Body Corporate 65115 v Middlemiss

[2017] NZHC 1906

IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY

CIV-2016-470-000170 [2017] NZHC 1906

BETWEEN

BODY CORPORATE 85115

Applicant

AND

JENNIFER ANNE MIDDLEMISS, REDOUBT TRUSTEES, COLIN GEORGE COWAN AND MSCA TRUSTEES

Respondents

Hearing:	11 July 2017
Appearances:	Daniel Shore for the Applicant
Judgment:	11 August 2017

JUDGMENT OF MOORE J

This judgment was delivered by me on 11 August 2017 at 3:00 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar

Date:

BODY CORPORATE 85115 v MIDDLEMISS & ORS [2017] NZHC 1906 [11 August 2017]

Introduction

[1]      The applicant is a body corporate under the Unit Titles Act 2010 (“the Act”). It has 26 apartments and three retail shops.  These are arranged into three buildings which surround a central courtyard and swimming pool.

[2]      In 2014 the body corporate discovered that a number of the complex’s decks and balconies were suffering from defects which relate to their weathertightness. These defects have given rise to safety concerns and have allowed water to enter some of the apartments.  The body corporate proposed and the unit owners resolved to prepare a scheme of repairs to remedy the defects.   The body corporate now applies to this Court for an order to settle that scheme under s 74 of the Act.

Background

[3]      The chairman of the committee of the body corporate, Marek Grzybowski, has sworn an affidavit in which he sets out the history of how the defects were discovered and the circumstances surrounding the decision by the body corporate to obtain a scheme of repair.

[4]      Mr Grzybowski deposes that in 2014 it became apparent that remediation work was required.   On 28 June 2014 the body corporate resolved at an annual general meeting (“AGM”) to investigate the cause and extent of the damage.  At the next AGM it was resolved that the body corporate would retain the services of Phil Carling, an architect of the firm Carling Architects Limited.

[5]      Mr Carling carried out an investigation to assess the nature and extent of the damage.  He has sworn an affidavit which has been filed in these proceedings.  Mr Carling explains in his affidavit that the joints between the decks and the adjoining wall structures are insufficient and almost solely reliant upon sealant which breaks down over time.  Further, the clearance between some of the decks and the finished floor  levels  inside  each  unit  is  less  than  that  which  is  required  to  meet  the New Zealand Building Code.  The decks’ drainage facilities are also inadequate and do not allow sufficient volumes of water to escape.

[6]      After completing his initial investigations, Mr Carling co-ordinated a tender process on behalf of and following resolution by the body corporate.  Tenders were received from four contractors with prices ranging from $1,300,000 plus GST to

$1,830,057.66.   With the assistance of Mr Carling, the body corporate committee reviewed the tenders and agreed to retain Stanley Construction Limited to complete the repairs.

[7]      On  15 April  2016  the  body  corporate  gave  notice  to  all  owners  of  an upcoming extraordinary general meeting (“EGM”) directed at the appointment of a contractor for repair work and the nature of the scheme that would need to be approved under s 74 of the Act.

[8]      At the EGM a total of 24 units out of 29 were represented either in person or by way of proxy. At the EGM it was resolved that:

(a)      Stanley  Construction  was  to  be  retained  to  complete  the  contract works with a contract cost of $1,300,000 plus GST;

(b)special levies of $1,300,000 plus GST and $9,100 plus GST be raised on all owners based on utility interest to meet the costs of the repairs and the costs of the contract administration undertaken by Mr Carling;

(c)      McCaw Lewis Lawyers would be engaged to prepare the s 74 scheme for the repairs at an estimated cost of $20,000 plus GST and that the committee be empowered to approve the contents before it is provided to owners for consideration and approval; and

(d)the cost of the s 74 scheme would be paid from existing long term maintenance funds.

[9]      After the EGM the body corporate was advised by Stanley Construction Limited that it could no longer honour their tender due to escalations in cost.  The body corporate also learned that the second lowest tenderer had gone into liquidation and could not be engaged to complete the repairs.

[10]     Mr Carling initiated a second round of tenders.   As a result of the second tendering process, the body corporate retained CH Builders Limited to complete the remedial works at a cost of $1,158,681 plus GST.  The body corporate accepted CH Builders Limited’s contractual offer to complete the repair work on 23 August 2016.

[11]     The body corporate then moved to settle the scheme under s 74 of the Act.  It filed its originating application in the Tauranga High Court on 19 October 2016. Under s 74 the body corporate was required to serve its application on the following people:

(a)       the owners of the units;

(b)those with an interest in the units (being mortgagees of which there are eight); and

(c)       the insurer of the building.

