Body Corporate 78693 v Gibson Sheat Shelf Company no.28 Limited
[2020] NZHC 825
•28 April 2020
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2019-485-000314
[2020] NZHC 825
UNDER the Unit Titles Act 2011 IN THE MATTER OF
an application to settle a s 74 scheme
BETWEEN
BODY CORPORATE 78693
Applicant
AND
GIBSON SHEAT SHELF COMPANY NO. 28 LIMITED
First Respondent
ALLEN BINSON GOH
Second RespondentHILL VIEW HOLDINGS LIMITED
Third Respondent
Hearing: 9 – 11 March 2020 Counsel:
J K Mahuta-Coyle and K S Hagan for the Applicant P W Michalik for the First Respondent
L M McKeown for the Second Respondent G W D Manktelow for the Third Respondent
Judgment:
28 April 2020
JUDGMENT OF DOOGUE J
Table of contents
Introduction [1]
Schemes under s 74 [13]
Respective parties’ positions [20]
Scope of the enquiry in this case [24]
Factual background [26]
BODY CORPORATE 78693 v GIBSON SHEAT SHELF COMPANY NO. 28 LIMITED [2020] NZHC 825
[28 April 2020]
Preliminary questions [67]
Do the facts establish a breach of the Unit Title Regulations? [69]
What were the statutory duties of this Body Corporate? [75]
Whose interests need to be protected under the scheme? [85]
The scheme [86]
Assessment of the scheme using the Tisch principles [87]
Does the scheme have broad support? [88]
Is the scheme sufficiently detailed? [97]
Proposed plans and costs [98]
Proposed funding [107]
Does the scheme depart from the scheme of the Act and from the Body Corporate rules to
such an extent as to make it unfair as between unit owners? [125] Analysis of how costs of repair ought to be apportioned [126] Past practice of the Body Corporate [136] Costs of this proceeding and unauthorised deductions from insurance monies [139] Compensation [141] Alternatives that might be considered [145] Conclusion [155] Result [161] Costs [162] Introduction
[1] The “Maison Cabriole” Apartments are located at 30 Tory Street
in the
Wellington central business district. They comprise three separate buildings: a seven-storey tower block consisting of 17 residential apartments (the Tower Block); a two-storey building containing a single commercial unit and five residential units (the Courtenay Block); and a three-storey building containing a ground floor carpark unit and four residential apartments (the Tory Street Block). Each of the blocks stands alone and all are independent of each other, except they comprise a single unit title development. The only common property they share is the carpark which is where some of the residents of all three blocks park cars. The carparks constitute auxiliary units under the unit title development.
[2] The Tory Street Block contains Unit 29 owned by the first respondent (Gibson Sheat Shelf Company No. 28 Limited, a company controlled by Mr Barton),
Unit 28 owned by the second respondent (Mr Goh), and Units 24 and 25 owned by the third respondent (Hill View Holdings Limited, a company controlled by Ms Wong).
[3] Each of the blocks suffer from weathertightness issues – they are leaky buildings. Additionally, the Tory Street Block suffered a number of mishaps leading to significant damage. The combination of all of these issues (and particularly the damage to the Tory Street Block) are the reasons for this proceeding.
[4] This is a hard case. The rather complex facts applied to the overlay of the Unit Titles Act 2010 (the Act) are compounded by the physical structure of the unit title development not being ideally suited to unit title ownership. The circumstances as they have unfolded have challenged all participants. They have all found it difficult to engage and compromise. The minority (the owners of units in the Tory Street Block) have not fully engaged with the process. The majority (all other unit owners) find it difficult to contemplate the spectre of significant capital expenditure by them in favour of assets not owned by them. The Body Corporate has struggled to deal with the disparate interests.
[5] Thus the Body Corporate has brought this application pursuant to section 74 of the Act.
[6] The real problems began on 14 November 2016, when the Kaikōura earthquake damaged a commercial carpark associated with Reading Cinemas adjacent to the northern side of the Tory Street Block. The damage to the carpark necessitated its demolition. In carrying out the demolition on 23 February 2017 the contractors (Naylor Love) dropped a large concrete column through the roof of Unit 29 in the Tory Street Block. This not only caused significant damage to the unit, it also damaged other building elements of the entire Tory Street Block. Temporary weather protection was erected by Naylor Love. This was inadequate, and water leaked into the building. There was a flood of one or more of the units in the Tory Street Block during a significant storm on 5 January 2018.
[7] In addition to the damage caused by Naylor Love and the flood, subsequent inspection of the Tory Street Block revealed historic weathertightness defects caused by a combination of faulty design and construction methods.
[8] Since 3 November 2017, the Tory Street Block has been structurally unsafe, uninhabitable by the unit owners and the site has become a haven for vandals, squatters and petty criminals.
[9]The Body Corporate wants to demolish and rebuild the Tory Street Block.
[10] The scheme proposes that the remnants of the Tory Street Block, excluding the ground floor carpark, be demolished. It proposes that the four units be rebuilt like for like and in accordance with modern building standards and regulations.
[11] The cost of the demolition and rebuild has been estimated by quantity surveyors as $2.626 million. The scheme proposes that the Tory Street Block unit owners bear 80 per cent of the costs and the other unit owners bear the remaining 20 per cent. Mr Barton and Mr Goh would need to contribute approximately $500,000 each and Ms Wong would need to contribute approximately $1,000,000.
[12] The application is opposed by the Tory Street Block unit owners. They say the scheme is not fair nor appropriate, is generally unworkable and that the proposed allocation of costs places an unfair burden on them. Further, Mr Goh seeks compensation for loss of use of his unit. Although Mr Barton and Ms Wong did not formally seek compensation, I understand from their counsels’ oral submissions that they also consider compensation for loss of the use of their units should be a factor when considering the fairness of the scheme.
Schemes under s 74
[13]The starting point is s 74 of the Act. Those parts relevant to this case are:
74 Scheme following destruction or damage
(1)This section applies if any building or other improvement comprised in any unit or on the base land is damaged or destroyed, but the unit plan is not cancelled.
(2)The High Court may, by order, settle a scheme on the application of—
(a)the body corporate; or
…
(3)A scheme under subsection (2) may include provisions—
(a)for the reinstatement in whole or in part of the building or other improvement; or
(b)for the transfer of units to the body corporate so as to form part of the common property.
…
(6)On any application to the High Court under subsection (2), the following persons have the right to appear and be heard:
(a)any person having or claiming to have any estate or interest in any unit or in the whole or part of the base land; or
(b)any insurer who has effected insurance on the buildings or other improvements comprised in any unit or in the whole or part of the base land.
(7)In the exercise of its powers under subsections (2) and (3), the High Court may make any orders that it considers expedient or necessary for giving effect to the scheme, including orders—
(a)directing the application of any insurance money; or
(b)directing payment of money by or to the body corporate or by or to any person; or
(c)directing the deposit of an appropriate new unit plan; or
(d)imposing any terms and conditions that it thinks fit.
…
(9)The High Court may make any order for payment of costs that it thinks fit.
[14] The onus falls on the applicant to satisfy the Court that the proposed scheme should be settled.1
[15] In Tisch v Body Corporate 318596, the Court of Appeal identified a three-step process for the purpose of settling a scheme:2
a) The Court must be satisfied that the building has been damaged or destroyed.
b) If so satisfied, the Court must decide whether to settle a scheme. That is, the Court must determine whether a scheme is appropriate in the circumstances.
1 Gu & Ors v Body Corporate 211747 [2018] NZCA 396 at [58].
2 Tisch v Body Corporate 318596 [2011] NZCA 420, [2011] 3 NZLR 679 at [35]. Although Tisch concerned the approval of a scheme under s 48 of the Unit Titles Act 1972, it was decided after the passage of the 2010 Act. The Court noted at [26] that s 74 is “essentially the equivalent of s 48”.
c) If the Court considers a scheme is appropriate, it must then determine what the terms of the scheme should be.
[16] The overall aim of the third step must be to balance the interests of each unit holder and to arrive at terms which achieve the fairest outcome to all.
[17] It is only the third step which the parties contest in this case. The Body Corporate and the other unit owners accept that the Tory Street Block has been damaged and that the approval of a scheme is necessary.
