Chambers v Strata Title Administration Ltd and Fifer Residential v Gieseg.30
[39] In Chambers v Strata Title Administration Ltd amended rules were drawn up prior to the deposit of the unit plan. The unit plan was deposited on 15 December
1997 and the body corporate came into being but the amended rules were not notified at that time. The developer was the sole proprietor at the time of deposit and incorporation. It was only on 4 June 1998 that the rules were registered. Between December 1997 and 4 June 1998 several other persons became registered proprietors of units in the development. As Paterson J explained:
[27] On 5 September 1997 Mr Chapman-Smith [the future secretary to the body corporate] wrote to Mr Finn [one of the developer’s solicitors] stating, amongst other things:
I enclose in duplicate an updated set of rules for Body Corporate
183930 signed under seal together with front and backing sheets suitable for lodgment in the LTO.
The reference to “signed under seal” was a reference to the “Notice of Change of Rules” which was purportedly signed under the common seal of Body Corporate 183930 and the signature attesting to the affixing of that common seal was Mr Chapman-Smith’s. Mr Chapman-Smith’s evidence was
30 Chambers v Strata Title Administration Ltd (2004) 5 NZCPR 299 (HC); and Fifer Residential v
Gieseg (2005) 6 NZCPR 306 (HC).
that he affixed the common seal as it was “normal practice and ensures that immediately upon the developer exercising its power to choose to lodge the rules for registration it or its agent can do so”. While nothing turns on this point, I note that the Body Corporate did not come into existence until 15
December 1997, and it is difficult to see, common practice or not, how a
Body Corporate can execute a document before it comes into existence.
[28] Mr Chapman-Smith assumed that the Rules in form R03 were registered at or shortly after the Body Corporate came into existence on 15
December 1997...
It was not until late May 1998 that Mr Chapman-Smith discovered, on receipt of a letter from Mr Finn, that the Rules had not, in effect, been registered. The evidence is unsatisfactory as to what happened to the original document sent by Mr Chapman-Smith to Mr Finn on 5 September 1997. On receipt of Mr Finn’s letter of 25 May 1998, Mr Chapman-Smith sent two further sets of R03 to Mr Finn for registration. Somewhat surprisingly, Mr Finn could not say whether or not his firm registered the Rules on 4 June
1998. I suspect it is likely that his firm did, but this point is immaterial to the matters which I am required to determine. The application attached to the Rules when they were registered on 4 June 1998 was dated 15 December
1997.
[40] Certain of the proprietors attempted to maintain that the amendment on
4 June 1998 was invalid. Paterson J summarised that argument as follows:
[29] Against this background, Mr Ferguson for the owners, submitted that the Rules are invalid because they were a replacement by way of amendment of the statutory rules in the Second Schedule to the Act and, as such, they were not approved by unanimous resolution of the proprietors of the Body Corporate. The first annual general meeting of the Body Corporate took place on 3 August 1998. Those minutes contain no reference to an amendment to the statutory rules. At the time the Body Corporate came into existence on 15 December 1997, Ambrico [the developer] was the registered proprietor of the units on DP183930A. There was no evidence that Ambrico, as the only proprietor at the time, passed a resolution to amend the statutory rules. Further, it was submitted that the Rules registered on 4 June 1998 were not adopted in accordance with s 37(3) of the Act because by that date several purchasers had become registered proprietors of units and they did not participate in any resolution adopting the Rules.
[41] Paterson J noted that it would be possible, on the basis of established authority,31 to hold that the registration was valid, though irregular, if:32
(a) the act of registration was honest and intra vires the powers of the corporation; and
31 Bobbie Pins Ltd v Robertson [1950] NZLR 301 (SC).
32 Chambers v Strata Title Administration Ltd at [32].
(b)the unanimous consent of the proprietors (as members of the corporation) could be found at the time the body corporate acted.
[42] This was so because if the unanimous agreement of the proprietors existed at the time the act was done then they could also, at that time, have unanimously agreed to waive the formality required to effect the amendment.
[43] The matter saving the unanimous agreement in Chambers, where additional proprietors who would have objected to the amendment were present at the 4 June
1998 registration date, was contractual. The additional proprietors had signed agreements for sale and purchase of the units that bound them to agree to rules that the developer might make.33
[44] In Fifer Residential v Gieseg the Court was confronted with a situation in which the developer had lodged the amended rules and the application to deposit the unit plan at the same time on 14 April 2000. The unit plan was deposited, titles issued and the body corporate was incorporated on 20 April 2000.34 As Hansen J noted:
[51] Until a unit plan is deposited, there are therefore no proprietors and no body corporate with the ability to amend the rules under s 37(3) or (4). In the present case, they did not come into existence until 20 April. The prior attempt to amend the rules was therefore of no effect. An amendment to any rule pursuant to subs (3) or subs (4) of s 37 does not have effect until the body corporate has lodged a notification with the Registrar and the Registrar has recorded it in accordance with s 37(7). As, after 20 April, there was no attempt to further amend the rules, the amendments relied on by Fifer have never come into existence. The rules of the body corporate are those set out in the Second and Third Schedules to the Act.
[52] Fifer relied on the decision in Chambers (supra) and the unanimous assent rule as validating the amendments.
[45] However, Hansen J considered that Chambers could be distinguished:
[53] Paterson J held that the unanimous assent rule applied to bind the body corporate to the change of Rules. The transaction was intra vires and honest and had the assent of all corporators. The principle in Bobbie Pins Limited v Robertson [1950] NZLR 301 applied. The assent of all corporators was achieved through their agreement as purchasers of the units to accept
33 At [7], [8] and [31]-[32].
34 Fifer Residential v Gieseg at [49].
and adopt the Rules. The failure to pass a formal resolution was held therefore to be an irregularity which did not invalidate the Rules (see in particular at [31]-[32]). The circumstances in this case are distinguishable in two critical respects. First, the Rules have not been registered since the body corporate came into existence. There is no transaction capable of being validated. Secondly, as discussed in [49]-[51] above, the respondents are not contractually bound to assent to the new Rules as they were in Chambers. The unanimous assent rule has no application in this case.
[46] Both High Court Judges and counsel in this case placed reliance on the unanimous assent principle as described in Bobbie Pins Ltd v Robertson.35 That principle has also been affirmed by the Court of Appeal:36
In support of this [principle], [counsel] referred to several cases stemming from Parker & Cooper Ltd v Reading [1926] 1 Ch 975. In that case the issue was the validity of a debenture given intra vires for good consideration but without a valid directors' resolution. All the shareholders had however assented to it, and Astbury J held, consistently with a line of earlier authority, that that was sufficient. It is to be noted that the question was not whether the act of the shareholders bound the company but whether the act of the company was duly authorised. It was a question of that kind that arose in the other cases upon which counsel relied: Bobbie Pins Ltd v Robertson [1950] NZLR 301, In re Duomatic Ltd [1969] 2 Ch 365 (both concerning the payment of directors fees) and Swiss Screens (Australia) Pty Ltd v Burgess (1987) 11 ACLR 756 (allotment of shares). These cases are but examples of the well-recognised principle that failure to comply with the formalities prescribed for the exercise of a company's powers is cured by the assent of all its members. The company's act is valid and binding if they all concur in it.
Application – Schedule 2 rules
[47] The amended rules are valid for the following reasons:
(a) No particular procedure was required except that the decision be made unanimously.
(b)If a particular procedure was required then the defect could be cured by the unanimous assent principle.
35 Bobbie Pins Ltd v Robertson [1950] NZLR 301 (SC).
36 Wairau Energy Centre Ltd v First Fishing Company Ltd (1991) 5 NZCLC 67,379 at 4-5. See further: Westpac Securities Ltd v Kensington [1994] 2 NZLR 555 (CA); and Nicholson v Permakraft (New Zealand) Ltd (in liquidation) [1985] 1 NZLR 242 (CA).
[48] When the Body Corporate came into existence on 7 February 2008 the default rules found in Schedules 2 and 3 of the UTA 1972 were applicable to the Body Corporate.37 However, those rules did not regulate the activities of the Body Corporate so long as TVL remained the sole proprietor.38 Had there been any other proprietors, the default Schedule 2 and Schedule 3 rules, which in effect remained in
suspension during this period of sole proprietorship, would have regulated the conduct of the Body Corporate.