[12]     On 2 November 2016 the body corporate obtained directions of the Court as to service.1   The directions permitted the body corporate to effect service by way of email save for two respondents who were to be served in person.

[13]     However, when the body corporate attempted to serve the respondents by way of email it discovered that two of the documents were too large to send as attachments so it uploaded them to a cloud-based storage system and emailed the respondents with an access link.   However, two of the respondents, Westpac New Zealand and ASB Bank Limited, later advised the body corporate that they could not access the documents through the link provided.

[14]     On 7 March 2017 a formal proof hearing took place before Peters J.   In a reserved judgment issued on 9 March 2017, her Honour held that the body corporate had not adequately served all of the respondents and declined to make the order

sought.2    Her Honour did not accept that emailing a link to a cloud storage facility

1      Body  Corporate  85115  v  Middlemiss  HC  Tauranga  CIV-2016-470-170, 2  November  2016 (Minute of Associate Judge Bell).

2      Body Corporate v Middlemiss [2017] NZHC 382.

was the same as, or equivalent to, sending the documents themselves by email.  That was the form of service agreed with the affected respondents, and the directions as to service that were sought and given.   Peters J noted that some of the registered proprietors of units may be elderly or have a limited grasp of English.  Her Honour ordered that the applicant to make a fresh application for directions as to service.

[15]     On  23  March  2017  the  body  corporate  filed  a  further  application  for directions as to service.   On 28 March 2017 Christiansen AJ made an order that service be effected in accordance with the further application for directions.   This required the body corporate to confirm that all parties had been able to access the documents, or failing that, make alternative arrangements to effect service.

[16]     The body corporate has now confirmed, through an affidavit sworn by Joshua Dennis, that it has complied with the second order for service.  Mr Dennis, a solicitor at the law firm retained by the body corporate, deposes that all of the respondents have been provided access to the service documents.

[17]     Relevantly, Mr Dennis also deposes that, upon receipt of service, one of the respondents indicated an intention to oppose the application.  Mr Dennis advised him to seek independent legal advice.   This respondent subsequently filed in the High Court at Tauranga a single page of handwritten notes purporting to be a notice of opposition.  No affidavit in support was provided.

[18]     The registry later followed up with the respondent requiring a compliant notice of opposition and a filing fee.   The respondent did not provide any further documentation and was unwilling to pay the filing fee.  Registry confirmed to Mr Dennis that the document filed by the respondent did not constitute a formal notice of opposition and the 10 working days permitted for the proper filing of a notice of opposition had elapsed.

[19]     Significantly, no other respondents have taken any steps towards opposing the scheme.

The relevant law

[20]     Notwithstanding the lack of formal opposition the body corporate still carries the burden of satisfying the Court that its jurisdiction to order a scheme is invoked and that it should grant the scheme as filed.

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

Court to be satisfied that:

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

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

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

[22]     The relevant principles were summarised by the Court of Appeal in Tisch v Body Corporate 318596.3   Although that decision related to the previous legislation, the section in question was materially the same as s 74.   The Court of Appeal observed:

“[45]    First, a scheme with a broad support is to be preferred. The greater the level of support from owners for the proposed scheme, the more likely it is that the scheme does justice between owners. This will not invariably be so, because a majority of owners may support a scheme that is unfair to a minority …

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

[47]     Thirdly, providing that what has been done by the body corporate before  the  s 48  scheme  is  actually  approved  is  in  accordance  with  the scheme, the order has retrospective effect. …

[48]      Fourthly, work should normally be done to the same standard at the

same time …

[49]      Fifthly … the terms of the s 48 scheme should depart from the scheme  of  the Act  and  from the  body  corporate  rules  no  more  than  is

reasonably necessary to achieve what is fair as between unit owners in the circumstances. Thus the Act and the Body Corporate rules remain relevant considerations. An  exception  to  this  fifth  guiding  principle  is  a  scheme unanimously agreed to by all unit owners.”

[23]     I turn now to apply these principles to the present case.

Discussion

[24]     I am satisfied that s 74 is triggered. The evidence is that many of the decks in the complex are damaged.   The damage is relatively extensive with the costs of repairs totalling more than $1 million.   I have already referred to Mr Carling’s affidavit in which he summarises the nature and extent of the defects.

[25]     The next question is whether a scheme is required.   In Tisch the Court of

Appeal stated that:4

“whatever the particular situation, settling a scheme should always be the best option for the unit holders as a whole.”

[26]     Mr Shore, for the body corporate, submits that settling a scheme in this instance is the best option for the unit holders for the following reasons with which I agree:

(a)      Even if not all owners are suffering from damage to their own decks, they are all affected in some way by water damage, for example in relation to decks on neighbouring units.

