Body Corporate S90876 v Palmer Trading Limited
[2022] NZHC 146
•10 February 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2020-404-000941
[2022] NZHC 146
IN THE MATTER OF Declaratory Judgments Act 1908 and an agreement dated 15 April 2008 BETWEEN
BODY CORPORATE S90876
Plaintiff
AND
PALMER TRADING LIMITED
Defendant
Hearing: 06 December 2021 Appearances:
D G Hayes for the Plaintiff T J Rainey for the Defendant
Judgment:
10 February 2022
JUDGMENT OF VAN BOHEMEN J
This judgment was delivered by me on 10 February 2022 at 2.00pm Pursuant to Rule 11.5 of the High Court Rules
…………………………
Registrar/Deputy Registrar
Solicitors/Counsel:
Hunwick Law Limited, Hamilton Pidgeon Judd Law Limited, Hamilton FortyEightShortland Barristers, Auckland
BODY CORPORATE S90876 v PALMER TRADING LIMITED [2022] NZHC 146 [10 February 2022]
Introduction
[1] Body Corporate S90876 applies for a declaration under the Declaratory Judgments Act 1908 as to the validity of a Property Caretaking & Management Agreement (Caretaking Agreement) concluded on 15 April 2008 between the Body Corporate and Palmer Trading Ltd.
[2] The Caretaking Agreement relates to the caretaking and management of the property known as Aspen Villas at 9 Tui Street, Taupo, which is owned by the Body Corporate and was developed by persons associated with Palmer Trading.
[3] The Body Corporate says that the Court should declare that the Caretaking Agreement:
(a)was ultra vires from inception; or
(b)was valid only for an initial term of five years; or
(c)expires on 14 April 2023; or
(d)expires on 14 April 2028.
[4] The Body Corporate also says that the Court should declare a Variation of Property Caretaking & Management Agreement concluded on 15 March 2008 (Variation Agreement), which extended the term of the Caretaking Agreement, void and unenforceable or rescinded from a date the Court considers just.
[5] Palmer Trading opposes the declarations sought by the Body Corporate but has irrevocably waived its rights under the Variation Agreement. Palmer Trading cross applies for a declaration that the Caretaking Agreement is valid.
Relevant background
[6] Aspen Villas was re-developed in 2001 by Grenville Developments Ltd, a company wholly owned by Ian and Victoria Calvert, who are husband and wife and the sole directors of Grenville Developments. The Aspen Villas were subdivided into
17 principal units through the deposit of a unit plan in accordance with the Unit Tiles Act 1972 (UTA 1972).
[7] The initial Body Corporate Rules for the property were adopted on 22 June 2001 (2001 Rules) and registered with the District Land Registrar in accordance with s 37 of UTA 1972. The 2001 Rules largely consisted of the rules set out in sch 2 and 3 of the UTA 1972.
Initial operation of Aspen Villas
[8] According to Mark Calvert, a son of Ian Calvert and Victoria Calvert, the property was redeveloped as a motel complex, even though the individual units in the development were to be owned separately by investors. The concept was that unit owners would receive a share of the income generated by the motel business and would be able to use their units for a limited period each year as holiday homes, but primarily the units would be part of the motel operation.
[9] Initially, the motel business was operated by Kelbronard Investments Ltd, a company unrelated to Grenville Developments or the Calverts. Kelbronard Investments purchased Unit 17, which is occupied by manager of the complex and serves as the reception for the complex.
[10] By 6 November 2002, more than five of the units in the Aspen Villas had been sold to persons who were not associated with Grenville Developments.
[11] In 2003, Palmer Trading purchased the motel business and Unit 17 from Kelbronard Investments. The directors of Palmer Trading are Ian Calvert, Mark Calvert and Neil Calvert.
Body Corporate Rules replaced
[12] On 23 May 2004, the Body Corporate repealed the 2001 Rules and replaced them with new Body Corporate Rules (2004 Rules). The 2004 Rules replaced the rules set out in schs 2 and 3 of the UTA 1972.
[13]The 2004 Rules included the following:
2.3.The Body Corporate may:
…
2.3.9appoint and enter into agreements with the person appointed from time to time as a Caretaker and enter into a Caretaking Agreement with such person to provide for the management control and administration of the Building and the Common Property and the provision of the Letting Services which agreement shall require the Caretaker be the same person as the then Proprietor of the Manager’s Unit which agreement may provide amongst other things for:
2.3.9.1a term of five years with the Body Corporate having the power to renew any agreement from time to time with the Caretaker;
…
2.3.9.8 anything else which the Body Corporate agrees is necessary or desirable having regard to the operational and management requirements of the Body Corporate.