[49] The decision to amend the Schedule 2 rules clearly required a unanimous resolution under s 37(3) UTA 1972 and could not be made otherwise. The UTA
1972, by itself, does not place any formalities around the making of that decision; that is done by the rules in force at the time. As the rules did not at the time regulate the governance of the Body Corporate, no particular procedure needed to be followed in making the decision to amend.
[50] In addition, s 3 UTA 1972 provides that the decision of a sole proprietor shall be regarded as a unanimous resolution.
[51] TVL decided on or prior to 13 February 2008 to amend the Schedule 2 rules, as is evidenced by the notice of change form signed on that date. TVL made a further decision to change the rules on 18 February 2008 at the meeting which followed the registration.
[52] Given that there were no particular formal requirements around the exercise of the sole proprietor’s decision (which serves as a unanimous resolution), the decision made on or prior to 13 February 2008 was effective to change the Schedule
2 rules.
[53] Even if that was not the case and the resolution of 18 February 2008 is the operative document, it would still appear that the rules were validly amended. This
is because the unanimous assent rule does apply in this case.
37 UTA 1972, s 37(2).
38 UTA 1972, s 37(1).
[54] Fifer Residential v Gieseg can be distinguished from the present case. In Fifer there was no body corporate in existence when the purported amendment was made. Here the Body Corporate had come into existence when it attempted to amend the rules. Equally in Fifer there was no effective registration of the amended rules once the body corporate had come into existence. Chambers v Strata Administration is also different. In that case the rules were registered after the formal resolution to register them by the proprietor had been made. In this case registration may have been made before the formal resolution.
[55] Nonetheless, the unanimous assent rule has currency in this case as, despite the failure to pass a formal resolution to register the rules until after registration, the Body Corporate’s act was one that was intra vires, in good faith and had the unanimous assent of all its corporators.
Application – Schedule 3 rules
[56] Given that the rules, while technically applicable to the Body Corporate, did not regulate it whilst TVL remained the sole proprietor, TVL need only have complied with s 37(4) UTA 1972 to amend the Schedule 3 rules.
[57] The fact that s 37(4) includes the requirement that the proprietors come together in a general meeting does not defeat the effect of the unanimous assent rule.
[58] While the statutory requirement to hold a meeting cannot be excluded by the unanimous assent rule it can, nevertheless, be rendered largely nugatory. The powers relating to the requirements for the calling of a general meeting are to be found in rr 14 – 20 of the default Schedule 2 rules and are also in the amended rules at rr 14 –
20. There are some small variations to the default rules in the amended rules of the
Body Corporate but these are not relevant in this case.39
39 Given the findings in relation to the amendments to the Schedule 2 rules, the question of which rules were in force at the time of any amendment to Schedule 3 might arise in some cases but need not be considered here given the similarity between the default and amended rules.
[59] There is a requirement to allow seven days notice for the calling of a general meeting.40 Evidently it is doubtful whether such a thing could have happened given that the Body Corporate came into existence on 7 February, purported to notify the change of rules on 13 February and held what was said to be a general meeting on
18 February to “ratify” the rules.
[60] Objection might have been taken to the failure to notify the meeting but either that failure cannot invalidate the meeting or it can be waived by the corporators under the unanimous assent rule. While procedurally imperfect, the Schedule 3 rules were validly amended.
Conclusion
[61] The first cause of action fails. While there were procedural irregularities in the amendment of the rules they would have been cured by the rule of unanimous assent which applied to the Body Corporate at the time of the amendments.
Second Cause of Action – ultra vires UTA 1972
[62] The second cause of action pleaded by the Body Corporate is that provisions of the management agreement are ultra vires the rules of the Body Corporate and the powers of a body corporate generally as set out in the UTA 1972.
Counsels’ submissions
[63] The plaintiffs submit that certain provisions of the agreement are ultra vires the powers of the Body Corporate and that it could not therefore have entered into them. While they accept that the Body Corporate may appoint a building manager and enter into an agreement with the manager to organise and pay for management services, the plaintiffs point to a number of provisions of the agreement that they submit are ultra vires the powers of the Body Corporate. In their amended statement
of claim and in their closing submissions the plaintiffs provided a long list of clauses
40 Default r 16 and amended r 16.
and sub-clauses that they submitted were ultra vires. I do not propose to list those here but will deal with them when I come to apply the law to the facts of the case. Some of the central objections, however, related to the letting service, the real estate sale service, the Sentinel residents service and the provisions providing for them. Equally the plaintiffs questioned the validity of provisions more closely connected to the role of managing the building which, it is said, detract from the mandatory duties of a body corporate under the UTA 1972 and some of which are said to not be incidental to or reasonably necessary for the functioning of the Body Corporate.
[64] Counsel for the defendant accepted that one part of the agreement (relating to concierge services which have already been stopped) was likely ultra vires. However the defendant maintains that the nature of the services and the exclusivity provided in respect of the letting service, the real estate sale service and the Sentinel residents service are not ultra vires. The defendant also maintains that the aspects of the building management arrangements complained of are incidental to and reasonably necessary to the performance by it of duties under the UTA 1972 and the rules. The precise arguments on each point are dealt with below.
Legal Principles – ultra vires
[65] The nature of the ultra vires principle and its relationship to the UTA 1972 was discussed by Heath J in Low v Body Corporate 384911:41
[28] The ultra vires principle, in relation to bodies corporate, had its origins in company law. In particular, it was used to determine whether a company had power to enter into particular types of contracts. That was done at a time when the law restricted what a company could do in relation to the activities set out in the company’s memorandum of association. While, in New Zealand, the ultra vires doctrine no longer applies to companies: the principle continues to be applied to incorporated societies, Maōri incorporations and bodies corporate under the Act. As to the latter, I agree with Stevens J’s observation, in Body Corporate 201036 v Broadway Developments Ltd, that the principle does apply to a body corporate under the Act.
[66] In the case of body corporates under the UTA 1972, the phrase ultra vires
may have two distinct aspects. It may mean that:
41 [2011] 2 NZLR 263 (HC).
(a) That some amendment or addition to the rules modifying the duties or powers of the body corporate is ultra vires the Act; or
(b)That the body corporate has entered into transactions or agreements, or otherwise acted in a way that is ultra vires the powers of the body corporate set out in the rules.
[67] This Court has, on numerous occasions, accepted that the power to review the rules and the actions of a body corporate includes the power to determine whether terms of contracts made by the body corporate are intra vires.42
[68] I will come to the way in which this case has been pleaded but, in brief, both aspects of the ultra vires principle are present in this case.
Ultra vires the UTA 1972
[69] The first aspect, whether the rules under which the Body Corporate operates are ultra vires, may be dealt with by reference to the relevant parts of ss 15(1), 16 and 37(5) and (6):
15 Duties of body corporate
(1) The body corporate shall—
(a) Subject to the provisions of this Act, carry out any duties imposed on it by the rules:
...
(f) Keep the common property in a state of good repair:
(g) Comply with any notice or order duly served on it by any competent local authority or public body requiring repairs to, or work to be performed in respect of, the land or any building or improvements thereon:
(h) Subject to this Act, control, manage, and administer the common property and do all things reasonably necessary for the enforcement of the rules:
42 Body Corporate 201036 v Broadway Developments Ltd (2010) 11 NZCPR 627 (HC); Low v Body Corporate 384911 [2011] 2 NZLR 263 (HC); and Russell Management v Body Corporate No 341073 (2008) 10 NZCPR 136 (HC).
...
16 Powers of body corporate
Subject to the provisions of this Act, the body corporate shall have all such powers as are reasonably necessary to enable it to carry out the duties imposed on it by this Act and by its rules:
Provided that the body corporate shall not have power to carry on any trading activities.
37 Rules
...
(5) Any amendment of or addition to any rule shall relate to the control, management, administration, use, or enjoyment of the units or the common property, or to the regulation of the body corporate, or to the powers and duties of the body corporate (other than those conferred or imposed by this Act):
(6) Provided that no powers or duties may be conferred or imposed by the rules on the body corporate which are not incidental to the performance of the duties or powers imposed on it by this Act or which would enable the body corporate to acquire or hold any interest in land or any chattel real or to carry on business for profit.
...