(b)A scheme will provide all unit owners with certainty in terms of the remedial work to be undertaken, a timeline for that work, the rights and responsibilities of each party during the process, the allocation of cost for the work and a process to be followed in case of a dispute.

(c)      The members of the body corporate seek the certainty of a Court approved scheme rather than a contractual arrangement.

(d)The scheme provides certainty in the event that the scope of repairs increases  due  to  further  damage  being  discovered  upon commencement of repair work.

(e)      The scheme enables work to be completed by one contractor, ensuring continuity across the complex.

(f)      The unit owners received legal advice on alternatives to a scheme with the unit owners resolving that the best option was to apply to the Court for a scheme.

(g)At an EGM on 30 April 2016 it was resolved that McCaw Lewis Lawyers would be engaged to prepare the s 74 scheme for the repairs at a cost estimate of $20,000 and that the committee be empowered to approve the content before it is provided to owners for consideration and approval.

(h)There has been no formal opposition to the application despite every respondent being served and having ample time to file an opposition.

[27]     I am satisfied that a scheme of repairs is in the best interests of the unit holders as a whole.  Next I must ask whether the scheme should be imposed on the terms proposed.

[28]     The proposed scheme is annexed to the affidavit of Mr Grzybowski.   It is appropriately detailed in accordance with the Court of Appeal’s judgment in Tisch.  I am  satisfied  this  is  a  sensible  scheme  and  it  should  be  imposed  on  the  terms proposed.  However, before I proceed to summarise its terms, there are two matters which require discussion.

[29]     The first of these is that the proposed  scheme diverges  from the Act  in regards to owner contributions for repairs to unit property.  Under the Act the body corporate is responsible for repairs to common property and levies owners according

to  their  utility interest5   whereas  unit  owners  are  responsible  for  the  repair  and maintenance of their own unit property.6   Under the scheme, however, both common property and unit property, so far as they relate to the proposed work, fall under the responsibility of the body corporate with both types of property being levied against

the owners in accordance with their utility interest.

[30]    Mr Shore explains that the nature of the damage to unit balconies and surrounding cladding means that all unit owners benefit from the proposed repairs. Thus the proposed scheme departs from the Act to allow all repairs to be levied against  the owners on  a utility interest  basis.    I am  satisfied  this  is  a sensible departure and in the best interests of the unit owners as a whole.

[31]     The  second  matter  which  requires  mention  is  a  potential  inconsistency between two of the clauses in the proposed scheme.   Clause 17.2 provides for dispute resolution and states that parties who have failed to resolve a matter between themselves “must” refer disputes to arbitration.   Clause 25 provides the right of parties to apply to the Court for orders in respect of disputes arising under the scheme.  Mr Shore suggests the “must” in clause 17.2 should be substituted with the word “may” in order to avoid any potential conflict between the provisions.

[32]     The “must” in clause 17.2 is clearly intended to bring disputes to resolution through the compulsory engagement of an arbitrator.  I see merit in the mandatory nature of the clause.   The difficulty with Mr Shore’s suggestion is that amending clause 17.2 so that the word “may” is substituted for “must” means that there is no compulsory resolution procedure for disputes.  The parties would be permitted but not obliged to apply to either the Court or refer the matter to arbitration.  In other words,  there  would  be  no  mechanism  under  the  scheme  by  which  to  compel

resolution of the dispute.

5      Unit Title Act 2010, ss 121 and 138.

6      Unit Title Act 2010, s 80(g).

[33]     Accordingly, I propose to amend the scheme so that clause 17.2 reads as follows with the amended words appearing in bold:

17.2     If any difference or dispute (“the Matter”) arises as a result of this Scheme, parties may elect to resolve the Matter between themselves.  Failing that, the Matter must be referred to and finally resolved by arbitration in accordance with the Arbitration Act 1996 (and any amendment to that Act or any other statutory provision then relating to arbitration) and the current arbitration protocols of the Institute. The arbitration will be by one arbitrator to be agreed on by the parties and if they fail to agree within 10 working days,  then  by  an  arbitrator  to  be  appointed  by  the  president  of  the New Zealand  Law  Society  or  the  president’s  nominee.    This  clause  is subject to clause 25 which reserves leave to any party to apply to the Court for further orders including in respect of disputes.

[34]     This amendment is intended to allow the parties to seek either directions from the Court or refer the matter to arbitration.  As I did not raise the possibility of this amendment at the hearing, leave is granted to the body corporate to apply for recall of this judgment within five working days if this term is not to its satisfaction.