[18] The Court in Tisch cited the following five guiding principles to be taken into account:3
[45] First, a scheme with broad support is to be preferred. The greater the level of support from owners for the proposed scheme, the more likely it is that the scheme does justice between owners. This will not invariably be so, because a majority of owners may support a scheme that is unfair to the minority.
…
[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. We endorse the following comments by Ronald Young J in Re Body Corporate 304209:
As a question of interpretation of s 48 I can see no reason why orders cannot relate back to the time when the damage entitling an order under s 48 first occurred. It would in my view be wholly unreal to suggest a s 48 order could not be retrospective. Without retrospective effect the Body Corporate will be hamstrung until an order is made.
[48] Fourthly, work should normally be done to the same standard and at the same time. We referred in [40] above to Courtney J’s statement in Dunn about this. To achieve that outcome, Courtney J held that “the work should be the subject of a single managed building contract”. There is a similar statement by Heath J in Meader although, as we have pointed out, fairness between proprietors demanded a departure from this principle in Meader. The reasons for this principle are really self evident: maximising efficiency; minimising cost and disruption. The fairness and desirability of completing work to a uniform standard is equally self evident.
3 At [45]-[49].
[49] Fifthly, as we explain in [30] and [31] above, 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.
[19]The authorities establish that in general:
(a)section 74 is an exception to the general rule that a body corporate may only undertake tasks associated with common property,4 but it does not follow that s 74 is to be used without regard to the general rule;
(b)a body corporate is responsible for common property and building elements (including external and internal components necessary to the structural integrity of a building);5
(c)individual unit owners are responsible for their own units;6
(d)there is a presumption that cost will be apportioned on a utility interest basis where the repairs and maintenance benefit the common property generally, although not on a strictly formulaic basis;7
(e)a combination of ss 126 and 138(4) enables a body corporate to claim recovery of any expenditure from those owners that substantially benefit or where work primarily involves remedial work within some principal units only and not others;
(f)in s 74 applications “the focus … is on pragmatic considerations”.8
4 Body Corporate 172108 v Meader (2010) 12 NZCPR 101 (HC) at [18].
5 Common property as defined in the Unit Titles Act 2010, s 5.
6 Tisch v Body Corporate 318596, above n 2, at [29]; citing Fraser v Body Corporate S63621 (2009) 10 NZPR 674 (HC) at [34](b).
7 Body Corporate 199380 v Cook [2018] NZHC 1244 at [99].
8 Body Corporate 172108 v Meader, above n 4, at [20].
Respective parties’ positions
[20]The Body Corporate submitted that all the guiding principles enunciated by
Tisch have been given effect in the scheme.
[21]To the contrary, the Tory Street Block unit owners say that:
(a)the scheme does not in fact have broad support;
(b)the scheme is not sufficiently nor appropriately detailed;
(c)the terms of the scheme depart from the scheme of the Act and from the Body Corporate rules to such an extent as to make it unfair as between unit owners;
(d)aspects of what the Body Corporate has done to date would exacerbate the scheme’s unfairness if approved; and
(e)any such scheme should provide compensation for the period of loss of use of their units.
[22]The Tory Street Block unit owners exhort the Court to settle a scheme that:
… would see the costs of the repairs either paid by the building’s insurer, who would then recover the costs from the wrongdoing contractor, or funded by legal action taken directly against the wrongdoing demolition contractor.
…
If that is not possible due to decisions made and actions taken by the Body Corporate, then a just scheme would see the Body Corporate take responsibility for that, by shouldering the full cost of the necessary work.
[23] They also submitted that the opposition of the Tory Street Block unit owners to the scheme should be determinative. In other words, they should have some preferential status before the Court.
Scope of the enquiry in this case
[24] At the outset, it is important to state that in this proceeding the Tory Street Block unit owners have attempted to extend the s 74 enquiry and assert the Body Corporate has used unauthorised procedures, has breached its statutory duties under ss 138, 135 and 136 of the Act and has been negligent in a general duty of care in tort to the Tory Street Block unit owners by their negligence in:
(a)halting works on the Tory Street Block;
(b)negotiating settlement with their insurers without adequate legal advice and in reliance on an incorrect interpretation of their insurance policy to the detriment of the Tory Street Block unit owners; and
(c)failing to pursue Naylor Love for damages caused by its negligence.
[25] The Court must confine its focus only to those factual matters raised by the Tory Street Block unit owners that impinge on the inquiry as to the Tisch principles and the overall fairness of the proposed scheme. It is an illegitimate use of this proceeding to conduct an enquiry and make findings on whether or not the Body Corporate breached any of its statutory duties and/or a duty of care in tort. Any pursuit of Naylor Love or of the insurers or of the Body Corporate will need to be by way of separate proceedings. This proceeding is not the place to litigate those issues.
Factual background
[26] Given the unusual circumstances of this case and the way it has been presented it is necessary to address the facts in some considerable detail. It is only in examining the detail to this extraordinary extent that it is possible to demonstrate the position the parties have taken since the unhappy events have occurred, and why I conclude that their relationship and resources are such that the scheme as proposed cannot be settled by the Court.
[27] On 23 February 2017 Naylor Love were undertaking demolition works on the Readings Cinema carpark on Tory Street. They dropped a large concrete column
through the roof of Unit 29 of the Tory Street Block. Naylor Love were instructed the next day to install a tarpaulin as temporary weather protection over the hole.
[28] The next day the Body Corporate filed a claim under its building insurance policy with its insurers.
[29] The insurance claim was accepted, engineers were engaged to identify the scope of the damage and plans to effect repairs got underway, the details of which are not important at this stage except that it was found the damage affected not only Unit 29 but also Units 28 and 25.
[30] Additionally, the process uncovered that six consents had never been signed off nor issued with code compliance certificates by Wellington City Council (WCC).
[31] WCC determined that all new building work would have to comply with the building code and related building standards as they existed in 2017 rather than those standards that were applicable at the time of the Tory Street Block’s construction in the 1990s. WCC further advised that the repair work would also require an application for – and the issue of – a building consent. WCC granted consent for the insured remediation works on 3 November 2017.
[32] Reconstruction began on 14 November 2017. In order to give the Tory Street Block some weather protection while it was completely exposed, a large “tent” consisting of a plastic building wrap over the scaffolding was first erected over the upper two storeys of the Tory Street Block. Demolition then commenced.
[33] There was an extreme weather event on 5 January 2018. The tent was destroyed. The Tory Street Block (Unit 25 in particular) was seriously damaged by flooding. The Body Corporate filed a further claim with its insurers.
[34] To compound matters, the stripping of Units 29 and 25 exposed historic weathertightness damage. This was as a consequence of the building’s design and construction methods and defective plumbing. The construction of the
Tory Street Block significantly departed from the consented plans so that it lacked proper structural support in a number of key areas.
[35] On 25 January 2018 the Chair of the Body Corporate, Mr Gill, was advised for the first time that significant leaky building issues and other construction defects had been uncovered.
[36] On 7 February 2018 Mr Gill met with the owner of the commercial unit in the Courtenay Block (Mr Chin) and a designer/engineer, and it was agreed that the north wall of Unit 25 should be replaced to resolve the leaky cladding and that this would allow the work to proceed without further delay.
[37] Contractors were instructed to remove and replace the wall and allow Unit 29 works to continue. The Body Corporate, through Mr Gill and Mr Chin, agreed that the Body Corporate would assume the responsibility for the cost of remediating the weathertightness issues as distinct from the damage caused by Naylor Love and the flood.
[38] On 27 February 2018, Mr Gill received an extensive report on the works associated with repairing the damage to Units 29 and 25 from the project manager. The most critical recommendation was the following:
Capital to complete reconstruction of north wall apartment 25 and complete apartment 29 rebuild including roof. This will reinstate the waterproof integrity of the structure. However, completion dependent on upgrade Tory St confirmation of bracing requirements.
[39] The next day Mr Gill ordered the construction to be stopped. The decision to stop the works, without following the advice that the site should have been made weatherproof by finishing the wall and the roof repairs, is a significant causative intervention for the problems that now exist in the Tory Street Block.
[40] On 23 April 2018 Mr Gill received an opinion from Mr Greenwood, the Body Corporate’s solicitor, concerning the prospects of the Body Corporate taking action against Naylor Love. Mr Greenwood advised that the Body Corporate would
be unlikely to recover damages from Naylor Love for the historic construction issues because they were not caused by the contractor.