…
2.11Subject to any restriction imposed or direction given at a general meeting, the Committee may;
…
2.11.2 employ for and on behalf of the Body Corporate such agents and employees as it thinks fit in connection with the control, management, and administration of the Common Property, and the exercise and performance of [th]e powers and duties of the Body Corporate.
2008 AGM and approval and execution of Caretaking Agreement
[14] On 15 April 2008, the Body Corporate held its annual general meeting (2008 AGM). The minutes of the 2008 AGM record that Ian Calvert, Victoria Calvert, Mark Calvert and Neil Calvert were present “as per Attendance List completed by owners.”
[15] According to the minutes of the 2008 AGM, at that meeting the Body Corporate, among other things:
(a)elected an owners’ committee (Committee) comprising Neil Calvert, Mark Calvert and Ian Calvert;
(b)discussed the proposed Caretaking Agreement, ratified in principle the terms of the Agreement and agreed that the Committee would arrange for the execution of the Agreement;
(c)approved the budget for the operation of the Aspen Villas complex, which included payment of a Building Management Fee of $67,000; and
(d)discussed proposed amendments to the Body Corporate Rules and agreed that BCA was to register the amended Rules (2008 Rules).1
[16] Later that same day, the Committee executed the Caretaking Agreement with Palmer Trading. Mark Calvert and Ian Calvert signed for the Body Corporate. Neil Calvert and Ian Calvert signed for Palmer Trading.
What the Caretaking Agreement provided
[17] The relevant provisions of the Caretaking Agreement are set out in the Annex to this judgment.
[18]Among other things, the Caretaking Agreement provided that:
(a)Palmer Trading was appointed Caretaker of the Common Property and would undertake the Caretaking Services specified in a schedule to the Agreement for a period of five years from 15 April 2008;
(b)the Caretaking Agreement would be automatically renewed for three further five year periods commencing on 15 April 2013, 15 April 2018 and 15 April 2023;
1 In the event, the amended rules were not registered with the District Land Registrar until 5 May 2010.
(c)the Caretaking Fee for the first year was $67,000; and
(d)the Body Corporate could cancel the Caretaking Agreement only if the Caretaker defaulted on its obligations and failed to remedy the default within 14 days of notice of default being given, or if the Caretaker became bankrupt or insolvent, or ceased to own and occupy Unit 17.
Renewals of the Caretaking Agreement
[19] In accordance with its terms, the Caretaking Agreement was automatically renewed for five year terms in April 2013 and April 2018.
Unit Titles Act 2010 enters into force
[20] On 20 June 2011, the Unit Titles Act 2010 (UTA 2010) entered into force. The UTA 2010 repealed and replaced the UTA 1972.
The 2016 AGM
[21] On 16 May 2016, the Body Corporate held its annual general meeting for 2016 (2016 AGM). The minutes of the 2016 AGM record that Ian Calvert, Victoria Calvert, Simon Calvert, Jamie Steele, Jim Steele, Barbara Steele, Neil Calvert and Mark Calvert were present “as per Attendance List completed by owners.”
At the 2016 AGM, the Body Corporate, among other things:
(a)elected a Committee comprising Mark Calvert, Neil Calvert, Ian Calvert; Jim Steele and Simon Calvert;
(b)delegated to the Committee all the powers of the Body Corporate except those excluded by s 108 of the Unit Titles Act 2010.
The Variation Agreement
[23] The Variation Agreement was executed on 15 March 2017. The Variation Agreement was signed by Neil Calvert and James Steele for the Body Corporate and by Mark Calvert and Ian Calvert for Palmer Trading.
[24] The Variation Agreement amended the Caretaking Agreement to provide for the automatic renewal of the Caretaking Agreement for two further terms of 10 years commencing on 15 April 2028 and 15 April 2038.
[25] Although Palmer Trading maintains that the Variation Agreement was a valid exercise of the Body Corporate’s powers, Palmer Trading has waived the additional rights of renewal of the Caretaking Agreement provided for in the Variation Agreement.
Other developments
[26] At the Body Corporate’s annual general meeting in April 2019, Mr Hayes, who owns Unit M and represents the Body Corporate in the present proceeding, raised a question about the validity of the Caretaking Agreement.
[27] Following that meeting, Mark Calvert, the Chairperson of the Body Corporate and a member of the Committee for that year, sought legal advice on the lawfulness of the Caretaking Agreement. In summary, the advice received in May 2019 was that the Caretaking Agreement was inconsistent with r 2.3.9.1 of the 2004 Rules but that inconsistency did not render the Agreement void or unenforceable because r 2.3.9.1 was not a mandatory requirement for an agreement entered into under r 2.3.9.
[28] At an extraordinary general meeting held on 30 January 2020 (January 2020 EGM), the Body Corporate voted to remove the then Committee members from office and elected a new committee comprising Mr Hayes, Colleen Warin, Margaret Simmons and Terence Hart. The Body Corporate also resolved to cease further payments under the Caretaking Agreement.