[70] Amendments to the rules are possible but it is also possible for amendments to the rules to exceed the limited corporate role that Parliament has defined for body corporates. In Velich v Body Corporate 16498043 the Court of Appeal held that an amendment to the rules which purported to require owners to seek the body corporate’s consent for non-structural additions or alterations to their units was ultra vires in that it differed significantly from the default rule and was not “incidental” to
the existing powers and duties of the body corporate. As the Court of Appeal explained, the wording of ss 15 and 37 imposes limits on the extent to which the default rules can be modified:
[28] Under s 37(5) amendments of, or additions to, the rules must relate to:
43 Velich v Body Corporate 164980 (2005) NZCPR 143 at [28] – [30]. See further: Chambers v Strata
Title Administration Ltd at [41]-[43].
(a) The control, management, administration, use, or enjoyment of the units or the common property; or
(b) The regulation of the body corporate; or
(c) The powers and duties of the body corporate (other than those conferred or imposed by the Act).
[29] Rule 2.1(f) undoubtedly relates to “the powers and duties of the body corporate”. For this reason it is within the scope of the proviso to s
37(5). Accordingly it is only valid if the new powers and duties conferred
can fairly be seen as “incidental” to the performance of powers and dutiesimposed on the body corporate by the Act.
[30] The only duty imposed by the Act which could be invoked to justify rule 2.1(f) is that provided by s 15(1)(a), “to … carry out any duties imposed on it by the rules”. As a matter of common sense, it is only powers and duties which are extant at the time of the rule change which are relevant. So the only new powers or duties which may be conferred by rule change on a body corporate are those which are “incidental” to existing powers and duties.
...
A rule which appreciably expands the existing powers and duties of the body corporate (as rule 2.1(f) purports to do) cannot fairly be regarded as merely “incidental” to those existing powers and duties.
[71] In Chambers v Strata Title Administration Ltd a new rule entrenching the position of an administration company as secretary, such that it could only be removed by unanimous resolution, was ultra vires as it was not incidental to the powers or duties under the Act. As Paterson J noted:
[44] Rule 9(f) imposing a power, falls within the amending provisions of s 37(5). It adds or amends the original power in the statutory rules. As such, it will be outside the powers of amendment given to the Body Corporate unless it is “incidental to the performance of the duties or powers imposed on the body corporate by the Act”. “Incidental” as used in this context means, in my view, naturally attached to, or arising from, or naturally appertaining to any of the duties and powers set out in the Act. I cannot see that the appointment of a professional manager which can only be terminated by a unanimous resolution of the proprietors is incidental to the performance of any of the duties or powers imposed on the Body Corporate by the Act. A power as defined in the Act is something reasonably necessary to carry out the duties imposed on the Body Corporate. It is not reasonably necessary for a secretary to have a contract that can only be terminated by a unanimous resolution.
[72] Similarly in Body Corporate 318566 v Strata Title Administration Ltd44 the Court ruled ultra vires a rule entrenching the position of the company appointed as secretary and entitling it to exercise proxies on behalf of members who were not present at body corporate meetings.
Ultra vires the rules
[73] The second aspect of the ultra vires principle relates not to the legality of the provisions but the legality of acts done in the purported exercise of power pursuant to those provisions. The objector in such a case takes no issue with the scope of powers conferred on the body corporate but merely objects to the way in which the body corporate has acted beyond their scope.
[74] The consideration of the agreement in this case follows from the following basic propositions:
(a) In order for a body corporate to act in a certain way it must be empowered to do so;
(b)In order for the body corporate to have that power that power must be derived from some duty;
(c) That duty must be one found within the UTA 1972 or in some rule which is valid according to the UTA 1972.
Framing the legal arguments in this case
[75] In this case the parties have framed their arguments as a challenge to and defence of, respectively, the validity of the terms of the management agreement. However, in substance the challenge is one to the validity of the amended rules. This is because the rules contain provisions that purport to allow the Body Corporate to contract in ways which the proprietors have objected to in their challenges to the
management agreement.
44 Body Corporate 318566 v Strata Title Administration Ltd (2009) 10 NZCPR 221 (HC).
[76] In this case to take the plaintiffs’ arguments as a test of simply whether the making of the management agreement is intra vires the amended rules without examining whether those rules are intra vires the UTA 1972 would be to ignore the substance of the case and the way in which it was argued.
[77] For this reason I will focus first on the provisions in the amended rules that purport to underlie the provisions of the management agreement to which the plaintiffs object. If I find that those amended rules are ultra vires the UTA 1972 then there will consequentially be no power to make the corresponding terms of the agreement and those terms will be invalid.
[78] If I find that an amended rule is valid then it will be necessary to consider whether it is reasonably necessary for the Body Corporate to have the power to enter into the corresponding terms of the agreement in order to carry out the duties imposed by that rule. This involves consideration of whether the terms are incidental to the performance of duties in the amended rules.
Legal principles – severance
[79] The Courts have traditionally held that contractual provisions which fail as a result of being ultra vires are void or invalid and may be severable from the remainder of the contract.45
[80] The principal New Zealand authority on this point cited by both counsel was
Low in which Heath J observed:
[93] I did not hear any significant argument on the question of severance. However, the principles are relatively straightforward. They were summarised by the Privy Council in Carney v Herbert, by reference to a test postulated by Jordan CJ in McFarlane v Daniell:
When valid promises supported by legal consideration are associated with, but separate in form from, invalid promises, the test of whether they are severable is whether they are in substance so connected with the others as to form an indivisible whole which cannot be taken to pieces without altering its nature ... If the elimination of the invalid
45 Russell Management v Ltd v Body Corporate No 341703 at [62]-[68]; Low v Body Corporate
384911 at [91]-[95]; Body Corporate 201036 v Broadway Developments Ltd; and Gilbert v About
Body Corporates Limited HC Auckland CIV-2009-404-2046, 23 June 2009 at [35]-[37].
promises changes the extent only but not the kind of the contract the valid promises are severable ... If the substantial promises were all illegal or void, merely ancillary promises would be inseverable.
[94] The most helpful authority is that of the High Court of Australia, in Humphries v Proprietors Surfers Palms North Group Titles Plan 1955. In that case, a body corporate had purported to amend statutory rules so as to provide it with the power to enter into a management agreement with a third party. The agreement contained terms relating to letting services that the Court held were not incidental to the body corporate’s statutory duties or powers. As a result, those rules were declared ultra vires and unenforceable. The question was whether the whole of the management agreement was invalid or whether the provisions relating to letting services could be severed from it. On the particular facts of that case, the Court held that the whole of the agreement was unenforceable. A useful discussion of the principles applicable to a severance argument in a case of this type can be found in the judgment of McHugh J.
[81] The comments of McHugh J are particularly useful given the relative similarity between the situation in the High Court of Australia case and the present case. The High Court’s judgment in Humphries and the cases cited therein suggest that the following features of a contract may make severance impossible:
(a) Where the invalidity of the provisions leads to a mutation in the kind of the agreement rather than its extent;46
(b)Where the valid and invalid terms are so inter-dependent or so much the part of one whole as to be inseparable;47 or
(c) Where the term is to be regarded as so central to the agreement, so much the heart and soul of it, that the parties would not have made the bargain in the first place.48
[82] The same principles are also set out at greater length in the judgment of the
Privy Council in Carney v Herbert,49 which was also cited in the judgment of
Heath J in Low.
46 (1994) 179 CLR 597 at 618-619.
47 At 604-605 and 618-619.
48 At 609 and 618-619.49 [1985] 1 AC 301.
Application – ultra vires
[83] The provisions to which the plaintiffs object can be divided into the following categories:
(a) Those relating to the letting service;
(b) Those relating to the real estate sale service;
(c) Those relating to the Sentinel residents service;
(d)Those relating to the way in which the management agreement is to be carried out and the roles and responsibilities of the respective parties; and
(e) Other miscellaneous provisions.
The Letting Service
[84] The default rules contain no provisions for a service of this type. The following provisions of the amended Schedule 2 rules deal with the letting service:
Second Schedule Rules
1. A proprietor shall:
...
(k) Not appoint any other manager or any other person or entity to provide management services to the Body Corporate, or letting services, real estate sale services or other additional services to the Proprietors to the intent that there shall only be one building manager providing building management services to the Body Corporate at any one time and one manager providing the letting services, real estate sale services and additional services to the Proprietors.