[41] It was about this time things began to be formalised. A Body Corporate meeting was held on 2 May 2018, which only one of the Tory Street Block unit owners attended. The discussion on the status of the insurance claims was led by an agent for the insurer. He advised that the liability of the insurers was limited to the damage caused by the demolition works and the subsequent flood damage, and did not include liability for remediation of any of the historic issues as set out in [34]. He advised that the insurers considered the ongoing costs of the scaffolding and consultant’s fees were deemed the liability of unit owners and the Body Corporate.
[42] On 22 May 2018 the Body Corporate held another meeting for the express purpose of getting the views of the Tory Street Block unit owners. Of the owners of Units 24, 25, 28 and 29, only Ms Wong and a niece of Mr Goh were present. Ms Wong was there for only a short time. As a result of the inadequate attendance and having no quorum, the meeting progressed as a general discussion. No resolution could be made in the absence of two of the three unit owners. The financial hardship of the Tory Street Block unit owners was acknowledged.
[43] On 20 June 2018 Mr Greenwood sent out a memorandum of general advice to all unit owners. The memorandum gave advice about the difference between rebuilding and total redevelopment, compensation, funding of any rebuilding or redevelopment and the prospect of requiring the High Court to settle a scheme. He set out a range of percentages that might be utilised in the cost allocation of a rebuild under a scheme. These ranged from 80/20 to 60/40, but without any precise analysis.
[44] Further, in July 2018 a comprehensive email was sent to all unit owners. It outlined the obligations of the Body Corporate, advised all unit owners of the options for their consideration for either a like for like rebuild or redevelopment and advised that they could express their views at an upcoming extraordinary general meeting (EGM). The email contained the following: “you are advised to seek your own legal advice on these matters as this is a significant and important situation to resolve.”
[45] On 12 July 2018 the Body Corporate held an EGM. All of the Tory Street Block unit owners were in attendance. The owners of thirteen other units were also in attendance. The project manager presented the unit owners with an overview of events up until that point. The insurers’ agent advised the meeting that the liability of the insurers was limited to the remediation of the damage caused by the demolition and the flood damage, and that any historical issues would not be covered. Mr Greenwood gave advice about various options the unit owners might consider going forward, including the Body Corporate purchasing the site from the Tory Street Block unit owners.
[46] There is no evidence that the Body Corporate ever got any legal advice on the meaning and interpretation of the insurance policy, or the Body Corporate’s rights thereunder, in respect of both insurance claims. Mr Gill conceded that the Body Corporate simply relied on Mr Greenwood never raising any red flags about the assertions that were being made to the Body Corporate by the insurers about the Body Corporate’s rights against the insurer.
[47] It was agreed that before the Body Corporate could move forward with any of the options that the Tory Street Block unit owners would need to consider the options themselves and then provide feedback as to what they thought would be the best possible outcome. It was also agreed that Mr Greenwood should provide them with a document outlining the various options for their consideration.
[48] On 18 July 2018 the insurers wrote to the Body Corporate setting out a proposal for settling the Unit 29 claim. It contained detailed calculations, and offered a total settlement of $336,155.37. It appears this letter was not sent to any of the unit owners; including, significantly, Mr Barton.
[49] A meeting of the Body Corporate Committee (the Committee) was held on 8 August 2018. Again, the minutes are instructive. They record the Body Corporate’s administrators’ concerns about the irregularity of Committee meetings and the financial state of the Body Corporate. The financial state of the Body Corporate was unhealthy as repairs to the lift in the Tower Block were $120,000 over the original budget cost of $150,000. The Tory Street Block issue had added a non-budgeted cost
of $80,000, and the Body Corporate needed to raise $300,000 in long-term maintenance levies. The closing balance was considered to be “tight”, but the Body Corporate resolved it could not ask for more from the unit owners at that time.
[50]Significantly, these minutes also record:
$340,000 will be coming in from the insurance claim, which the BC will motion at the AGM to get transferred to the contingency fund, which would be used for the Tory Street Block costs.
Keith expressed that he didn’t thing [sic] that the Tory Street Block owners would want the insurance money absorbed by the BC, however the rest of the committee were happy to put the motion forward at the AGM.
[51] The Committee resolved at that meeting to seek the Body Corporate’s approval of the insurance settlement at an annual general meeting (AGM).
[52] An AGM was held on 27 August 2018. The Body Corporate formally approved the settlement offer, and a special resolution was carried “that the Body Corporate establishes a contingency fund and transfers the total insurance claim payouts from the operating account to the contingency fund.”
[53] The very next day the insurers emailed a letter of offer for the flood damage claim to Unit 25. The insurers calculated the total value of the loss covered by the claim as $123,767.21. From this, they deducted some costs they had already paid for, and offered a total settlement of $119,264.91. On 30 August 2018 Mr Gill received the respective discharge forms from the insurers for signature. Mr Gill raised concerns about signing the discharge forms as worded and advice was then sought from Mr Greenwood. Mr Greenwood advised “the affected owners need to also agree the settlement offers and sign”.
[54] It was not until 7 September 2018 that the Tory Street Block unit owners were advised of the two offers of settlement in an email. They were advised what had taken place at the 27 August 2018 AGM. They were further advised that as none of them had been present their approval and/or comments were now sought on the offers before formal acceptance of the offers was given to the insurers.
[55] There was nothing to alert the Tory Street Block unit owners about getting their own advice on the appropriateness of the insurer’s settlement offers having regard to the Body Corporate’s insurance policy. Mr Gill conceded that they were not expressly advised that their approval was required. However, nor did the Tory Street Block unit owners use this as an opportunity to seek independent advice.
[56] The Body Corporate continued to get advice from Mr Greenwood on a revised form of the discharge that could be signed by Mr Gill as Chairman and by another member of the Body Corporate and that did not require the signature of any of the Tory Street Block unit owners. This was resolved in or around mid-September.
[57] A meeting of the Tory Street Block unit owners and the Body Corporate took place on 11 October 2018. Mr Gill was present as were other advisors, including Mr Greenwood. None of the Tory Street Block unit owners had sought the attendance of their own legal representatives.
[58]The minutes of this meeting record the following:
3. Acceptance of Insurance Settlements
The Tory Street Block owners were asked to consider the two settlement offers sent prior to the meeting, namely:
(a)$335,905.37 for the impact damage caused by demolition of Reading Carpark (ref 2084110MZT)
(b)$114,264.91 for Water Damage to Apt 25 and Carpark below (ref 2124189MZT)
After much discussion around whether these offers were fair and reasonable, and given that the insurer is unlikely to change their position, all of the owners consented to accepting the settlement as tabled.
4. Use of Insurance Settlement Funds
Peter mentioned that these agreed insurance settlements will be paid into a Contingency Fund set aside purely for the costs relating to the Tory Street Block works, and any amounts that may be determined to be allocated, and proportionately paid, to the affected owners.
Furthermore, since the Body Corporate is considering various options beyond pure remediation, it will be necessary to pass a special resolution allowing these funds to be used towards whatever options are decided for the Tory Street Block, including any settlement to affected owners. There are also
additional costs (incurred, current and future) relating to Tory Street Block, such as scaffolding and weathertightness issues, as well as consultants’ fees.
This special resolution is currently being drafted and will be put to all owners as soon as possible.
…
6. Future Options and Information requested from the three owners
Dave Barton proposed going straight to developers, as is, and advised he would be happy to run that process. It was agreed that Dave be given until 31 October 2018 to pursue these options and an EGM be held shortly after that date to discuss.
It was agreed that it would be useful to get some valuations done as part of this process, including:
i.Values before the impact damage,
ii.Current values, and
iii.Potential future values.
Paul de Lisle will do a scope of valuation to present to the owners.
There would need to be provisions made for the 11 carparks, and if developed, these would need to be replaced.
If the block is demolished and a bigger tower than is currently on site, erected, a developer would need to put in a new foundation which would affect the carparks for the duration of the works.
7. Review of Levies for the 3 Owners
Since the 4 Tory Block units are uninhabitable, it was agreed that the 3 owners should receive relief from relevant portions of their levies.
This would require a special resolution from all owners.