[29] Following the January 2020 EGM, Palmer Trading continued to provide services under the Caretaking Agreement and to invoice the Body Corporate for those services. No payments have been made, however, by the Body Corporate. As at 10 September 2021, Palmer Trading had submitted invoices for $166,015.82 which remain unpaid. According to Mark Calvert, since September 2021, fees under the Caretaking Agreement have continued to accrue at a rate of $6,616.19 per month.
Legal proceedings
[30] In March 2020, Palmer Trading and interests associated with the Calverts brought a proceeding in the Tenancy Tribunal challenging the removal of the previous Committee members, the election of the new committee members and other resolutions adopted at the 2020 January EGM.
[31]In June 2020, the Tenancy Tribunal removed that proceeding to the High Court.
[32]Also, in June 2020, the Body Corporate brought the present proceeding.
[33] On 17 February 2021, Whata J issued a decision on the validity of the actions challenged in the Tenancy Tribunal proceeding.2
[34] In October 2021, Palmer Trading cross-claimed for a declaration that the Caretaking Agreement is a valid and enforceable contract.3
The questions at issue in this proceeding
[35] In its application dated 23 June 2020, the Body Corporate pleaded four causes of action as follows:
(a)the Caretaking Agreement was ultra vires the powers of the Body Corporate because its terms were contrary to the 2004 Rules;
2 Body Corporate S90876 v Palmer Trading Ltd [2021] NZHC 192, (2021) 21 NZCPR 836.
3 Palmer Trading, through its counsel, advised the Court that it no longer sought a declaration as to the enforceability of the Caretaking Agreement.
(b)the Body Corporate Committee breached its fiduciary duty to the Body Corporate in entering into the Caretaking Agreement;
(c)the Body Corporate Committee breached its fiduciary duty to the Body Corporate in entering into the Variation Agreement; and
(d)the Caretaking Agreement and the Variation Agreement are harsh and unconscionable and not in the interests of the owners of the units of Aspen Villas.
[36] At the hearing on 6 December 2021, Mr Hayes accepted that Palmer Trading had waived its rights under the Variation Agreement so that those aspects of the causes of action were moot.
[37] Mr Hayes also did not pursue the second cause of action regarding breach of fiduciary duty with respect to the Caretaking Agreement. As Mr Rainey, counsel for Palmer Trading submits, there is no authority for the proposition that a body corporate committee owes fiduciary duties to either the body corporate or the members of the body corporate. Accordingly, I take the second and third causes of action no further.
[38] Mr Rainey also submits that the Court has no jurisdiction to consider whether the Caretaking Agreement was harsh and unconscionable in terms of s 140(5) of the UTA 2010 because the section does not apply to the Caretaking Agreement. Mr Hayes contests that position.
[39]As a result, the remaining questions at issue are:
(a)Was the Caretaking Agreement ultra vires the powers of the Body Corporate under the UTA 1972?
(b)Does s 140 of the UTA 2010 apply to the Caretaking Agreement?
(c)If s 140(5) does apply, is the Caretaking Agreement harsh and unconscionable such that it should be set aside?
[40] Depending on the answers to the above questions, there are the following further questions:
(a)If the Caretaking Agreement is held to be ultra vires or harsh and unconscionable, what orders should the Court make regarding the validity of the Agreement?
(b)If the Caretaking Agreement is held not to be ultra vires or harsh and unconscionable, should the Court declare the Caretaking Agreement to be valid?
Was the Caretaking Agreement ultra vires the powers of the Body Corporate under the UTA 1972?
[41]It is well established that the ultra vires principle applies to bodies corporate.4
[42] As Muir J discussed in Body Corporate 401803 v Vermillion Wagener Ltd¸ the ultra vires principle can have two distinct aspects:5
(a)an amendment or addition to the body corporate rules that is ultra vires the powers of the body corporate under the UTA 2020; and
(b)the body corporate enters into a transaction or agreement or takes some other action that is ultra vires the body corporate rules.
[43]As Muir J also discussed:6
(a)amended or additional rules that are ultra vires have no effect and the default rules in the UTA 1972 or the UTA 2010, as the case may be, apply; and
4 See for example: Velich v Body Corporate No 164980 (2005) 6 NZCPR 143 (CA); Low v Body Corporate 384911 [2011] 2 NZLR 263 (HC); Body Corporate 396711 v Sentinel Management Ltd [2012] NZHC 1957, (2012) 13 NZCPR 418; Body Corporate 401803 v Vermillion Wagener Ltd [2015] NZHC 285, (2015) 15 NZCPR 758; Vermillion Wagener Ltd v Body Corporate 401803 [2015] NZCA 313, (2015) 16 NZCPR 483; Russmore v Body Corporate 345866 [2016] NZCA 418, (2016) 18 NZCPR 56.
