Douglas v Body Corporate 102029
[2024] NZHC 3695
•6 December 2024
PUBLICATION OF UNREDACTED VERSION OF JUDGMENT OTHER THAN TO THE PARTIES/COUNSEL/COURT APPEALED FROM
PROHIBITED PENDING FURTHER ORDER OF THE COURT
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2023-404-002182
[2024] NZHC 3695
UNDER Section 141 of the Unit Titles Act 2010 IN THE MATTER
of an appointment of an administrator
BETWEEN
ANDREW ALEXANDER DOUGLAS, IAN STUART PETRY, LEONARD
ELLSWORTH KURPUIS and JOHN FRANCIS MATHER
ApplicantsAND
BODY CORPORATE 102029
First Respondent
Continued overleaf
Hearing: 6 November 2024 Appearances:
I J Stephenson for Applicants J Heatlie for First Respondent
S E Wroe and T Ashley for Second, Third, Fourth and Fifth Respondents
Judgment:
6 December 2024
INTERIM JUDGMENT OF ANDERSON J
[Redacted version]
This judgment was delivered by Justice Anderson on 6 December 2024 at 4.00 pm pursuant to r 11.5 of the High Court Rules 2016.
………………………………
Registrar/Deputy Registrar
DOUGLAS v BODY CORPORATE 102029 [2024] NZHC 3695 [6 December 2024]
MAUD JOHNS LIMITED
Second Respondent
JOANNE LEE UNDERDOWN
Third Respondent
VEER CHARAN
Fourth Respondent
LE MANS PROPERTY LIMITED
Fifth Respondent
TABLE OF CONTENTS
Para No
Background[4]
Statutory context [17]
Scheme of the UTA[17]
Cancellation of a unit title plan[24]
Sale of co-owned land[30]
Scheme for repair under s 74 UTA[33]
Sequence[38]
Material in support of the applications [40]
Respective positions of unit owners[43]
Owners in favour of demolition and rebuild[44]
Owners in favour of selling[45]
Information parameters [48]
Collective sale[49]
Costs of demolition and rebuild[50]
Resale value of units following rebuild[56]
Sale of individual units prior to any rebuild[57]
Analysis of the parameters[58]
Assessment of application under s 188 [62]
What is just and equitable in the context of these circumstances?[72]
Application for sale under s 339 [83]
Result[84]
[1] The Napier Street unit title development comprises seven residential units in Freemans Bay built in 1984. Six of the seven are terraced houses. The seventh is stand-alone, except for a wall adjoining another unit’s garage. The units have significant water ingress and structural issues. Due to a combination of the building issues and ground conditions, everyone agrees it is not economically viable to repair them. The buildings are presently uninsurable and realistically untenantable to third parties.1 There are health risks to occupiers.
[2] The seven owners are deadlocked as to what step to take. Three of the unit holders want to demolish and rebuild. Four do not. They want the unit plan to be cancelled and to sell the property “as is” to a developer. By ownership interest,
41.5 per cent of owners want to demolish and rebuild (“minority”). The remaining
58.5 per cent want to sell (“majority”). The unit holders each have compelling reasons for their individual stances.
[3] This interim decision addresses the issue of whether it is just and equitable that the unit plan be cancelled2 and an order for sale made;3 or whether there should be a scheme to rebuild.4 The detail of any orders will be the subject of a final decision if the orders cannot be agreed.
Background
[4] The owners have been exploring their options for ten years. Initial identification of watertightness issues led to progressively further bad news once it also became apparent that there were serious problems with ground stability complicated by public stormwater and wastewater services under the site. With various options being put up but not agreed over the years, it has already been a stressful and draining process.
1 One unit has been uninhabited since 2020.
2 Unit Titles Act 2010 (UTA), s 187.
3 Property Law Act 2007, s 339.
4 UTA, s 74.
[5] The chairman of the body corporate (Andrew Douglas) resigned in April 2023, frustrated with the situation. Mr Douglas had taken over from Lance Jimmieson as chairperson in June 2020 after Mr Jimmieson also indicated his desire to step down.