The BC Committee will meet first to review which elements of the budget should be removed from these levies and consider any reimbursement amounts if/where applicable.
[59] An addendum was added by the Body Corporate to the 11 October 2018 minutes seemingly without reference back to the unit owners and it read:
It was decided after the meeting closed that rather than send a special resolution, the Body Corporate would hold an EGM on 25 October 2018.
[60] Mr Gill signed the insurance discharge form for Unit 25 on 11 October 2018, and the form for Unit 29 on 12 October 2018. After deduction of excess, the
Body Corporate received a total of $450,170.28 ($335,905.37 for Unit 29 and
$114,264.91 for Unit 25).
[61] The Tory Street Block unit owners say that they were confronted with a fait accompli at the meeting as the other unit owners had already agreed to accept the settlement at the 27 August 2018 AGM. This is an overreach of the events as they had unfolded because the Tory Street Block unit owners would have learnt by the minutes of the meeting of 22 May 2018 that the Body Corporate was in negotiation with the insurers. They would have received both the general advice sent to all unit owners by way of a memorandum on 20 June 2018 and the subsequent comprehensive email which exhorted them to get legal advice on what were characterised as significant matters. They were in attendance at the 12 July 2018 meeting and they had been advised as to what had transpired at the 27 August 2018 meeting. They had been sent the two offers of settlement on 7 September 2018. Their approval had been expressly sought in that email and they had had over a month to seek independent advice up to that point.
[62] Notice of the extraordinary general meeting (EGM) referred to in the addendum to the minutes was duly given to all unit owners. Apologies were sent by Mr Barton and Ms Wong, and Ms Goh had a bereavement and did not attend. The EGM was held on 25 October 2018. A special resolution was passed unanimously:
That the Body Corporate agrees that the insurance settlement funds, noted above in the explanatory note, may be used to reimburse existing funds expended on Tory Street Block B, in the sum of $128,637.46, and that future funds from this contingency account may be utilised towards existing scaffolding and wrap-around, or alternative weather-proofing systems, to the north-east Tory Street Block; plus any future demolition and/or reinstatement works to the north-east Tory Street building; plus any related consultancy fees; plus any compensation paid to the affected owners.
[63] The Tory Street Block unit owners say that they had understood as a result of the 11 October 2018 meeting that the insurance proceeds would be available for distribution to them. That is not what the minutes record. It is clear the resolution reflects that the Body Corporate set aside funds for the costs relating to the Tory Street Block works and that there may be allocations made to the Tory Street Block unit owners as a result. The 25 October 2018 resolution expands what is included within
the concept of “costs relating to the Tory Street works” and reaffirms that compensation would still need to be quantified and paid to the unit owners after payment of such works and associated costs.
[64] At a further meeting of the Body Corporate on 8 November 2018 it was proposed that Mr Greenwood be consulted to give further clarity around “proper use/allocations of insurance funds, responsibilities of payments and assignments of costs”. There is no evidence this occurred.
[65] The next meeting of the Body Corporate on 26 November 2018 is significant because there was agreement to pursue a s 74 scheme and agreement that some relief from levies should be provided to the Tory Street Block unit owners.
[66] The final meeting of relevance is the 13 December 2018 meeting at which four motions were unanimously passed:
(a)the Body Corporate would carry out remediation work to reinstate the apartments to make them fit for purpose as residential accommodation and to repair the ceiling of the carpark;
(b)the Body Corporate would instruct lawyers to advance an application for a scheme;
(c)the estimated cost of completing the work was $2.626 million (inclusive of GST), and the cost of the work would be split between the owners of units 24, 25, 28 and 29 (contributing 80 per cent) and all other unit owners (contributing 20 per cent) subject to any different decision by the High Court; and
(d)the Committee was authorised to grant the unit owners of units 24, 25, 28 and 29 relief from levies for cleaning of common areas, electricity, water and rubbish removal charges on a fair and equitable basis.
Preliminary questions
[67] Before considering the detail of the scheme itself, there are three preliminary questions raised by the way in which the Tory Street block owners presented their criticisms of the proposed scheme. They are:
(a)Do the facts establish a breach of the Unit Title Regulations?
(b)What were the statutory duties of this Body Corporate?
(c)Whose interests need to be protected under the scheme?
[68] In answering questions (a) and (b) it must be acknowledged at the outset that such causes of action have not been fully pleaded. I have only some of the necessary evidence to address them. Thus any comments I make must be classed as observations and not findings. That said, the purpose of answering these questions is to give context for assessing the Body Corporate’s ability to discharge the responsibilities it proposes to assume under the proposed scheme.
Do the facts establish a breach of the Unit Title Regulations?
[69] The Tory Street Block unit owners submitted there was an innate unfairness in the procedures utilised by the Body Corporate leading up to the advancement of the scheme. They argued that this has largely left them in the dark and that they were unable to have meaningful participation in the decisions the Body Corporate took. Regrettably, they did not refer me to any of the procedures mandated by the Unit Titles Regulations 2011 and how it is asserted these were breached in order to render any of the resolutions passed at these Body Corporate meetings ultra vires. There is no evidence to suggest that the Tory Street Block unit owners were not given notice of meetings. They could (and did on occasion) exercise their right to attend, although the impression I have gained from the evidence is that they did not take full advantage of those opportunities. Furthermore, they were provided with extensive information as set out in [61] including an exhortation to take their own independent legal advice.
[70] For example, much criticism was made by them of the settlement of the insurance claims being “done deals” and that they had no input into the decisions by the Body Corporate to accept the insurer’s two offers of settlement. But despite this, they were in attendance at the EGM on 12 July 2018 where the insurer’s agent presented the case for the insurers. They could have – but did not – attend the AGM on 27 August 2018 where the insurer’s original settlement offer in respect of Unit 29 was discussed.
[71] Furthermore, on 7 September 2018 they were sent an email about the two offers of settlement from the Body Corporate. The offer of settlement in relation to the flood was received by the Body Corporate on 28 August 2018. They were advised what had happened at the 27 August 2018 AGM. They were advised that their approval was sought before formal acceptance of the offers was given to the insurers.
[72] Despite their protests of fait accompli at the 11 October 2018 meeting, there was ample time for the Tory Street Block unit owners to have sought their own independent legal advice in the period 12 July 2018 to 11 October 2018. They had ample opportunity to challenge the insurers on the position for which they now contend.
[73] Although there is no evidence the actions of the Body Corporate were ultra vires, I am nonetheless left with concerns about the manner in which some of the processes were conducted by the Body Corporate. There are questions raised by the evidence that cause me sympathy with the level of distrust the Tory Street Block unit owners now have in the Body Corporate. Examples include the stop work instruction made without heeding the advice as to how to secure the structure; the paucity of legal advice obtained; the irregularity of meetings and the lack of urgency in early 2018; the management of its finances; and, in particular, the cavalier approach to ensuring the insurance proceeds were kept intact for application to the reinstatement. Finally, the failure to properly investigate, evaluate and then compare the full range of options provided to them by Mr Greenwood.
[74] My examination of the facts and the conclusions I have reached are of relevance in assessing the scheme. The Body Corporate’s past behaviour, and the
latitude it has taken in some respects, is the best predictor of its future behaviour. The scheme provides for significant discretion to repose in the Body Corporate. Discretionary elements reposing in the Body Corporate ought, in my view, to be kept to a minimum in any scheme.
What were the statutory duties of this Body Corporate?
[75] The Tory Street Block unit owners argued the Body Corporate had breached the following statutory duties to:
(a)repair and maintain common property (s 138);
(b)ensure that insurance was in place to keep insured all buildings and other improvements on the base land to their full insurable value (s 135(1));
(c)pursue its insurers for reinstatement of the Tory Street Block units on “a new for old basis”; and
(d)apply monies paid by the insurers towards reinstatement of the unit title development (s 136(4)).