5 Body Corporate 401803 v Vermillion Wagener Ltd, above n 4, at [62].
6 At [63] – [64].
(b)agreements or transactions entered into ultra vires the powers of the body corporate are void ab initio.
[44] The Body Corporate does not challenge the vires of the 2004 Rules, which both sides accept were the applicable rules at the time the Caretaking Agreement was concluded.7 The Body Corporate says, however, that the Caretaking Agreement was ultra vires the powers of the Body Corporate because r 2.3.9 of the 2004 Rules placed a restriction on the Body Corporate entering into a contract of more than five years and required that the Body Corporate should have the power to decide to renew any contract.
[45] In response, Mr Rainey says that the Committee clearly had the power under the UTA 1972 and under the 2004 Rules to appoint a building manager on such terms as the Committee saw fit. Mr Rainey also says that it is doubtful that the Body Corporate had the power to adopt r 2.3.9, because there was no equivalent rule in sch 2 of the UTA 1972 so it was not “incidental” to any existing power of the body corporate, and that, in any event, r 2.3.9 did not constrain the Body Corporate’s power to engage a caretaker on appropriate terms.
Analysis
[46]Mr Rainey’s submissions invite the Court to conclude either that:
(a)to the extent the Caretaking Agreement was not within the powers of the Committee under the 2004 Rules, that aspect of the Rules was ultra vires the UTA 1972 and has no effect; or
(b)the Caretaking Agreement was within the powers of the Committee under the 2004 Rules.
7 Because the 2008 Rules were not registered with the District Land Registrar until 5 May 2010, the 2008 Rules were not in effect when the Caretaking Agreement was executed. See s 37(7) of UTA 1972.
[47] Both propositions require analysis of the scope of the Body Corporate’s power to make rules and to direct in those rules the content of agreements entered into by or on behalf of the Body Corporate.
The Body Corporate’s power to make rules
[48] The 2004 Rules were adopted, and the Caretaking Agreement was concluded, when the UTA 1972 was in effect.
[49]Section 15(1) of the UTA 1972 provided:
The Body Corporate shall–
(a)subject to the provisions of this Act, carry out any duties imposed on it by the rules:
…
(f) keep the common property in a state of good repair:
…
(h) subject to this Act, control, manage and administer the common property and do all things reasonably necessary for the enforcement of the rules:
…
[50] Section 16 of the UTA 1972 provided that the Body Corporate had all such powers as are reasonably necessary to enable it to carry out its duties under the Act and under its rules.
[51] Section 37(2) of the UTA 1972 provided that, subject to any amendment, repeal of or addition to the rules set out at schs 2 and 3 of the UTA 1972, the rules applicable to the Body Corporate, were those set out at those schedules.
[52] Section 37(3) of the UTA 1972 empowered the Body Corporate to add to, amend or repeal the rules in sch 2 but only by unanimous resolution of the owners of the units.
[53] Section 37(5) of the UTA 1972 provided that any amendment of or addition to any rule must relate to the control, management, administration, use or enjoyment of
the units or the common property, or to the powers or duties of the Body Corporate (other than those conferred or imposed under the Act). However, it also provided that no powers or duties could be conferred or imposed by the rules which were not incidental to the performance of the duties and powers imposed on the Body Corporate by the Act.
[54] In Velich v Body Corporate No 164980, the Court of Appeal confirmed that a rule that appreciably expanded the existing powers and duties of a body corporate could not fairly be regarded as merely “incidental” to those existing powers and duties.8 In Russmore v Body Corporate 345866, the Court of Appeal confirmed that “incidental” means “naturally attached to, or arising from, or naturally appertaining to any of the duties and powers set out in the Act.”9 In Russmore, the Court of Appeal also confirmed that the existing powers and duties of a body corporate are those set out in the UTA 1972 and the default rules.10
[55] The question for consideration, therefore, is whether r 2.3.9 of the 2004 Rules was properly made or whether it was ultra vires the Body Corporate’s powers.
Was r 2.3.9 ultra vires?
[56] Because the control, management and administration of the Common Property is one of the Body Corporate’s duties as specified in s 15(1)(h) of the UTA 1972, there can be no doubt that the Body Corporate had the power to make rules for that purpose. That is also confirmed by the language of s 37(5) of the UTA 1972. In addition, r 11(b) of the default rules in sch 2 of the UTA 1972 provided expressly that the Body Corporate may employ agents and employees in connection with the control, management and administration of the Common Property.
[57] Rule 2.11.2 of the 2004 Rules repeated r 11(b) of the default rules verbatim. As Mr Rainey says, the Committee had the power under that rule to employ Palmer Trading to perform the services provided for under the Caretaking Agreement and had been authorised to do so at the 2008 AGM.