...
2. The Body Corporate shall:
...
(i) Not appoint any other manager or any other person or entity to provide management services to the Body Corporate or letting services, real estate sale services or other additional services to the Proprietors to the intent that there shall be only one building manager providing building management services to the Body Corporate at any one time and one manager providing the letting services, real estate sale services and additional services to the Proprietors.
3. The Body Corporate may:
...
(h) Enter into a building management agreement with a management company or professional manager for the carrying out and management of all or any such duties of the Body Corporate and the provision of concierge services to the Proprietors at such remuneration and upon such terms and conditions as are stipulated including:
...
(iii) The reserving to the manager of the exclusive right to operate a letting service business from the Property:
...
(viii) Granting to the manager the right to erect signage on the property for the purposes of promoting the letting service, the real estate sale services and other additional services that the manager may provide to Proprietors with the consent of the Body Corporate (such consent not to be unreasonably withheld).
[85] The plaintiffs contend that the exclusive right to operate the letting service is not incidental to the exercise of the duties of the Body Corporate and should be considered ultra vires.
[86] The defendant argues that the exclusive right to perform the letting service is intra vires. The defendant has pointed out that use of the letting service by the proprietors is not mandatory and that the service has not been forced upon proprietors in that manner. Instead Mr Campbell argued that the effect of the relevant amended rules is merely to give the company the exclusive right to offer letting services from (or on), rather than in respect of, the property. The effect is to prevent other proprietors or the Body Corporate from operating these services from their units or the common property.
[87] The defendant relies on r 3(d) of the amended rules. This rule does not differ in substance from r 3(d) of the default Schedule 2 rules. In the amended rules it provides:
3. The Body Corporate may:
...
(d) Enter into any agreement with a Proprietor or an occupier of any unit for the provision of amenities or services by it to the Unit or to the Proprietor or occupier.
[88] There are a number of cases concerning the provision of letting services alongside management services. In Russell Management,50 Russell Management acquired the rights to exclusively manage a complex as well as the right to provide an on-site letting service which the proprietors were bound to use if they wished to let their units51 and for which Russell Management was entitled to charge proprietors a commission for letting their units. Lang J stated:
[50] Counsel for the plaintiffs contended that the new rules had a counterpart in r 3(d) of the default rules. That rule provided as follows:
3. The Body Corporate may -
...
(d) enter into any agreement with a proprietor or an occupier of any unit for the provision of amenities or services by it to the unit or to the proprietor or occupier:
[51] Counsel contended that this rule mirrored to some extent the wording used in new r 2.39(a). Moreover, the body corporate granted [Russell Management] the rights to operate exclusive letting service by means of an agreement with the proprietor of Unit 1. That agreement gave the occupier of Unit 1 [Russell Management] the right to provide a letting service for all proprietors.
[52] In reality, however, the new rules go well beyond r 3(d) of the default rules. The new rule empowers the body corporate to enter into an agreement with a third party under which that third party receives an exclusive right to let all of the units in the complex for up to 30 years. Such a power is, in my view, substantially different, and much wider, than a power permitting the body corporate itself to provide amenities or services to individual proprietors and units at their request. The letting service is not provided in the present case by the body corporate. Rather, it is provided by the third party. Moreover, individual proprietors have absolutely no say in
50 Russell Management v Body Corporate No 341093 (2008) 10 NZCPR 136 (HC).
51 At [52],[53] and [62].
relation to the letting service. They cannot request that it be provided or not provided. They are required to accept that the letting agency nominated by the body corporate shall have the exclusive right to let out their units.
[53] Furthermore, I do not see how the power to enter into an exclusive letting service can realistically be viewed as being incidental to the powers and duties that the body corporate possessed before the rules were amended.
[89] In Humphries v Proprietors “Surfers Palms North” Group Titles Plan 195552 the High Court of Australia considered a scheme where the management agreement required the manager to conduct a letting agency which proprietors could use should they wish to. The provision of the letting service was part of the bundle of duties which the manager was contracted to provide for a fixed (non-apportioned) remuneration. The manager did, however, appear to be free to impose any additional charge or commission for the services.
[90] The majority of High Court held that the expenditure of funds by the body corporate to the manager for making available to the proprietors the letting service was not one that was reasonably necessary for carrying out the body corporate’s functions.53 McHugh J went further and considered that the agreement was void not only on the expenditure argument but also because the exclusive power to carry out a letting service would be inconsistent with the property rights of the other proprietors, including a right to carry on lawful business.54 As McHugh J observed:
Unquestionably, s 37(1)(a) and 37(1)(c) authorise a body corporate to enter into a contract to maintain and administer the common property. But nothing in those paragraphs confers any authority on a body corporate to enter into an agreement to pay money to a person in consideration of that person providing a letting service for the benefit of unit proprietors. They confer power in relation to the common property. They do not confer a power to enter into an agreement with a third party which affects the lots of other individuals as well as the common property.
Furthermore, nothing in ss 27 and 37 authorises an agreement which gives the manager the exclusive right to carry on the business of letting units in a complex. The exclusivity provisions of the agreement are also inconsistent with the right of other proprietors to conduct lawful businesses from their lots. If a body corporate has power to enter into an agreement giving exclusive rights to a particular person in relation to the use of the lots and common property, it must also have the implied power to prevent proprietors from enjoying those rights. The making of the exclusive arrangement by
52 (1994) 179 CLR 597.
53 At 602 and 608.
54 At 614.
itself cannot interfere with the rights of the proprietors. Some further power is needed to enable a body corporate to carry out its implied undertaking that it will prevent the proprietors of lots from exercising those rights. However, apart from the by-law making power ... nothing in the Act authorises a body corporate to interfere with the rights of proprietors in respect of their lots.
Moreover, by implication, the terms of s 37(2) exclude the making of an exclusive letting agreement of the kind involved in this case. By authorising an agreement with a proprietor for the provision by the body corporate of services to his or her lot, it impliedly excludes a power to make an agreement with a third party to provide services to that lot and also impliedly excludes any general power in the body corporate to interfere with the rights of proprietors in respect of their lots. That subsection also tends to indicate that services for the benefit of a proprietor are to be paid for by the proprietor and not out of the funds contributed by the other proprietors.
The general powers conferred on the body corporate by ss 27(3) and 37 are, therefore, insufficient in my opinion to enable the body corporate to enter into an agreement which would require the body corporate to act in a way which would affect the rights and obligations of proprietors in respect of their lots.
[91] In Atrium Management v Quayside Trustee Ltd (in rec & in liq)55 the Court of Appeal dealt with an appeal from a refusal to grant summary judgment. One of the central issues on the appeal was the validity of a clause in a management agreement which gave the building manager the exclusive right to operate an on-site letting service which proprietors could choose to use while at the same time acknowledging that the proprietors were free to engage an off-site agent to arrange letting of their units.56 The Court of Appeal made reference to Russell Management and noted:57
Lang J held in Russell Management that it was ultra vires for a body corporate to grant a manager exclusive rights to operate an on-site holiday letting service over an entire development because this was in breach of ss
37(5) and 37(6) of the Unit Titles Act 1972. Atrium had learned of the decision in August 2009.
[92] Dismissing the appeal the Court remarked that:58
The decision in Russell Management was not an unforeseen contingency. While we accept that a change in the law which renders the performance of a contract impossible may amount to frustration, the decision in Russell Management did not change the law. Rather, that decision involved the interpretation of the Unit Titles Act in accordance with settled principles. In terms of that Act, parts of cl 12 of the draft management agreement were
55 [2012] NZCA 26.
56 At [8].
57 At [9].58 At [22].
ultra vires the powers of the body corporate from the outset even if the parties did not appreciate that. Accordingly, we need not consider this argument further.
[93] The effect of the provision in this case is different to two of the above examples. Here the cost of the letting service is separate from the general management fee and so the problem of non-user proprietors contributing, which persuaded the majority of High Court of Australia in Humphries, is not present. The service is also not exclusive in the sense seen in Russell Management. In that case the agreement was doubly exclusive in the sense of:
(a) Compelling the body corporate not to allow any other person to operate a letting service from the development; and
(b)Restricting proprietors’ ability to engage another person to let their property by empowering Russell Management alone to do this.