[76] In considering the extent of the Body Corporate’s duties to unit owners the starting point is the Act. Section 84 sets out the powers and duties of the Body Corporate. Relevantly the section lists:
84 Powers and duties of body corporate
(1) The body corporate has the powers and duties set out in–
…
(g)section 105(4) (which requires the body corporate to comply with the body corporate operational rules):
(h)section 108 (which is the general power of delegation):
…
(n)section 135 (which relates to insurance of the buildings and other improvements on the land):
(o)section 136(4) (which relates to the application of insurance moneys in or towards reinstatement of the development):
(p)section 138 (which relates to repair and maintenance of the common property, assets designed for use in connection with the common property, infrastructure, and building elements and access for those purposes):
(q)section 206 (which relates to the provision of records and documents on request from a unit owner):
…
[77] Section 138 imposes the general duty to repair and maintain common property and building elements and infrastructure that relate to more than one unit. The roof and walls of the Tory Street Block damaged by Naylor Love fall into the latter category, and the obligation to repair the damage done to the Tory Street Block falls plainly on the Body Corporate.
[78] Sections 135-136 impose on the Body Corporate the obligation to insure “all buildings and other improvements on the base land to their full insurable value”. There can be no dispute that the Body Corporate fulfilled its obligation in this regard.
[79] There is no statutory guidance or fetter on how a body corporate is to pursue an insurer in the event of claim being made to repair damage. Thus, the fact that the Body Corporate took advice (albeit scant) and obtained the necessary resolutions to negotiate with their insurers in the manner they did is not a breach of any statutory duty.
[80] The only provision that fetters the Body Corporate’s exercise of its insurance rights is s 136(4), which provides for how money paid by an insurer under a principal insurance policy is to be applied. Section 136(4) says:
136 Insurance: principal insurance policy
…
(4)Money paid by the insurer under the principal insurance policy must be applied in or towards reinstatement of the unit title development unless the body corporate decides otherwise by special resolution at a general meeting.
[81] According to the Body Corporate’s administrator, approximately $114,182 of the insurance money remains in the contingency fund. The special resolution of the
25 October 2018 EGM provided that the insurance proceeds were applied to reimbursement of funds already expended on the Tory Street Block and future costs. The Body Corporate’s administrator said that, following the raising of $235,000 in levies pursuant to a resolution passed by the Body Corporate AGM on 28 March 2019, the balance of the contingency fund as at 3 March 2020 was $406,050.94.
[82] The evidence as to how these monies have been spent is unsatisfactory for two primary reasons. First, the genesis for the special resolution can be found in the minutes of the 8 August 2018 meeting where it is clear that the funds were earmarked to assist the Body Corporate out of a “tight” fiscal situation. I refer to paragraphs [49] and [50] herein. Secondly, the accounts presented to the Court by the Body Corporate were unsatisfactory.
[83] I have attempted a detailed analysis of the accounts myself but have encountered difficulties. First, there is no comprehensive set of audited accounts. Secondly, it is not entirely clear from what has been produced exactly how expenses are coded. It is therefore not clear what each expense relates to, and whether or not they are expenses that were accounted for in the calculation of the insurance pay-outs. In addition, it is clear that monies have been drawn down to pay expenses not authorised by the special resolution; for instance, the legal costs in relation to both the application for interim relief and for the prosecution of this proceeding. Counsel for the Body Corporate accepted these costs were unauthorised, and submitted they had instead been deducted from the levies paid into the contingency fund, rather than the insurance money. However, the precise situation remains unclear due to the nature of the accounts provided.
[84] There should be an independent examination of the accounts and reinstatement of any unauthorised expenditure to be applied to the reinstatement of the Tory Street Block in compliance with s 136(4). In addition, this raises a major concern about the Body Corporate’s ability (even with professional administrators to assist them) to manage funds levied appropriately and fairly.
Whose interests need to be protected under the scheme?
[85] Having dealt with the context for this proceeding I now turn to an examination of the scheme. I must, however, address one aspect of the Tory Street Block unit owners’ case. They asserted they should have preferential status before the Court. They do not. The Court in considering the fairness and appropriateness of the proposed scheme should have concern for the interests of all unit owners on an equal footing, and I approach my task that way.
The scheme
[86]The relevant provisions of the scheme provide:
1.3This scheme (the Scheme) governs repairs primarily to Units 24, 25, 28 and 29 (the affected Apartments) and to the carparks and storage areas below resulting from damage caused to the Building by a mixture of water ingress, earthquake damage, inherent building defects and damage caused by a large concrete block falling on the roof of Unit 29 from a crane while demolishing the neighbouring carpark building on 23 February 2017 (the Damage).
…
1.6 In order to effect the Repairs in full, it will likely be necessary to demolish Units 24, 25, 28 and 29 and completely rebuild them. This, in the Body Corporate’s view, is the most efficient and cost effective approach as opposed to further limited deconstruction and repair of those units.
…
1.8The Scheme fixes and apportions responsibility for the Costs (as that term is defined in Clause 4) incurred in carrying out the Repairs primarily based on the Units that will substantially benefit from the carrying out of the Repairs. The contribution of the owners of Units 24, 25, 28 and 29 (Affected Owners) is to be 80%, and apportioned on their respective relative utility interests. The remaining 20% contribution shall be borne by all other owners, also apportioned on their relative utility interests.
A schedule marked “C” shows the indicative cost splits between the owners based on the estimated cost of the Repairs being $2,626,000 inclusive of GST.
1.9There is no separate utility interest assessment so utility interests are the same as each Owner’s ownership interests.
…
1.10The Body Corporate resolved by an ordinary resolution at an Extraordinary General Meeting on 10 December 2018, which was approved by 100% of those Owners who voted, to apply to the High Court for an order under section 74 of the Unit Titles Act 2010...
…
3.1The term Repairs is to be given the widest possible meaning. The Repairs are generally to be completed in accordance with the outline plans and specification set out in the overheads produced by Inside Limited (Inside) a copy of which is annexed hereto and marked “E” (Plans and Specifications), or any amendment thereto that the Committee may approve as provided for by the Scheme.
3.2Repairs shall include the removal (including any demolition of the Affected Apartments) …
3.3For the sake of clarity, Repairs may include replacement works but shall not be limited to:
(a)Demolition and replacement of the affected apartments;
…
4.3 The anticipated Costs of the Repairs, as set out in the schedule attached marked “C”, are Costs that may be Levied and collected from the Owners in accordance with the provisions of the Scheme.
…
7.1The Body Corporate is hereby authorised to levy (Levy), and the Committee is authorised to collect from each Owner from time to time such money (Levies) as the Body Corporate deems necessary for undertaking, progressing or completing the Repairs …
7.2All such Levies shall be calculated in the proportions set out in Schedule C attached.
…
19.4No Owner shall have any claim of whatever kind against the Body Corporate or the Committee for any compensation, if payable, to an Owner’s tenant or to any subtenant of an Owner’s tenant, to the intent that Owners who tenant their Units, and tenants who subtenant their Units, shall have the sole responsibility for such tenancy or subtenancy and for any consequent liability to deal with their tenants or subtenants in the manner provided under the Scheme or the relevant tenancy agreement and otherwise seek to recover any such loss from their own insurers.
19.5No Owner, Owner’s tenant, Owner’s tenant’s subtenant, or any other occupier, in respect of any Unit, shall have any claim of whatever kind against the Body Corporate or the Committee for any loss of profits or savings, or for any indirect or economic consequential damages in the nature of loss of profit or loss of revenue, however caused, arising
out of or in connection with the performance or non-performance by the Body Corporate or the Committee of its rights, powers or duties arising out of and under the Scheme.
…
Assessment of the scheme using the Tisch principles
[87] I consider that for the reasons that follow the scheme should be rejected. The reasons for that can be summarised as:-
(a)The scheme does not in fact have broad support.
(b)The costs to be incurred are inexact and unreliable.
(c)The funding model is aspirational and impractical.
(d)The analysis of what constitutes common property including building elements for which the Body Corporate is responsible and unit title holders’ responsibilities has not been undertaken with the necessary forensic rigour.
(e)Past levies by the Body Corporate have not been apportioned fairly as between unit owners which would compound the unfairness of the scheme.
(f)Undue powers of discretion repose in the Body Corporate, whose past behaviour is concerning.
(g)There is a lack of representation of any of the Tory Street Block unit owners on the Committee potentially overseeing the rebuild.
(h)The deduction of unauthorised costs by the Body Corporate from the insurance proceeds.
(i)Alternatives that might provide better value were not properly investigated by the Body Corporate.
(j)The Body Corporate’s failure to relieve the Tory Street Block unit owners from a proportion of the debt due to the Body Corporate for unpaid levies and insurance costs from which they have enjoyed no benefit whatsoever for the last three years.