8 Velich v Body Corporate No 164980, above n 4, at [31].
9 Russmore v Body Corporate 345866, above n 4, at [38].
10 Ibid.
[58] However, the general power conferred by r 2.11.2 must be subject to the specific provisions of r 2.9.3 which authorised the Body Corporate to enter into a caretakers agreement and indicated the matters that such an agreement may address – in particular, the term of the agreement and the right of the Body Corporate to renew the agreement.
[59] While r 2.9.3 may not have been strictly necessary given the breadth of r 2.11.2, that does not mean the rule was ultra vires. It is a rule directly related to one of the Body Corporate’s functions. In specifying the matters that may be included in a caretakers agreement, in particular the term of the agreement and the possibility of renewals, the rule clearly addresses matters that naturally appertain to the Body Corporate’s duty to control, manage and administer the common property. The term of a management contract and whether there can be rights of renewal are clearly incidental to that duty. In addition, the rule constrains rather than expands the powers conferred under r 11(b) of the default rules and r 2.11.2.
[60] For these reasons, I am satisfied that r 2.3.9 was not ultra vires the Body Corporate’s powers at the time it was made. The next question, therefore, is whether the Caretaking Agreement was ultra vires the Body Corporate’s powers under r 2.3.9.
Was the Caretaking Agreement ultra vires r 2.3.9?
[61] Mr Rainey submits that r 2.3.9 provides a broadly permissive power and does not prevent the Body Corporate from contracting on other terms as negotiated between the Body Corporate and the appointed building manager. I do not agree. I do not accept that the use of “may” in the opening words of r 2.3 or the phrase “which agreement may provide amongst other things for:” in r 2.3.9.1 permit the body corporate to enter into an agreement that contains provisions that are outside the scope of the authorising language in r 2.3.9.1. The use of “may” in both instances is permissive in the sense that the Body Corporate is not required to enter into any caretaker agreement and is not required to agree to a term of five years. But in setting out the matters that any agreement, if entered into, may provide for, the rule was setting out relevant parameters for any such agreement. For these reasons, I consider that the evident intent of r 2.3.9.1 was that the Body Corporate could not enter into a caretakers
agreement of more than five years and could not enter into a caretakers agreement under which it does not retain the right to decide whether to renew the agreement for any new term.
[62] Mr Hayes says that the Caretaking Agreement effectively bound the Body Corporate for 20 years. As a practical matter, that is correct. However, in form, the agreement was for an initial term of five years. The Agreement itself states that it will be automatically renewed at the end of each five year term unless the Caretaker gives notice of its intention to terminate or the Body Corporate terminates on one of the prescribed grounds in cl 12. Only one of those grounds operates at the election of the Body Corporate – where there has been a default by the Caretaker – and even that is highly circumscribed. The Body Corporate has no ability simply to decide that it does not want to renew the Agreement at the end of each term. That is, the Body Corporate has no power to decide whether to renew the agreement or to terminate the agreement without cause after five years.
[63] In these respects, I am satisfied that the Caretaking Agreement is inconsistent with r 2.3.9 – which was the legal advice given to Mr Calvert in May 2019. However, for the reasons already set out, I do not agree with another aspect of that legal advice, namely that 2.3.9.1 was not a mandatory requirement for an agreement entered into under r 2.3.9.
[64] Nor do I accept that r 2.3.9.8 provides any basis for the Body Corporate to enter into an agreement outside the scope of r 2.3.9.1. In its own terms, r 2.3.9.8 authorises the Body Corporate to do “anything else” which the Body Corporate agrees is necessary or desirable for the operation and management requirements of the Body Corporate. The words “anything else” must mean anything not dealt with in rr 2.3.9.1
– 2.3.9.7. They do not authorise the Body Corporate to enter into an agreement that was inconsistent with rr 2.3.9.1 – 2.3.9.7.
[65] For these reasons, and even if it is accepted that the Agreement was valid in as much as it provided for an initial term of five years, I am satisfied that in agreeing that the Agreement would be automatically renewed and in accepting that it had no right
to terminate other than for cause, the Body Corporate entered into an arrangement that was outside the scope of the powers conferred by r 2.3.9.
[66] As Heath J discussed in Low v Body Corporate 384911, if a body corporate acts beyond the powers of the relevant Act and its rules, it is acting ultra vires.11 That is so, even if the relevant rule is only incidental to a body corporate’s existing powers and duties under the UTA 1972 and the default rules.
[67] Lastly, and for the sake of completeness, I note that Mr Rainey did not pursue in argument the alternative proposition advanced in the legal advice obtained by Mark Calvert in May 2019. The advice was that, even if the Caretaking Agreement was not consistent with r 2.3.9.1, it had been retrospectively validated by the Body Corporate when the Body Corporate approved the Variation Agreement. There are two evident difficulties with that proposition: the Variation Agreement itself was clearly ultra vires r 2.3.9.1 and there is no evidence that the Variation Agreement was ever approved at a formal meeting of the Body Corporate.