[94] The argreement in this case is exclusive in the (a) sense only. The arrangement in this case is, however, the same as that seen in Atrium Management. In Atrium Management the Court of Appeal approved Lang J’s judgment in Russell Management and held on that basis that, the terms of the contract, being akin to those in Russell Management, the exclusivity provisions were thus ultra vires.
[95] The arguments in favour of holding that the rules relating to the exclusive provision from the site of the letting service are intra vires are the lack of authority on the point (setting aside the Court of Appeal’s remarks in Atrium Management), the force of r 3(d), the fact that under s 37(5) amendments may generally be made to the rules to affect the use of units and that the amended rule in this case is properly incidental to the duties and powers of the body corporate (s 37(6)).
[96] Some examples of the limits that may be placed on the use of units are to be found in the default Schedule 3 rules:
A proprietor or occupier of any unit shall not—
(a) Use or permit his unit to be used for any purpose which is illegal or may be injurious to the reputation of the building:
(b) Make undue noise in or about any unit or common property:
(c) Keep any animal on his unit or the common property without the prior consent of the committee of the body corporate, or, if there is no committee, of the body corporate
...
(e) Use his unit or permit it to be used in such manner or for such purpose as to cause a nuisance or disturbance to any occupier of any unit (whether a proprietor or not) or the family of any such proprietor.
[97] The above rules all provide, in general terms, for the harmonious enjoyment of units within the development. The Body Corporate’s duties and powers to restrict the use of units are limited in this respect. Any amendment, such as one limiting the use of units so as to preserve an exclusive business right, must be shown to be incidental to the duties and powers in the UTA 1972 and, as the Court of Appeal has
made clear,59 the ambit of the default rules is an important indicator of this. I am of
the view that a duty on the Body Corporate to confer an exclusive business right on one proprietor by restricting the use of units by others cannot be said to be incidental to the functions of the Body Corporate.
[98] The reliance on r 3(d) may be misplaced as that rule is also subject to the proviso that any service agreed under it be reasonably necessary to enable the Body Corporate to discharge its duties under the Act, that is to say s 15, the rules and any amendments to them that fall within the narrow ambit of being incidental to the performance of the existing duties.
[99] This does not, of course, mean that SML has no right to undertake the letting service from the property. It has the right to do so as a proprietor provided that its activities do not fall foul of any of the rules restricting uses which have an impact on
other persons’ enjoyment and use of their units.
59 Velich v Body Corporate 164980 at [29] – [31].
The Real Estate Sale Service
[100] The following provisions of the amended Schedule 2 rules deal with the real estate sale service:
Second Schedule Rules
1. A proprietor shall:
...
(k) Not appoint any other manager or any other person or entity to provide management services to the Body Corporate, or letting services, real estate sale services or other additional services to the Proprietors to the intent that there shall be only one building manager providing building management services to the Body Corporate at any one time and one manager providing the letting services, real estate sale services and additional services to the Proprietors.
...
2. The Body Corporate shall:
...
(i) Not appoint any other manager or any other person or entity to provide management services to the Body Corporate or letting services, real estate sale services or other additional services to the Proprietors to the intent that there shall be only one building manager providing building management services to the Body Corporate at any one time and one manager providing the letting services, real estate sale services and additional services to the Proprietors.
3. The Body Corporate may:
(h) Enter into a building management agreement with a management company or professional manager for the carrying out and management of all or any such duties of the Body Corporate and the provision of concierge services to the Proprietors at such remuneration and upon such terms and conditions as are stipulated including:
(iv) The authorising of the manager to provide exclusively additional services from the property to the Proprietors and occupiers of units including but not limited to the provision of real estate sale services and other additional services to the Proprietors upon terms and conditions to be agreed between the manager and the Proprietors or
occupiers with any proceeds generated to be the property of the manager;
...
(viii) Granting to the manager the right to erect signage on the property for the purposes of promoting the letting service, the real estate sale services and other additional services that the manager may provide to Proprietors with the consent of the Body Corporate (such consent not to be unreasonably withheld).
[101] The exclusivity provisions relating to and the incidence of the real estate sale service are similar to the letting service. The default rules contain no provisions for a service of this type. As another restriction on the rights of other proprietors to use their units and one which cannot be shown to be incidentally linked to the central powers and duties of the Body Corporate, it is ultra vires. Again, nothing prevents SML from continuing to operate this service but its exclusivity cannot be maintained.
The Sentinel Residents Service
[102] The same provisions of the amended Schedule 2 rules deal with the Sentinel residents service. The provisions providing for exclusive use of the premises to provide the Sentinel residents services are, in my opinion, similarly ultra vires.
The Management Service
[103] The essential provisions in the amended rules relating to the management service are:
Second Schedule Rules
1. A proprietor shall:
...
(j) Not interfere or obstruct the manager from performing the manager’s duties or carry out any activity reserved to the manager under the management agreement or interfere with or obstruct the manager from using any part of the common property necessary for use by the manager.
(k) Not appoint any other manager or any other person or entity to provide management services to the Body Corporate, or
(a) the contract, lease, or transaction is oppressive; or
(b) a party has exercised, or intends to exercise, a right or power conferred by the contract, lease, or transaction in an oppressive manner; or
(c) a party has induced another party to enter into the contract, lease, or transaction by oppressive means.
...
124 Guidelines for reopening credit contracts, consumer leases, and buy-back transactions
In deciding whether section 120 applies and whether to reopen a credit contract, consumer lease, or buy-back transaction, the Court must have regard to—
(a) all of the circumstances relating to the making of the contract, lease, or transaction, or the exercise of any right or power conferred by the contract, lease, or transaction, or the inducement to enter the contract, lease, or transaction (as the case may be); and
(b) the following matters if they are applicable:
(i) whether the amount payable by the debtor under the contract, lessee under the lease, or occupier under the transaction is oppressive (whether or not on default by the debtor, lessee, or occupier):
(ii) if a debtor, lessee, or occupier is in default under the contract, lease, or transaction, whether the time given to the debtor, the lessee, or the occupier to remedy the default is oppressive, having regard to the likelihood of loss to the creditor, lessor, or transferee:
(iii) if the creditor has required, as a condition of the full prepayment of a credit contract, that the debtor pay a certain amount, whether the amount is oppressive having regard to the expenses of the creditor and the likelihood that the amount repaid can be reinvested on similar terms:
(iv) if the creditor, lessor, or transferee has refused to release part of any security interest relating to the contract, lease, or transaction, or has agreed to the release subject to conditions, whether the refusal is, or the conditions are, oppressive, having regard to the obligations secured by the security interest and the extent of the security that would remain after the release; and
(c) any other matters that the Court thinks fit.
[224] The Supreme Court recently had occasion to comment on the standard of oppressiveness embodied in the Act and observed:108
[46] A credit contract or other transaction to which Part 5 of the Act applies may be reopened as oppressive when it might not necessarily have been set aside as unconscionable by a court of equity. For example, in equity it is necessary to show that the borrower was under a special disability or disadvantage. As Arnold J remarked, the scope of oppression under the Act is broader than the equitable doctrine of unconscionability. That follows from the fact that the definition of “oppressive” is wider than unconscionable conduct and includes a “breach of reasonable standards of commercial practice”. The Court of Appeal has correctly said in Greenbank New Zealand Ltd v Haas that the various words which together form the definition of the term “oppressive” all contain different shades of meaning but they all contain the underlying idea that the transaction or some term of it is in contravention of reasonable standards of commercial practice. That sets an objective standard. A contract or course of conduct may therefore, as Arnold J also said, be treated as oppressive even though the party whose conduct is said to be oppressive may be (subjectively) blameless because the party is simply following industry practice. Where that practice is in breach of reasonable standards, compliance with it will not immunise a lender. It is for the courts rather than the industry to set the standard. But that assumes a situation in which the lender knows of the matter found to give rise to oppression or knows something which should have put it on inquiry.
Comparable legal standards: unconscionability
[225] The word unconscionable is one which can attract a variety of different meanings.109 It has strong links to the system of equity developed in the Court of Chancery but its meaning, even in that context, is far from clearly defined. It should also be remembered that Parliament’s intention, when using the word, may be to invoke wider principles of fairness and conscience divorced from the equitable definition(s).