Does the scheme have broad support?
[88] The Body Corporate says that there is majority support for the scheme. It relies on voting which occurred at the EGM held on 13 December 2018.
[89] Mr Gill conceded that a number of the unit owners did not have any in depth understanding of what was being proposed at that meeting. There were others who were anxious and found it all too problematic and did not wish to be further informed. He said other options (other than a like for like rebuild) were too complicated for some of the unit owners to rationally consider so they were content to approve the motion. In essence, the motion was approved by default rather than well informed active choice by the unit owners.
[90] I note that none of the Tory Street Block unit owners were present at that meeting. The minutes record that 59.3 per cent of total units were represented. This then appears to be 16 of 27 units. On its face, this was a majority vote. However, only approximately 12 per cent of the finance required was being sought from those who voted in favour of the scheme.
[91] Adding to the problems, the first motion passed at the 13 December 2018 meeting referred to “remediation work”. Inadequate consideration had been given by the Body Corporate to the alternatives. The alternatives were demolition of the whole structure and the redevelopment of the airspace by the Body Corporate (obviously with professional assistance) or collapsing the existing Body Corporate structure and creating two separate Body Corporates and selling the Tory Street land and airspace to a developer for redevelopment. These alternatives were raised consistently by Mr Greenwood and do not appear to have been seriously debated. Thus, the options for those who did vote were in fact extremely limited.
[92] The second motion noted that the Body Corporate recommended an 80/20 apportionment of costs between the Tory Street Block unit owners and the other unit owners, but also that the final decision on apportionment would be left to the High Court. The explanatory note provided to unit owners two days prior to the meeting also noted that the High Court would be required to make the final decision as to cost allocation, so the message was being given that any vote at the meeting was not fully determinative of the issue. There was no analysis given as to how the 80/20 allocation was arrived at, or what risks might be assumed in the Court having the final decision.
[93] The combination of those two factors meant that those who voted would not have known that the Court could conceivably burden them with considerably more cost or that on a cost benefit analysis, the other alternatives provided by Mr Greenwood might yield less complex and costly options for all unit owners.
[94] The meeting attendees appear to have been told (it is not clear by whom) that the Tory Street Block unit owners would substantially benefit from the proposed like for like rebuild. Thus, the decision was made on the basis of an overstatement as to the benefits to be obtained by the Tory Street Block unit owners.
[95] Further, at the time of the EGM on 13 December 2018, the scheme had not yet been drafted.
[96] In the circumstances, I place little weight on the majority vote being well informed and fair in the circumstances. As Asher J said in LV Trust Holdings v Body Corporate 114424:9
When the majority of owners will financially benefit and the minority will financially suffer, the majority support may do no more than reflect that unfairness. The position is different where the issue is one of method or scope, or aesthetics. If, for instance, there is broad support for a particular colour scheme or design, that is likely to be highly persuasive. Not so when it is just a question of who out of the various owners should pay, with a division along payment lines.
9 LV Trust Holdings v Body Corporate 114424 [2012] NZHC 3578 at [61].
Is the scheme sufficiently detailed?
[97] I consider the scheme is intrinsically unworkable, first because the details of the plans and cost estimates are not sufficiently reliable nor robust. Secondly, undue discretion is given to the Body Corporate to amend the plans, specifications and costs. Thirdly, the proposed funding is aspirational only and unworkable in reality.
Proposed plans and costs
[98] The Body Corporate says the proposed plans together with the prepared costs estimates are suitably detailed. They say it was not reasonable to have the Body Corporate instruct the preparation of detailed designs (as opposed to the concept designs presented) until if and when it obtained legal authority from the Court to carry out the rebuild. They also say because it is a like for like rebuild and not a remediation the risk of cost escalation is “somewhat minimised”.
[99] The scheme is lengthy yet contains very little detail as to the proposed work. It states that the full extent of the work required will not be identified until work begins and the exterior cladding has been removed. The scheme provides that the repairs are generally to be completed in accordance with the outline plans and specifications annexed to the scheme, or any amendment that the Committee may approve. Yet, the outline plans and specifications comprise just two pages: one drawing of levels two and three of the Tory Street Block and one drawing of the entire complex.
[100] The estimated cost of the repairs is $2,626,000. This was an estimate made in March 2019. Another estimate procured is slightly higher at $2,640,480.60. The difference is immaterial in the overall scheme of things but does show that there is scope for more exactitude, particularly when the full extent of the likely repairs is not yet known.
[101] The estimated costs documentation also identifies a number of exclusions. A review of those exclusions indicates a reasonable number of significant additional potential costs, for example “Substructure (piles or increase the existing footings to the carpark ground)”.
[102] I place no store on the Body Corporate’s submission that cost escalation in this case is “somewhat minimised”. Previous estimates relied on by the Body Corporate in relation to other works done to the development have fallen far short of the actual costs ultimately necessary. For instance, the Body Corporate provided an estimate for demolition works in August of 2018 of $136,200. By the time of the interim relief hearing in December 2019 the estimate had more than doubled, increasing to $354,192 reflecting a more detailed assessment of the work required.
[103] The scheme appoints the Committee as agents of the Body Corporate and of each owner. It authorises the Committee to amend the plans and specifications as required. It also authorises the Committee to approve any repairs that it considers necessary or advisable and authorises the Committee to commit the unit owners to any and all repairs. Further it provides (except in the case of manifest error) the Committee’s decision as to what constitutes repairs as final and binding on all unit owners.
[104] Thus, the scheme effectively gives the Committee complete discretion to decide what works are carried out. This is of concern, given that none of the Tory Street Block unit owners or their representatives are currently members of the Committee. The existing Committee members are all members of the majority owning units in the other blocks and are being required to bear the lesser proportion of costs. On the face of it, the existing Committee members’ interests conflict with the Tory Street Block unit owners’ interests. The Body Corporate acknowledged in closing that it would be reasonable for the Committee to include a representative of the Tory Street Block unit owners.
[105] As currently drafted, the scheme has retrospective effect. It enables the Body Corporate to apportion the costs of work already undertaken on an 80/20 basis. Once the historic work is taken into account, the total cost to the respondents could be far more than 80 per cent of $2,626,000. This obviously not only goes to foreseeability and certainty of the scheme but to the very essence of fairness as well.
[106] For these reasons, I find that the full costs of the redevelopment have not yet been reliably assessed in the plan. I accept that cost estimation in this situation is not
an easy task, but more needs to be done to satisfy this requirement. Additionally, I consider there is real scope for further misunderstandings and dissension between the unit owners, given the innate complexities of this development as previously described. As a result, there is also scope for potential unfairness to all unit owners who have accepted these costings and these reassurances when past behaviour of the Body Corporate shows they may have difficulty in managing and funding works on any rebuild or redevelopment.
Proposed funding
[107] The Body Corporate proposes to fund the repairs by levying all unit owners on the 80/20 split already referred to.
[108] This sees two of the Tory Street Block unit owners Mr Barton and Mr Goh being levied approximately $500,000 each, and Ms Wong being levied approximately
$1 million. All other unit owners’ contributions range from a minimum of around
$10,000 to a maximum of approximately $152,000.
[109] For some inexplicable reason the proposed scheme does not require carpark or storage unit owners to pay any more to reflect the additional benefit they will receive from the proposed works. The carpark and storage unit entitlements make up approximately 16 per cent of the total unit entitlements in the Tory Street Block.
[110]Under the scheme the estimated value of the Tory Street Block will be
$3,224,000 after the block is rebuilt. The only independent valuation advice before the Court is that of a registered valuer, Mr Truebridge. Mr Truebridge estimated that the proposed scheme results in an overall loss of $12,000. He acknowledged he could not give a lending recommendation on the basis of that valuation.
[111] Three of the four apartments are already subject to mortgages, which are not accounted for in Mr Truebridge’s valuation of the scheme. While that leaves one apartment without any encumbrance, that apartment is owned by Mr Goh. Mr Goh is 79 years old. In March last year he suffered a stroke and is now living in the medical facility of a retirement village.
[112] Ms Wong has not been in good health since the untimely death of her son in May 2018. She suffers from memory lapses and lack of motivation to manage her property and finances. She resides outside the complex and, like Mr Goh, would have extreme difficulty in obtaining finance with no rental income and an existing mortgage.