[68] I find, therefore, that, in providing for automatic rights of renewal after the first five year term and in not providing the Body Corporate any scope to terminate the agreement at the end of the initial and subsequent terms, the Caretaking Agreement was ultra vires the powers of the Body Corporate. I address the consequences of that finding after I have considered the Body Corporate’s second substantive challenge, namely that the Caretaking Agreement was harsh and unconscionable and should be set aside under s 140(5) of the UTA 2010.
Does s 140 of the UTA 2010 apply to the Caretaking Agreement?
[69] Because the Body Corporate’s fourth cause of action is based on s 140(5) of the UTA 2010, it is necessary to consider whether that section applies and, in that context, the definition of “control period” in s 6 of the UTA 2010. It is also appropriate to have regard to s 139.
11 Low v Body Corporate 384911, above n 4, at [29].
Sections 6, 139 and 140 of the UTA 2010
[70]Section 6 of the UTA 2010 provides:
6. Meaning of control period
(1)In this Act, control period, in relation to a unit title development, means the period beginning on the date that the unit plan is deposited creating the unit title development and ending on the date described in subsection (2).
(2)The date referred to in subsection (1) is the day after the last date on which, were a vote of the body corporate to be held, the original owner, or one or more associates of the original owner, or the original owner together with one or more associates of the original owner would be entitled to exercise 75% or more of the votes of the body corporate when the following are taken into account:
(a) the — (i)
number of principal units owned by the original owner or an associate or associates of the original owner; or
(ii)
share of the total ownership interest of all units as assigned under section 38(1) that is held by the original owner or an associate or associates of the original owner:
(b)
the —
(i)
number of principal units where the original owner, or an associate or associates of the original owner, hold proxies to vote; or
(ii)
share of the total ownership interests of all units where the original owner, or an associate or associates of the original owner, hold proxies to vote:
(c)
the —
(i)
number of principal units in respect of which the owners of those units have a contractual obligation to the original owner, or an associate or associates of the original owner, to vote in a particular way; or
(ii)
share of the total ownership interests in all units in respect of which the owners of units making up that share have a contractual obligation to the original owner, or an associate or associates of the original owner, to vote in a particular way.
(3)
…
[71]Section 139 of the UTA 2010 provides:
139Original owner’s obligation in relation to service contracts
(1)This section applies if a body corporate enters into a service contract for the unit title development before the date that the control period ends.
(2)The original owner and any associate of the original owner who is a member of the body corporate during the control period must exercise reasonable skill, care, and diligence and act in the best interests of the body corporate, as constituted after the date that the control period ends, in ensuring that—
(a)the terms of the service contract achieve a fair and reasonable balance between the interests of the service contractor and the body corporate as constituted after the date that the control period ends; and
(b)the terms are appropriate for the unit title development; and
(c)the powers able to be exercised, and functions required to be performed, by the service contractor under the service contract —
(i)are appropriate for the unit title development; and
(ii)do not adversely affect the body corporates ability to carry out its functions.
[72]Section 140 provides:
140Compensation for, or termination of, service contracts
(1)This section applies to a service contract—
(a)to which the body corporate of a unit title development is a party; and
(b)that was entered into before the date that the control period ended in relation to the unit title development concerned.
(2)The appropriate decision-maker may, on the application of the body corporate, require a person, or, as the case may be, persons, described in subsection (3) to pay compensation to the body corporate if it appears to the appropriate decision-maker that the body corporate has suffered loss or damage because that person has, or, as the case may be, those persons have, failed to comply with section 139.
(3)The persons referred to in subsection (2) are—
(a)the original owner:
(b)an associate of the original owner who was a member of the body corporate during the control period.
(4)An application under subsection (2) must be made within 3 years after that date that the control period ended.
(5)The appropriate decision-maker may, on an application made by the body corporate, make an order terminating the service contract if it appears to the appropriate decision-maker that the contract is harsh or unconscionable.
[73] Mr Rainey says that s 140, including s 140(5), plainly applies only to a contract entered into prior to the end of the control period as defined in s 6. He says that conclusion is apparent both from the language of the section and from its evident purpose. Mr Rainey says that Mark Calvert’s evidence establishes that the control period ended before the Caretaking Agreement was entered into. Mr Rainey also says that, in any event, the Caretaking Agreement is not “harsh and unconscionable” as that term was interpreted by Woolford J in Sentinel Management.
[74] Mr Hayes says that s 140(5) confers a general power to cancel a contract that is harsh and unconscionable and that the similarities between the agreement that was found to be harsh and unconscionable in Sentinel Management and the Caretaking Agreement are prolix. Mr Hayes also relies on Sentinel Management for the proposition that the time limits in s 140 do not apply to s 140(5).