[226] The grounds required to establish that an agreement is an unconscionable bargain are discussed above. The law of unconscionable bargains is a clear and defined equitable doctrine that relies upon the existence of a specific disadvantage or
disability on the part of one party.110 Beyond that specific doctrine, however, the
108 GE Cutodians v Bartle [2010] NZSC 146, [2011] 2 NZLR 31.
109 Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 214
CLR 51 (HCA) at [38]-[45] and [159]. See further: Gino Dal Pont “The Varying shades of
‘Unconscionable’ Conduct – Same Term, Different Meaning” (2000) 19 ABR 135.
110 Hart v O’Connor [1985] 1 AC 1000 (PC), [1985] 1 NZLR 159 at 1024.
word unconscionable is prone to be used in a number of different ways.111 To some degree the word unconscionable also serves as a general label for behaviours or situations where, under different doctrinal heads, equity has traditionally been recognised as willing to intervene:112
Historically, courts have exercised jurisdiction to set aside contracts and other dealings on a variety of equitable grounds. They include fraud, misrepresentation, breach of fiduciary duty, undue influence and unconscionable conduct. In one sense they all constitute species of unconscionable conduct on the part of a party who stands to receive a benefit under a transaction which, in the eye of equity, cannot be enforced because to do so would be inconsistent with equity and good conscience. But relief on the ground of "unconscionable conduct" is usually taken to refer to the class of case in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage, e.g., a catching bargain with an expectant heir or an unfair contract made by taking advantage of a person who is seriously affected by intoxicating drink. Although unconscionable conduct in this narrow sense bears some resemblance to the doctrine of undue influence, there is a difference between the two.
[227] In general the equitable notion of unconscionability does not go so far as to encompass generalised forms of moral wrong or conduct that the Court considers unfair.113
[228] However, it is not clear that either the narrow concept of an unconscionable bargains or the wider notion of unconscionability at equity necessarily relate to or serve to limit the statutory definition. One instance of the use of the word unconscionable in statute, which has produced a considerable body of case law, is in the Australian Consumer Law114 which includes the following provisions:
20 Unconscionable conduct within the meaning of the unwritten law
(1) A person must not, in trade or commerce, engage in conduct that is unconscionable, within the meaning of the unwritten law from time to time.
111 Royal Brunei Airlines v Tan [1995] 1 AC 378 (UKHL) at 392; and John McGhee (ed) Snell’s
Equity (32nd ed, Sweet & Maxwell, London, 2010) at [8-004].
112 Commercial Bank of Australia v Amadio (1983) 151 CLR 447 (HCA) at 461.
113 Nichols v Jessup [1986] 1 NZLR 226 (CA) at 232-233 & 235; and Attorney-General of New SouthWales v World Best Holdings Ltd [2005] NSWCA 261, (2005) 63 NSWLR 557 at [120].
114 The Australian Consumer Law is to be found in the Competition and Consumer Act 2010 (Cth), Sch 2 and applies as as if it were a Federal Act pursuant to s 131 of that Act.
(2) This section does not apply to conduct that is prohibited by section
21.
21 Unconscionable conduct in connection with goods or services
(1) A person must not, in trade or commerce, in connection with:
(a) the supply or possible supply of goods or services to a person
(other than a listed public company); or
(b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
...
(4) It is the intention of the Parliament that:
(a) this section is not limited by the unwritten law relating to unconscionable conduct; and
(b) this section is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour; and
(c) in considering whether conduct to which a contract relates is unconscionable, a court’s consideration of the contract may include consideration of:
(i) the terms of the contract; and
(ii) the manner in which and the extent to which the contract is carried out;
and is not limited to consideration of the circumstances relating to formation of the contract.
[229] The predecessor to s 21 of the Australian Consumer Law was s 51AB Trade Practices Act (Cth) 1974. There are a number of reported decisions in which Australian Judges have sought to apply the concept of unconscionability embedded in the section and have commented on its meaning.
[230] In Zoneff v Elcom Credit Union Ltd the Federal Court of Australia commented on how unconscionable behaviour within the Act should be understood:115
Further the conduct referred to in [the section] must be, in all the circumstances, unconscionable. The cases have not sought to define unconscionability nor is it appropriate so to do because the criteria to be applied will depend upon all the circumstances. Nevertheless, in general terms, it may be said that conduct will be unconscionable where the conduct can be seen in accordance with the ordinary concepts of mankind to be so against conscience that a court should intervene. At the least the conduct must be unfair. It invites comparison with doctrines of equity: cf. Blomley v. Ryan (1954-1956) 99 C.L.R. 362 and Commercial Bank of Australia Ltd. v. Amadio & Anor (1983) 151 C.L.R. 447 where inequality of bargaining power or absence of the ability to bargain freely will be relevant to the finding that there has been an unfair advantage taken by one person of the other.
[231] The New South Wales Court of Appeal in interpreting a section modelled on the Trade Practices Act also had occasion to comment on the meaning of “unconscionable” behaviour in retail leasing matters:116
The Ministerial second reading speech ... indicates a similar concern to distinguish what is unconscionable from what is merely unfair or unjust. Even if the concept of unconscionability in s 62B of the Retail Leases Act is not confined by equitable doctrine, as the decisions under s 51AC of the Trade Practices Act (Cth) suggest, restraint in decision-making remains appropriate. Unconscionability is a concept which requires a high level of moral obloquy. If it were to be applied as if it were equivalent to what was “fair” or “just”, it could transform commercial relationships in a manner which the Minister expressly stated was not the intention of the legislation. The principle of “unconscionability” would not be a doctrine of occasional application, when the circumstances are highly unethical, it would be transformed into the first and easiest port of call when any dispute about a retail lease arises.
...
There is a suggestion that the Tribunal in the present case may have adopted an unacceptably low standard. After setting out its conclusions, the Tribunal found: “we consider the conduct of WBH to be quite unacceptable ... having regard to normal industry standards and practices” (at [69]). It then proceeded to determine what were called “the legal issues”, including unconscionability, by identifying which of the considerations in s 62B(3) of the Retail Leases Act were applicable without further analysis of matters of fact and degree that need to be considered when applying a test of
115 (1990) ATPR 41-009 at 51,158. The section of the Act dealing with unconscionable conduct was at that time to be found in s 52
116 Attorney-General of New South Wales v World Best Holdings Ltd [2005] NSWCA 261, (2005) 63
NSWLR 557 at [121] and [123]-[125].
unconscionability. If, as appears likely, a test of “unacceptable conduct”
were adopted, this is a far lower standard than unconscionability.
...
Parliament did not intend that “unconscionability” claims could be made so readily as to virtually take the place of retail tenancy claims. They needed to meet a high standard of moral obloquy.
The best way of ensuring that this eventuality did not occur was, it appears, the vesting of the jurisdiction in persons whose cast of mind is such that they would not be tempted to take the easy course of avoiding the complexities of the legal rights and obligations of a situation and resorting, virtually in the first instance, to what has appropriately been called the formless void of a general discretion.
Application – time period
[232] On its face the statute provides that an application for compensation under the Act must be made within 3 years of the control period ending (s 140(4)). That restriction on the time for making an application does not appear, on the face of the statute, to apply to applications under s 140(5) to cancel the agreement. The defendant has, however, submitted that such is implicit in the structure of the section.
[233] The defendant’s argument that the application of s 140(5) is subject to the same time period as s 140(2) is not compelling for a number of reasons.
[234] The first is that the plain words of the statute do not support the imposition of a time limit on applications where none is evident in s 140(5) itself. The time limit imposed in relation to s 140(2) requires its own subsection (s 140(4)), makes explicit reference to s 140(2) and follows after s 140(2) (but precedes s 140(5)); it appears as a piece of clear and explicit drafting. Had Parliament wished to apply a time limit to
140(5) it might have done so by inserting a reference to s 140(5) into s 140(4) or by creating another subsection (following s 140(5)) and by including an explicit reference to (5) in that section.
[235] Mr Campbell’s argument that the “an application made” under s 140(5) is the same as “the application of the body corporate” under s 140(2) and “an application” under s 140(4) does not detract from this analysis. To hold that the application mentioned in s 140(5) is merely a limb of the application made under s 140(2) and
thus subject to the time limit in s 140(4) simply on the basis of the different uses of articles preceding the noun is not supportable.
[236] The conclusion that the time limit does not apply is supported by other parts of the Act. Section 229, in providing that service contracts entered into prior to the UTA 2010 may be challenged under s 140(5) but not s 140(2), suggests that they are different remedies and subject to different rules, at least in so much as time is concerned.