[35]     While a copy of the scheme to be settled is attached to this judgment, I set

out a précis of the scheme’s provisions:

(a)      The preamble (clause 1) sets out the nature of the property and a brief history of events that have led the body corporate to apply for the scheme.  It also gives a brief overview of the scheme and sets out the resolutions passed at an EGM on 30 April 2016.

(b)Clause 2 vests authority in the body corporate to take the practical steps necessary to give effect to the scheme.

(c)      Clause 3 enables the body corporate to delegate tasks and functions to the body corporate committee.

(d)Clause  4  describes  and  authorises  the  necessary  repairs  to  be undertaken.

(e)      Clause  5  authorises  the  body  corporate  to  engage  appropriate consultants to facilitate the scheme and the repairs.

(f)      Clause  6  requires  the  body  corporate  to  engage  a  contractor  to undertake the repairs.

(g)Clause 7 details the breadth of costs intended to be captured by the scheme.  The clause allows scope to reassess the extent of the repairs required.

(h)Clause 8 specifies the powers granted to the body corporate to give effect to the scheme.

(i)Clause  9  specifies  the  duties  imposed  on  the  body  corporate  in relation to the scheme.

(j)Clause 10 provides the method by which costs are to allocated and levied to the unit owners.  The costs of both the repairs to common property and repairs to unit property are to be allocated and levied in accordance with each owner’s utility interest, as opposed to what is provided for in the Act.  The reasons for the departure are sensible and are explained above.

(k)Clause 11 authorises the body corporate to issue levies in relation to the scheme.   Levies are to be allocated and collected in accordance with  clause  10.    The  body  corporate  has  the  ability to  take  debt recovery actions for levies which are not paid by any owner.

(l)       Clause 12 addresses how levy defaults and refunds are to be managed.

Shortfalls resulting from non-payment of levies will be distributed on a pro rata basis across all other owners, with respect to their utility interests. The defaulting owner remains liable for its non-payment.

(m)Clause 13 permits the body corporate to borrow funds and specifies the way in which the costs associated with that borrowing are to be addressed.

(n)Clause 14 specifies that funds raised pursuant to a levy are to be used to pay for the costs of the repair work.

(o)Clause  15  requires  the  body  corporate  to  keep  proper  accounting records.

(p)Clause 16 requires the body corporate to keep each unit owner fully apprised of the repairs and progress of the repairs by reporting not less than quarterly.

(q)Clause 17 provides for mechanisms for dispute resolution.  The body corporate’s decision is to be final in respect of all matters arising out of the scheme unless a unit owner has an objection which in monetary terms exceeds $30,000.  If any dispute arises as a result of the scheme the  parties  may  elect  to  resolve  the  matter  between  themselves. Failing resolution, the parties may refer the matter to arbitration or apply to the Court for directions.

(r)      Clause 18 requires the body corporate to meet certain obligations in relation to insurance.

(s)Clause 19 requires the unit owners to indemnify the body corporate for its actions except for any wilful misconduct or any act or omission that is carried out with fraudulent intent.  This clause also limits the liability of any trustee owners.

(t)Clause 20 addresses the liability of parties when a unit is sold and specifies the disclosures which may be made by the body corporate. This clause provides that where a unit is sold before repairs are completed both the vendor and the purchaser are to be jointly and severally liable for any outstanding levies and any future levies.

(u)Clause 21 clarifies liability when a unit has more than one owner. All owners are jointly and severally bound by the scheme.

(v)Clause 22 imposes obligations on owners to co-operate with the body corporate and specifies the consequences of failing to do so.

(w)      Clause 23 allows unit owners to have additional work undertaken but specifies how the costs for those works are addressed.   The body corporate retains the ultimate discretion in such situations to ensure that the ongoing repairs are not impacted by additional work undertaken at the request of a unit owner.

(x)      Clause 24 provides that no third party dealing with the body corporate in relation to the scheme will be obliged to verify the body corporate’s authority under it.

(y)      Clause 25 reserves leave to any party affected by the scheme to apply to the Court for further orders including in respect of disputes arising under the scheme or in the event the body corporate does not proceed with the scheme.

(z)       Clause 26 defines key terms referred to in the scheme. [36]    I reach the following conclusions:

(a)      The decks at the complex suffer from weathertightness failures and require remedial attention.

(b)      All unit holders either support the scheme or do not oppose it. (c)     Adequate steps have been taken to serve all interested parties.

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

Result

[37]     For  these  reasons  I  order  that  the  scheme  attached  to  this  judgment  is approved by the Court and thereby settled.

Moore J

Solicitors/Counsel:
Mr Shore, Auckland