Analysis
[75] As a preliminary point, I note that s 229 of the UTA 2010 confirms that s 140(5) applies to service contracts entered into before the entry into force of that Act. It is clear, therefore, that s 140(5) can apply to the Caretaking Agreement provided the Agreement comes within the terms of the section.
[76] As Mr Rainey submits, ss 139 and 140 are intended to constrain an original owner, that is, the developer of the unit title development, from abusing their position and powers during the period when the original owner alone or in conjunction with associated parties, has a super-majority in the body corporate and, unfettered, could enter into any service contract that they liked.
[77] Section 140 empowers a body corporate to make two different types of application in circumstances where it is alleged that the original owner, alone or with associates, did not comply with s 139(2):
(a)Under s 140(2), a body corporate may apply for an order that compensation be paid by an original owner or an associate of an original owner who was a member of the body corporate during the control period if it appears that the body corporate has suffered loss because those persons did not comply with s 139.
(b)Under s 140(5), the body corporate may apply to have a service contract set aside on the grounds that it was harsh and unconscionable.
[78] As Woolford J observed in Sentinel Management, an application under s140(2) seeks to hold the original developer to account, whereas s 140(5) is directed against the service provider.12
[79] Section 140(4) provides that any application under s 140(2) must be made within 3 years of the end of the control period. That limitation does not apply to an application under s 140(5), as Woolford J confirmed in Sentinel Management.13 However, there was no discussion in Sentinel Management as to whether s 140(5) can be read as falling outside the constraints of s 140(1), in particular s 140(1)(b), which provides that the section applies in respect of a service contract that was entered into before the date that the control period ended.
[80] Given the opening words of s 140(1), there can be no doubt that s 140(1) applies to all of s 140, including s 140(5). It follows that this Court has no jurisdiction under s 140(5) if the Caretaking Agreement was entered into after the end of the control period.
12 Body Corporate 396711 v Sentinel Management Ltd, above n 4, at [241] – [242].
13 At [232] – [245].
What was the control period for the Aspen Villas development?
[81] In his affidavit sworn on 11 September 2020, Mark Calvert provides evidence and supporting documents that show that:
(a)the control period for the Aspen Villas development began at least by 2 November 2001 with the issue of 17 titles;
(b)by 6 November 2002, titles to Units 5, 6, 7, 16 and 17 had been transferred to persons who were not associates of Grenville Developments or the Calverts; and
(c)at 6 November 2002, the unit entitlements for Units 5, 6, 7, 16 and 17 comprised 29.75 per cent of the total ownership interest in the development.
[82] As a consequence, it is clear that from 6 November 2002, Grenville Developments and persons associated with Grenville Developments, namely the Calverts, could not exercise 75% or more of the votes of the body corporate. In accordance with s 6 of the UTA 2010, therefore, the control period had ended by that date, which was considerably earlier than 15 April 2008, the date the Caretaking Agreement was executed.
[83] The Body Corporate has not challenged this evidence and Mr Hayes does not contest Mr Rainey’s analysis regarding the ending of the control period.
[84] I am satisfied, therefore, that the Caretaking Agreement was executed after the end of the control period. As a consequence, s 140(5) of the UTA cannot apply. It follows that the Body Corporate’s fourth cause of action cannot succeed, irrespective of the terms of the Caretaking Agreement. In these circumstances, it is unnecessary for me to consider whether the Caretaking Agreement is harsh and unconscionable in terms of s 140(5).
What orders should the Court make regarding the validity of the Caretaking Agreement?
[85] As discussed at [43] above, the standard position is that agreements or transactions entered into ultra vires the powers of the body corporate are void ab initio. However, as Muir J observed in Vermillion Wagener, management agreements are not per se ultra vires. It is their specific terms that may be challenged.14 In Low, Heath J severed from a management agreement terms that he considered were ultra vires the Body Corporate’s powers.15 Having regard to the analysis of McHugh J in Humphries v Proprietors Surfers Palms North Group Title Plan 1955,16 a judgment of the High Court of Australia, Heath J was satisfied that the ultra vires terms were not so material that they could not be severed from the agreement.17
[86] In its amended notice of opposition, Palmer Trading accepted that any term or condition of the Caretaking Agreement which is ultra vires the powers of the Body Corporate could be severed from the Agreement. Mr Hayes agreed with this point in his submissions.
[87] Had the challenge to the Caretaking Agreement been brought before the end of the first term, that is, before 13 April 2013, I am satisfied that it would have been appropriate to have severed from the agreement the provisions for automatic rights of renewal, in particular cl 2.2. Those provisions affected the extent of the agreement but were not essential to the nature of the agreement. However, since the Caretaking Agreement has already been renewed twice in accordance with cl 2.2, I see little purpose in severing the clause and related provisions. That clause is the principal reason the Agreement has continued in effect.