[237] Some aid is also gained from the concept of the “control period” created by the Act. To impose a three year time limit following the control period for cancellation in the context of existing developments makes little sense. Compare the following examples:
(a) A unit development created by the deposit of a plan on 1 January 2005 for which a 10 year service agreement is signed at the same time, meaning that the control period ends on 1 June 2005; and
(b)A unit title development created on 1 January 2008 with a 10 year service agreement signed at the same time, whose control period ends on 1 June 2008.
[238] Both body corporates would be taken as constituted under the old Act and s 229 would apply to them. However, if the defendant’s argument is correct, then upon commencement of the new Act one would have the right to contest the terms of its service contract while the other would not. There is nothing in the Act to suggest that this somewhat arbitrary distinction in outcomes should prevail.
[239] There is some force in Mr Campbell’s submission that the fact that a time limit applies to s 140(2) but not to s 140(5) is extraordinary. That what might be seen as the stronger remedial position, termination, is unlimited, while the lesser remedy of compensation is not, can however be explained.
[240] As several commentators have noted, the limitation period imposed on s
140(2) may relate to the way in which the power of the developer as the initial sole proprietor has, at times, been misused:117
Notoriously, on a unit title development being created, developers enter into service contracts with body corporate managers in consideration for receiving a “one-off” capital fee, sometimes of considerable proportion. This may commit the body corporate to a non-reviewable service contract for a considerable period of time. Thus, the body corporate shortly after incorporating may be saddled with a considerable burden of expensive management fees, whilst the developer, having pocketed the one-off fee, exits from the development.
[241] Where such conduct occurs s 140(2) will be particularly useful in holding the developer to account. Indeed the original developer or its associates are the only persons targeted by the section and no direct remedy is provided against the service provider. A remedy which is limited in time will both encourage the non-developer owners to act promptly to address agreements made by the fledgling body corporate and also provide some limits and some certainty for the developer that, following the three year period, there is no chance of monetary redress.
[242] The target in s 140(5) is different as the remedy lies essentially against the service provider. Section 140(5) is meant for a number of different situations:
(a) It may be that the contract entered into contains provisions that are not in the body corporate’s best interests, and which are challenged within the time limit but which are incapable of being financially compensated by the developer in which case termination is the proper remedy;
(b)It may be that the contract entered into well serves the body corporate’s commercial or economic interest yet contains terms relating not to the economic aspects of the building’s management but also gives other powers to the contractor. For instance if the contract allows the contractor to do things that are overly intrusive or which
interfere with the proper administration of the development. In many
117 Rod Thomas Brookers – Unit Titles Handbook 2011 (Thomson Reuters, Wellington, 2011) at 35.
cases the ultra vires ground may be the best way to challenge these provisions but in some cases the power of termination under s 140(5) might be more useful; or
(c) In some cases the service contract may appear perfectly sound in both commercial terms and the powers it gives to the contractor at the outset. However, it is entirely possible that some event might intervene which renders the service contract no longer sound and which gives it a harsh or unconscionable effect.
[243] The first situation above would not be affected by a time limit. The second situation arguably would not either, provided the body corporate detects the potential for powers to be used abusively at an early stage.
[244] However, in the last example a time limit on the power to terminate the contract would deprive the body corporate of a remedy. While careful drafting of service contracts and protective contractual provisions (such as price review mechanisms and force majeure clauses) can protect against many changes of circumstance and, freedom and the security of contracts are important aims, there are particular features of the unit titles system of ownership that may make it advisable for the courts or a tribunal to be able to exercise an ongoing power of termination in the right circumstances. Rejecting the time limit would also mean that s 140(5) can be applied and serves a useful purpose in the case of contracts entered into subsequent to the post control period three year limit.
[245] For these reasons, the time limit found in s 140(4) should not apply to an application under s 140(5).
Application – harsh and unconscionable
[246] The first point is to consider whether the words “harsh” and “unconscionable” should be treated as conceptually unitary or as separate. An approach that treated them as separate is certainly possible given the use of the conjunction “or” and the fact that most service contracts will have different aspects.
A court or a tribunal may need to consider both the details of the financial transaction (“the commercial aspect”) in the contract and the range and nature of powers and responsibilities given to the service provider and their intrusion on the rights and powers of the proprietors and the body corporate (“the powers aspect”).
[247] I would hold that in order for a service contract to be unconscionable under the Act that the decision-maker need not identify the specific grounds giving rise to the equitable concept of an unconscionable bargain nor need there be a specific (long-established) ground of equitable intervention such as estoppel or undue influence, all of which come under the heading of unconscionable in its larger, but still equitable, sense.
[248] There are a number of points that argue against importing these narrower equitable definitions into the statute. First, to have enacted a section merely to affirm that these particular types of contract can be set aside on existing equitable grounds seems to serve no purpose. Secondly, there is the coupling or pairing of the words “harsh” and “unconscionable”. From this I take that Parliament intended something more than the merely equitable grounds.
[249] Thirdly, there is the use of the same combination of words in other New Zealand statutes and the particular contexts in which those Acts operate.118 Those statutes govern the activities of tribunals whose role is to apply law and legal principles in a more general, less strictly rule-bound fashion. I also note that, in respect of the jurisdiction under s 140(5), the Tenancy Tribunal is also an “appropriate decision-maker”.
[250] While an argument might be made that there are reasons for holding the Tribunal to narrower legal principles in respect of unit titles arrangements than in respect of residential tenancies, I am not prepared to read this into the plain words of the statute especially when the larger meaning is supported by other reasons.
[251] Lastly there are policy reasons which might support diluting the normally strict contractual approach to the bargains of parties (and hence the limited grounds
118 Residential Tenancies Act 1986 & Disputes Tribunals Act 1988.
of equitable intervention) which would normally apply. Service contracts for the management of unit title developments operate in an atypical contractual context. They are not necessarily arms-length transactions, they will normally have a long period of interaction between the parties and they may involve significant powers in respect of people’s homes and the common space surrounding them. Such a context suggests that wider grounds of intervention than traditional contract law provides may be justified.
[252] I would not draw a formal division between the commercial aspect of a service contract and its powers aspect as far as the two terms, harsh and unconscionable, are concerned. However, I would note that the standard of harshness is likely to be more relevant to the commercial aspect of the service contract and in that respect I would hold that the contract must in commercial terms, not be oppressive in the way that that term is understood under the CCCFA.
[253] The “powers aspect” of the contract will normally fall to be assessed on the standard of unconscionability. This is a high standard and one to be exercised judicially but it is not the same as any of the equitable standards mentioned above. In this respect the conduct must be more than unacceptable, unreasonable, unjust or unfair. There must be an intrusion on the rights of proprietors or on the functioning of the unit title development that can be regarded, when seen through the eyes of society as a whole, as so against conscience as to justify the Court’s intervention. Simple unfairness, unreasonableness or commercial unsoundness will not suffice, something like “moral obloquy” or outrageousness comes closer to expressing the nature of the reaction and the view that the Court must take of the transaction in order to justify relief.
[254] The application of this standard of unconscionability is likely to be of limited effect. Powers conferred on the management company that provoke a reaction in the Court so strong as for it to feel satisfied that a severe moral wrong has been done or that the conduct is highly outrageous are likely to be comparatively rare. In addition, many of these instances will be caught by, and more readily arguable under the ultra vires principle than under the ground of unconscionability. For example, this would be the case where the service contract includes provisions which constitute an
unconscionable interference with the proprietors’ expectations of privacy within their units or the common property.
[255] Turning to the pleaded terms in the management agreement I consider whether they are harsh (oppressive) or unconscionable in the senses I have outlined above.
[256] The following terms of the agreement are specifically said to be harsh and unconscionable:
Management Agreement
5.4the management fee is to be adjusted annually by the annual percentage change in the CPI.
14.1the agreement may be terminated by the Body Corporate only on limited grounds c.f.
15.1(d) the agreement may be terminated by SML at any time upon giving three months notice.
“Expiry Date” means the date 10 years after the commencement date except if SML renews the agreement then the expiry date is at the end of such renewed period.
20.1SML may require the Body Corporate to enter into a new agreement.