[113] The evidence is silent as to Mr Barton’s circumstances, but in the overall assessment of the funding issue that is not critical.
[114] Thus, on the evidence before me there seems little reasonable prospect that the Tory Street Block unit owners could borrow together the $2,100,800 they would require as their proportion of the levies.
[115] In addition, this approach does not take into account that, as currently drafted, the scheme has retrospective effect. As earlier detailed, it enables the Body Corporate to apportion the costs of work already undertaken on an 80/20 basis. Once this “historic” work is taken into account, the total cost to the Tory Street Block unit owners could be far more than the 80 per cent of $2,626,000.
[116] If the Tory Street Block unit owners cannot meet their levies, the scheme cannot proceed as proposed unless the Body Corporate makes up any shortfall. It has been suggested that it could borrow to fund the scheme, but that seems unrealistic.
[117] The scheme permits the Body Corporate to borrow from unit owners or third parties. However, s 130(2) of the Act prohibits the Body Corporate from granting a mortgage, charge or encumbrance over the common property. The only independent evidence on the viability of third-party lending was that of Mr Truebridge, who said based on his experience banks would not lend to the Body Corporate in this situation.
[118] Mr Gill said he had not “directly” spoken with other unit owners about their willingness to lend to the Body Corporate in these circumstances. He suggested he might be prepared to lend but was not prepared to commit to such a course of action. It is a reasonable inference to draw that his attitude is likely indicative of that of other unit owners.
[119] The Body Corporate would most likely need to find a willing lender, despite being unable to offer any security. Unsecured loans for land redevelopment are not readily available. If available, they are expensive. Assuming funds were available at say, conservatively, 15 per cent, borrowing $2,100,800 would cost the Body Corporate approximately $315,000.00 annually.
[120] If the Tory Street Block unit owners are levied, but cannot pay, they could be sued. A judgment could result in a charging order against their units. Ultimately the units could be sold. But two out of three of them have prior mortgages and there seems to be little reasonable prospect that they represent valuable security for $2,100,800.
[121] The ultimate result of passing the scheme as it stands would therefore seem to be the sale of the apartments to cover the costs of the like for like rebuild, with no advantage to the Tory Street Block unit owners at all.
[122] To put the proposed funding into perspective, in the last three years the Body Corporate’s total operational levies have been $404,000, $280,000, and
$254,166.29. Long term maintenance fund levies add another $200,000, $220,000 and $80,000 respectively. On top of these expenses, insurance costs add approximately $300,000 annually, charged to each of the unit owners.
[123] It is difficult to see how the 23 units, apart from the Tory Street Block units, could tolerate the Body Corporate adding another $300,000 to their annual levy burden.
[124] In summary, it appears the proposed funding for the scheme is not sustainable in its proposed terms for all unit owners.
Does the scheme depart from the scheme of the Act and from the Body Corporate rules to such an extent as to make it unfair as between unit owners?
[125] The answer to this question is yes. A proper analysis of how the costs of repair ought to be apportioned as between the unit owners has not been done to the necessary extent. Past practice of the Body Corporate in their apportionment of earlier repairs and maintenance gives further cause for concern, as do their unauthorised deductions
from the insurance monies. Finally, the scheme prohibits compensation being paid to the Tory Street Bock unit owners.
Analysis of how costs of repair ought to be apportioned
[126] This is a unique case. Most schemes coming to the Court concern weathertightness remediation to an entire apartment complex or tower. Those cases are of extremely limited assistance in this case. The work proposed here is to be undertaken only to the four units in the Tory Street Block (save for carparks and accessory units). No other principal units are affected. The work is not, as in some cases, being undertaken to units whose roof or external walls provide weathertightness to other units adjacent or below. The carparks and accessory units gain some tangential benefit. The evidence on behalf of the Body Corporate is that they have and could function perfectly well and are unaffected by what exists above. That overlooks the evidence as to the damage done to the ceiling of the carpark by either the faulty plumbing or the weathertightness leaks.
[127] Mr Truebridge’s evidence and the cost estimates provided have not been directly analysed or been presented in a way in that forensically gives effect to the necessary analysis according to the principles of apportionment as set out in [19]. Therefore it is not readily ascertainable what precise benefits the Tory Street Block unit owners, carpark owners and accessory unit owners would receive. Nor is it readily identifiable what is the common property for which the Body Corporate would be generally liable. There is therefore no definitive basis for approving the 80/20 per cent allocation.
[128] A representative of the project manager was referred under cross examination to a table headed: “Cost allocation assumptions for re-build” which he described as a starting point for the proposed cost allocation between insurance, the unit owners and the Body Corporate. The table was prepared as a result of discussions between the project managers, the quantity surveyors and the administrators of the Body Corporate.
[129] The table apportions significant costs to the Body Corporate, including in respect of Mr Goh’s unit (Unit 28): 100 per cent of the roof costs, 100 per cent of the
external wall costs, 100 per cent of the external windows and doors, 75 per cent of the exterior works, 50 per cent of the structure and 70 per cent of the services.
[130] The proposed cost allocation set out in the table is more in line with the scheme of the Act and the principles that:
(a)the Body Corporate is responsible for common property and building elements (including the external and internal components necessary to the structural integrity of a building);10 and
(b)individual unit owners are responsible for their own units.11
[131] But even that table is incomplete and lacks explanation in the evidence as to how the estimates were calculated.
[132] Of the $2,283,296.40 (excluding GST) estimate provided by quantity surveyors:
(a)$65,000 (or three per cent) is for demolition;
(b)$317,760 (or 14 per cent) is for the external walls and finishes;
(c)$50,000 (or two per cent) is for exterior works;
(d)$65,675 (or three per cent) is for ceilings to carparks; and
(e)$763,956.40 (or 33 per cent) is for indirect costs – preliminary and general, contractors’ overheads and margin, contingency allowance and professional fees.
[133] These costs total approximately 55 per cent of the total estimate for works which the advisors to the Body Corporate have considered should be allocated to the
10 As defined in Unit Titles Act 2010, s 5.
11 Tisch v Body Corporate 318596, above n 2, at [29], citing Fraser v Body Corporate S63621 (2009) above n 6 at [34](b).
Body Corporate, or which provide no direct benefit to the Tory Street Block unit owners.
[134] The advice the Body Corporate relied on was fairly simplistic. Mr Gill initially said that Mr Greenwood advised that the Tory Street Block unit owners should bear
85 per cent of the cost and the other unit owners 15 per cent. He then said Mr Greenwood’s advice increased the percentage to be paid by the remaining unit owners to 20 per cent. Finally, minutes of the Committee held on 26 November 2018 state “From the meeting with John Greenwood a 70-80/20-30% split with the BC contributing 20-30% was suggested”. Yet Mr Greenwood’s earlier advice presented to all unit owners in his memorandum of 20 June 2018 said the range in allocation of costs runs from 60/40 to 80/20.
[135] I do not consider a proper process has established what the Act would prescribe as the responsibility of the Body Corporate and what would be the individual responsibility of each owner. Therefore, it is impossible to establish to what extent the 80/20 per cent allocation departs from the Act.
Past practice of the Body Corporate
[136] Another consideration in identifying the fairness or otherwise of the scheme is the past practice of the Body Corporate. The past practice has been to apportion the cost of the common property works (including weathertightness repairs) amongst all unit owners, on a unit entitlement basis (with no consideration of how the works benefit individual unit owners). Recent examples include the passenger lift installation in the Tower Block and the repair and seal of the north wall of the Tower Block, both completed in July 2018.
[137] Work benefiting individual units has also been funded by the Body Corporate on a unit entitlement basis, including repairing the skylights above Mr Gill’s penthouse units. It was not a focus of these proceedings to identify what the proper levies were on each unit holder and in particular what Mr Gill’s personal liabilities were in this regard. But there is evidence that he had to repay the Body Corporate for work done on his units and that the Body Corporate’s administrators assisted in a retrospective exercise in that regard.