[88] In these circumstances, I am satisfied that it is appropriate to make the second of the alternative declarations sought by the Body Corporate, namely that the Caretaking Agreement was valid only for an initial term of five years. As a consequence, the Caretaking Agreement expired on 14 April 2013.
14 Body Corporate 401803 v Vermillion Wagener Ltd, above n 4, at [71].
15 Low v Body Corporate 384911, above n 4, at [92] – [95].
16 Humphries v Proprietors Surfers Palms North Group Title Plan 1955 (1994) 179 CLR 597 (HCA) at 618 – 622.
17 Low v Body Corporate 384911, above n 4, at [95].
[89] I make no determinations as to the other consequences of this declaration. Those consequences were not addressed in the application or in submissions.
Other questions
[90] Given the above conclusion, the cross-application by Palmer Trading is dismissed.
[91] I do not discuss and make no findings on the voting issues canvassed in Mr Hayes’ submissions or on the matters addressed in the affidavits of Ms Waren. Those questions fall outside the scope of the declarations sought by the Body Corporate.
Result and declaration
[92] I grant the application brought by the Body Corporate and make the following declaration:
The Caretaking Agreement executed by Body Corporate S90876 and Palmer Trading Ltd on 15 April 2008 was valid only for an initial term of five years.
Costs
[93] Although it succeeded in only one of its four causes of action, in the normal course, the Body Corporate would be entitled to costs on a 2B basis because it succeeded in its principal application; namely, the obtaining of a declaration that the Caretaking Agreement is no longer valid. However, because the Body Corporate was represented by its chair, Mr Hayes, there may be a question as to whether the usual costs rules should apply.
[94] If the parties are unable to agree costs, they may submit memoranda of no more than 5 pages.
[95] Any memorandum on behalf of the Body Corporate should be submitted by 3 March 2022.
[96] Any memorandum on behalf of Palmer Trading should be submitted by 17 March 2022.
G J van Bohemen J
Annex: Relevant provisions of Caretaking Agreement
1.Definitions
In this Agreement unless the context otherwise requires:
…
Caretaker’s Suite means Unit 17 of the Unit Plan comprising a residence and a reception area;
…
Caretaking Fee means the annual fee payable by the Body Corporate to the Caretaker for the Caretaking Services;
…
Further Term means the following periods:
ia term of 5 years commencing on [15/4/2013] and expiring on [14/4/2018];
iia term of 5 years commencing on [15/4/2018] and expiring on [14/4/2023];
iiia term of 5 years commencing on [15/4/2023] and expiring on [14/4/2028];
…
Term means a term of 5 years commencing on the 15th day of April 2008 and includes any renewal of the Term.
2.Appointment and term
2.1Appointment
The Body Corporate appoints the Caretaker and the Caretaker accepts the appointment as the caretaker of the Common Property on the terms and conditions of this Agreement and for the Term.
2.2Automatic renewal
This Agreement shall be automatically renewed for the relevant Further Term unless:
(a)the Caretaker gives to the Body Corporate 3 months notice in writing prior to the commencement of the relevant Further Term of the Caretaker’s intention to terminate the Agreement on that date; or
(b)the Body Corporate terminates this Agreement under clause [10].18
2.3Terms and conditions of further term
(a)If this Agreement is renewed the renewal shall be on the same terms and conditions in this Agreement except that the Caretaking Fee for the first year of the relevant Further Term shall be calculated in accordance with Clause 5.3(b).19
(b)There is no requirement for the parties to execute a new Agreement for any Further Term.
…
10Termination by Body Corporate
10.1Termination
This Agreement may be terminated by the Body Corporate by notice in writing to the Caretaker in any of the following events:
(a)If the Caretaker defaults the performance of the obligations of the Caretaker under this agreement and fails or neglects to remedy the default for a further period of 14 days after notice in writing has been given to the Caretaker by the Body Corporate specifying eh default and clearly stating what has to be done by the Caretaker to remedy the default.
(b)If the Caretaker is a natural person and becomes bankrupt, is convicted of an indictable offence; or is committed pursuant to any legislation relating to mental health.
(c)If the Caretaker is a company, and an order is made or a resolution is effectively passed, for the winding up of the Caretaker (other than for the purposes of amalgamation or reconstruction) or if the Caretaker suffers the appointment of Receiver or Provisional Liquidator or if an Administrator is appointed.
(d)If the Caretaker ceases to be the owner and occupier; or the Caretaker is a corporation and the Approved Employee ceases to be the occupier of the Caretaker’s Suite.
18 While the text of the agreement refers to cl 12, it is common ground that the correct reference is to cl 10.
19 The reference to cl 5.3(b) is also in error but has no bearing on this judgment.
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