20.3the new agreement is to be identical with this agreement except that the term of the new agreement is to be 10 years with one further right of renewal for a new agreement of 10 years (total term 30 years from commencement date).
[257] Mr Rainey, for the plaintiffs, also characterised the tone of the agreement in general as one that is unreasonably one-sided, unfairly priced and overly beneficial to SML.
[258] Mr Campbell, for the defendant, submitted that there was nothing harsh in the termination rights because the owners of the management rights are often owner/operators in which case the agreement will bear some analogy to an employment agreement. A director of SML, Mr Hayes, justified the length of the total term on the basis that a purchaser of the business required a long term to defray
the capital cost of purchasing the business and the commitment of moving into the complex.
[259] In assessing whether the management agreement is harsh or unconscionable, I start with the proposal dated 20 February 2007 made by Freestyle, the company which subsequently bought the shares in SML, to the developer that Freestyle be contracted from March 2007 to assist in the establishment of a management business for the management of the Sentinel and the provision of services to Sentinel residents. It is evident from the proposal that it was intended to sell the management rights “at a premium price”. The proposal also stated “As our end goal is to maximise the sale price is important to “value add” to a potential buyer”. The contract subsequently entered into between Freestyle and SML provided that a bonus would be paid to Freestyle if SML sold the business within 18 months of the opening date for a sum greater than $700,000. A bonus of $100,000 was payable if the net sale price exceeded $900,000.
[260] When advertised for sale in 2010 by SML, the management rights were valued at $1,770,000 for the business and $150,000 for the office and storage. The management rights term was specified as 10 years plus 2 x 10 year right of renewal commencing 2008 while the yield was said to be approximately 24%. The value of the business arose out of the agreement with the Body Corporate. It could be said to be at the expense of the Body Corporate.
[261] While the plaintiffs do not allege that the management fee in itself is unreasonable, the agreement between SML and the Body Corporate is obviously of value. It seems much of that value arises from the additional services provided by SML, being the letting service, the real estate sale service and the Sentinel residents service. I have already found that the provisions of the agreement restricting others from offering such services from the building are ultra vires. The fact that these provisions are ultra vires is a factor I can take into account when assessing whether overall the agreement is harsh or unconscionable under s 140 UTA 2010.
[262] As to the length of term of the management agreement, Heath J in Low v
Body Corporate 384911 held that the appointment of a building manager for 10
years, with a right to a further 10 years was not ultra vires. The UTA 2010 was not then in force so Heath J did not consider whether the length of term of the agreement was harsh or unconscionable under s 140 UTA 2010. Heath J stated:119
Each subsequent purchaser had the right to call for any building management agreement to consider its terms. If, after taking advice, intended purchasers elected to proceed, they were bound by its terms. Their remedy, if they did not like the term of the agreement, lay in their own hands: there was no compulsion for them to buy a unit.
[263] In Russell Management Ltd & Anor v Body Corporate No 341073120 the amended rules allowed the Body Corporate to enter into a management agreement for a term of 10 years with four rights to renew for four further terms of 10 years each. Lang J stated:
[43] The body corporate argues that this rule is ultra vires because of the potential length of the term of the agreement.
[44] I agree that the agreement will potentially be in existence for a very long time. There must therefore be an issue as to whether it a management agreement for such a lengthy term could be reasonably necessary.
[45] It is noteworthy, however, that the body corporate has the right to terminate the agreement in the usual way for non-performance. The plaintiffs may also be able to establish that a lengthy term is appropriate in contracts of this type. For that reason I do not consider that this particular issue should be determined using the summary judgment procedure. It should instead be determined at trial.
[46] The position is, however, significantly different so far as the other two rules are concerned.
[264] The potential length of term of the agreement in the present case may not be unusual. The explanation given is that a purchaser of the business would require a long term to defray the capital cost of purchasing the business but it makes little sense from the point of view of the Body Corporate. The second plaintiff stated, in the course of evidence:
It strikes me that whatever security a professional manager might require it cannot be commensurate with locking the unit owners out for a generation. I would have thought some significantly shorter term would have adequately catered to both sides of the agreement.
119 At [64].
120 Russell Management Ltd & Anor v Body Corporate No 341073 (2008) 10 NZCPR 136 (HC).
[265] The difference in termination rights is justified on the basis that owners of management rights are often owner/operators in which case the agreement will bear some analogy to an employment agreement. However, I consider that this is not a proper analogy. The agreement is essentially a commercial arrangement not an employment contract. In any event, the question could be asked what employment contract provides security of employment for 30 years.
[266] I have concluded that the agreement is harsh or unconscionable in terms of s
140(5) UTA 2010 because of the combination of its ultra vires clauses, the potential length of its term and the difference in termination rights. It was designed to maximise profit for SML in a way which has restricted the rights of apartment owners to manage the building through the Body Corporate.
Conclusion
[267] The sixth cause of action succeeds. I consider that the management agreement is harsh or unconscionable in terms of s 140(5) UTA 2010. Mr Campbell, for the defendant, submitted that if the agreement is found to be harsh or unconscionable, that merely gives the Court a discretion to terminate. Mr Campbell submitted that I should not terminate the agreement because of the disadvantage to Freestyle, who purchased the business in 2008 without knowledge of the objections now raised by the owners. There was also no complaint as to the reasonableness of the remuneration or the quality of the services being provided. Finally, Mr Campbell submitted that if there are any ultra vires provisions, they can be severed from the agreement, which is preferable to termination under s 140(5).
[268] However, Freestyle assisted the developer in setting up the management business in 2007 before Sentinel was completed. Freestyle proposed the end goal of selling the management rights at a premium price. They were to be paid a substantial bonus if a certain sale price was achieved. They are in part the authors of the scheme. Further, although the ultra vires provisions can be severed from the agreement, I consider that the potential length of the term and the difference in termination rights are equally objectionable. I, therefore, consider the only option is to terminate the agreement.
Result
[269] The plaintiffs have:
(a) Failed in respect of the first cause of action;
(b)On the second cause of action, succeeded in respect of the following rules which are ultra vires:
(i)Rule 1(k) insofar as it applies to the letting service, real estate sale service and other additional services (namely the Sentinel residents service);
(ii)Rule 2(i) insofar as it applies to the letting service, real estate sale service and other additional services (namely the Sentinel residents service);
(iii) Rule 3(h) insofar as it refers to concierge services; (iv) Rule 3(h)(ii) insofar as it refers to concierge services; (v) Rule 3(h)(iii) in its entirety;
(vi) Rule 3(h)(iv) in its entirety;
(c) As a result the following terms of the management agreement are void:
(i) Clause 3.2 in its entirety;
(ii) Clause 4.2 insofar as it relates to the exclusive services; (iii) Clause 6.1 - 6.4 in their entirety;
(iv) Clause 10.4 insofar as it relates to the exclusive services;
(v) Clauses 11.1, 11.2 and 11.6 in their entirety; (vi) Clauses 12.1, 12.2 and 12.6 in their entirety; (vii) Clause 16.1 in its entirety.
(d)Since those terms are severable, the management agreement would otherwise be valid;
(e) On the third cause of action, the plaintiffs have not shown a breach of trust or dishonest assistance;
(f) On the fourth cause of action the Body Corporate has shown a breach of a fiduciary duty which would entitle it to relief;
(g)On the fifth cause of action the plaintiffs have not shown an unconscionable bargain;
(h)On the sixth cause of action the Body Corporate has shown that the service contract is oppressive and should be terminated.
Relief
[270] The conclusions above will largely involve declarative relief. The parties should consult upon the terms of the order necessary and particularly whether any other rules or clauses are rendered consequentially invalid as a result of this judgment. Leave is reserved to apply for clarification on any of those matters.
[271] In respect of the termination of the agreement, I appreciate that the parties may wish to negotiate transitional arrangements or that SML may wish to appeal. In order to allow time for those things to occur, termination of the agreement will take effect on a date 28 days from the date of this judgment unless the Court orders otherwise.
Costs
[272] Overall, the plaintiffs have been successful. If the question of costs cannot be agreed, then memoranda on costs should be submitted by the plaintiffs within 21 days of the date of this judgment and a reply is to follow from the defendants within
10 days. A hearing may be necessary. I would ask the parties to consider the position of the Body Corporate and Mr Ansley vis-a-vis costs.
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Woolford J
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