[138] Counsel for the Body Corporate submitted the Body Corporate would promulgate a suitable resolution at the next AGM that would propose the recovery of the lift costs from the units that benefited by a distinct and ascertainable amount from the lift works. I place little weight on that submission as it is unenforceable. It is of interest however because it could be characterised as an acknowledgement that it was inappropriate to fund the lift works on a unit entitlement basis in the first place and that the Tory Street Block unit owners should, along with other unit owners, be recompensed accordingly. It is also another warning bell about the dangers of the scheme placing too much discretion and complex management in the hands of this Body Corporate.
Costs of this proceeding and unauthorised deductions from insurance monies
[139] Further issues of unfairness arise from the fact that the Body Corporate’s costs in this proceeding have been paid out on a unit entitlement basis (meaning the Tory Street Block unit owners have had to contribute to the applicant’s costs, in addition to having to pay their own legal costs). Counsel for Mr Goh submitted that the Body Corporate’s costs from 28 February 2018 to 31 January 2020 total
$121,451.34 ($112,005.81 legal and $9,445.53 expert). However, due to the issues with the accounts provided, discussed above at [83], it is difficult to confirm the exact amount the Body Corporate has spent on this proceeding.
[140] In addition to the fact that these appear to have been paid in part by unauthorised deductions from the monies received from the insurers, they are also unfair to the Tory Street Block unit owners because they have been compelled to pay their own legal costs to establish the obvious and inherent difficulties and impracticalities of the scheme proposed.
Compensation
[141] The Tory Street Block unit owners argue they should receive compensation for the loss of use of their units since November 2016. The proposed scheme contains no provision for compensation. To the contrary, it specifically prohibits any such claims in paragraphs 19.4 and 19.5.
[142] The Court has considered the payment of compensation proper where one or more owners are far more inconvenienced or disadvantaged than other owners. In LV Trust Holdings Ltd v Body Corporate 114424 the applicants lost the use of their unit for approximately 18 months whilst repairs were completed.12 This exceeded the five-week period for which other owners lost the use of their units. The applicants were therefore awarded compensation based on the market rental for their unit.
[143] On appeal in Body Corporate 114424 v LV Trust Holdings Ltd, the Court of Appeal said the High Court should not be encouraged to open the floodgates to a multitude of claims for compensation and “there will need to be a significant loss for a particular unit owner before a claim for compensation should be contemplated”.13
[144] Having regard to the principles and purposes of the Act, it seems to me that framing this as compensation for loss of use and requiring compensation on a market rental value is unfair to the other unit owners who would not share in the benefit of that to the Tory Street Block unit owners. But if it is framed as relief from the levies they must pay it is entirely fair that they receive some recognition for loss of use of their apartments. Indeed, this was considered by the Body Corporate very early on. In my view, it is right and proper that any scheme includes relief from appropriate levies (levies for which the Tory Street Block unit owners have received no benefit) both generally and also retrospectively in respect of those levies that have benefitted only some of the other unit owners as foreshadowed at [136].
Alternatives that might be considered
[145] From the outset Mr Greenwood’s advice to the Body Corporate was that there were two primary alternatives to the proposed like for like rebuild that the Body Corporate should consider:
(a)demolition of the actual structure and redevelopment of the airspace by the Body corporate; or
12 LV Trust Holdings v Body Corporate 114424, above n 9.
13 Body Corporate 114424 v LV Trust Holdings Ltd [2014] NZCA 21 at [59].
(b)collapsing the existing Body Corporate structure, creating two separate Body Corporates and selling the Tory Street land and airspace to a developer for redevelopment.
[146] The latter could be achieved with the consent of the Tory Street Block owners after negotiation as to appropriate compensation or by application to the High Court for orders under s 188(2) of the Act and s 339 of the Property Law Act 2007.
[147] The primary reasons Mr Greenwood gave for proposing these alternatives were first the significant development value in the site; and secondly and prophetically that the estimated cost of carrying out a like for like rebuild would be beyond the means of the Tory Street Block owners.
[148] Mr Greenwood promoted these options between March and July 2018. In early October 2018 the Body Corporate agreed with Mr Barton that he should look into the redevelopment option. In November he sought more time to pursue this option but was denied any real opportunity to do so as the Body Corporate had resolved by early December that the like for like rebuild and a s 74 scheme was the preferred option. In the limited time Mr Barton had been given to explore redevelopment he ascertained that this in all likelihood would only be attractive to developers if the site were severed from the Body Corporate and the land and airspace sold to them.
[149] It is not possible to tell from the evidence why the Body Corporate did not pay real attention to Mr Greenwood’s advice nor allow Mr Barton to pursue his enquiries further. It does appear at least one of the concerns the Body Corporate had was the potential diminution in value of five of the units in the Tower Block whose light and views may be adversely affected by a redevelopment as opposed to a like for like rebuild. But perhaps the answer lay in the fact that the Body Corporate Committee had made up its mind to proceed with the rebuild come what may rather than deal with the perceived additional complexities of make the forensic investigations, evaluations and comparisons that looking at Mr Greenwood’s other alternatives would have entailed.
[150] It is not clear to me that there was any proper consideration of other schemes yielding greater value, nor that there was any reasonable basis for prioritising the concerns of the Tower Block unit owners over those of the Tory Street Block unit owners.
[151] I note that the Body Corporate did not address the other alternatives and why the like for like rebuild was a demonstrably better option for all unit holders than either of Mr Greenwood’s other alternatives in any of its submissions.
[152] Counsel for Mr Barton submitted that the potential value of the Tory Street Block land, if sold, would be $918,540. This is based on a buildable volume of 5,670 cubic metres, calculated from the horizontal limit of the site of 210 square metres, and the maximum vertical limit of 27 metres. Mr Truebridge’s valuation of the two-storey airspace provides a valuation of approximately
$162 per cubic metre. Mr Truebridge never formally valued the site as a freehold site (taking account of its maximum vertical buildable limit of 27 metres) but confirmed under cross-examination that this figure could give a “rough starting point”. He did concede the value of the whole site may in fact be less due to principles of diminishing market and utility.
[153] There could of course be some disadvantages for other unit owners if the land were to be sold. For example, if the full 27 metre height limit were utilised by a new building, some unit owners may lose views. However, this needs to be balanced against the fact that unit owners would be relieved of the burden of their share of the Body Corporate’s 20 per cent of the scheme cost. It is also possible that even if the land is sold, a new building might only be low-rise and therefore not impact on other unit owners’ views.
[154] Without more fulsome valuations and without a cost benefit analysis ever having been undertaken by the Body Corporate’s advisors it is impossible to know whether the like for like rebuild was in fact the optimal approach for all unit holders had it proceeded some time ago. But the present reality is that it cannot be funded now.
Conclusion
[155] A root cause of the difficulties in this case lies in the oddity of the unit title development itself. The rather complex facts applied to the overlay of the Act are compounded by the physical structure of the unit title development not being ideally suited to unit title ownership.
[156] Management of such a complex set of competing interests was always going to be innately difficult, as was the management of the repairs to the devastated Tory Street Block.
[157] The history of the management of these complexities amply demonstrates that even if costs were fixed and funding was available, this Body Corporate does not appear to have the capacity to manage a redevelopment (allowing for professionals to undertake the actual oversight of any redevelopment) or even a like for like rebuild of the site with the requisite level of effectiveness. Nor does it have the confidence of all its unit owners to do so.
[158] The like for like rebuild cannot be funded on the terms proposed in the scheme. Thus, the scheme is doomed to failure.
[159] It appears to me that the alternative options posited by Mr Greenwood were worthy of greater consideration than given by the Body Corporate. I do not have the evidence to conclude that collapsing the Body Corporate into two Body Corporate structures and selling the land and airspace which the Tory Street Block occupies is the best option in the circumstances, but at face value it seems possible that it may be the only realistic way in which all the unit owners might be relieved of the ongoing difficulties they face.
[160] Having reached the conclusions above I am not able to settle the terms of any scheme.
Result
[161]The application to settle the proposed scheme is declined.
Costs
[162] The issue of costs is especially complicated in this proceeding due to the Body Corporate’s unsuccessful interim relief application, and the unauthorised application of insurance proceeds to the costs of both the proceedings for interim relief and this proceeding for settlement of the proposed scheme.
[163] If the parties cannot settle the issue of costs because of the complexity of the issues, time will need to be set aside for counsel to appear to make their submissions on costs (half a day).
Doogue J
Solicitors:
Greenwood Roche, Wellington Grieg Gallagher & Co, Wellington
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