[6] An administrator, Anthony Woodworth, was appointed by the Court in October 2023 on application by the minority to make a recommendation on whether to rebuild or sell. The appointment was made with the majority’s somewhat reluctant consent. The recommendation made by his report to the Court on 27 March 2024 was that to demolish and rebuild was the better option for owners.5
[7] The background to his report is that David Reid Homes/MDR Design & Build Ltd (Reid Homes) provided costings and a concept design. The Administrator considered a rebuild on this estimate against the option of a collective sale of the property under a heads of agreement obtained by the majority. The Administrator’s recommendation was that further competitive costings be obtained on a detailed design with a view to returning to the Court with recommendations on tendering a rebuild contract and raising levies to pay for the work.
[8] The majority disagreed with the recommendation. They say they are not in a position to raise finance for the rebuild, and they would be forced to sell their units. They also emphasise risk and uncertainty associated with a project of this sort and the further years of stress it would entail.
[9] They engaged Roger Levie, the joint founder of the Home Owners and Buyers Association of New Zealand Inc who assessed the options of a collective sale (now with a formal offer from the potential purchaser) versus a rebuild. Mr Levie concluded a collective sale was the better course. The Administrator issued an addendum report on 22 April 2024 addressing Mr Levie’s analysis and reiterating his previous recommendation.
[10] The majority then applied for cancellation of the unit plan under s 188 of the Unit Titles Act 2010 (UTA) and an order for sale of the base land under s 339 of the
5 The administrator filed an initial report on 27 March 2024 and an addendum report dated 22 April 2024.
Property Law Act 2007 (PLA). The minority have responded with an application under s 74 of the UTA that the Court approve a scheme for reinstatement. Other interested parties (mortgagees) were served. They have taken no steps, so I regard their position as neutral.
[11] The minority want to pursue a scheme because they wish to stay living on the site and consider they will be worse off financially in the alternative scenarios. The scheme would involve the complete demolition of the structures and a proposed like-for-like rebuild. The same unit plan (footprint) is to be retained if possible.
[12] The backdrop for the applications is the condition of the unit title development. The minority say I should approach the application on the basis that a repair of the buildings is not impossible. Yet they agree, and the Administrator confirms, it is not economically rational or viable to repair. Putting aside the cost, remediation would involve the majority of the building elements, which are assessed as defective or near or past their durability (for example substantially decayed timber framing). A 2022 structural engineering report noted evidence of significant racking of internal and external walls that may need to be replumbed, linings replaced, restopped and redecorated. Remediation would also involve significant engineering work to the foundations and protecting or propping of the superstructure while that occurred.
[13] The above history has led to antipathy between the two owner factions. In a demolish and rebuild scenario, even getting to the stage of approved detailed plans, more certain costings and a building consent would require co-operation. That being the case, if a scheme is settled, the minority urge that Mr Woodworth be appointed to administer it.
[14] Mr Woodworth agrees. He submitted that a wide discretion is required to the appointed administrator under such a scheme in circumstances where owners are unable to agree and disputes among them will be inevitable.
[15]He deposes that:
Having regard to my involvement in the administration thus far, I have no confidence that the owners will be in a position to agree matters without disputes which will inevitably delay, if not derail, either [a collective sale or rebuild] process.
[16] These comments underline the discord evident among the body corporate owners and the prospect that in a scheme scenario there may need to be further supervision from the Court in the context of a lengthy redevelopment project.
Statutory context
Scheme of the UTA
[17] The UTA gives unit owners stratum estate in each principal and accessory unit which may be transferred or otherwise devolved.6 By s 7, among other things, a principal unit must contain a building or part of a building or be contained in a building (or be a carpark).
[18] The body corporate owns the common property7 (which includes the airspace above and land below the development).8 Together with the stratum estate in the unit, unit holders have beneficial interest in the fee simple in the common property in proportion to their ownership interest.9 They also hold an undivided share in the fee simple estate in all the units to which the owners are contingently entitled should the unit plan be cancelled.10
[19] The UTA provides for staged developments11 and hence creation of stratum estates in future development units identified on a stage unit plan.12 Subdivision in stages is affected by successive deposit of stage unit plans and a complete unit plan.13 In the context of a unit plan other than a stage unit plan, the subdivision of land is accompanied by a certificate to the effect that every building shown on the plan (if
6 UTA, ss 18 and 50.
7 Section 54(1).
8 Section 5(1).
9 Section 54(2).
10 Sections 180–182.
11 Part 2, subpt 3.
12 Sections 24–25 and 27.
13 Section 24(2).
any) has been erected and every principal unit meets the requirements of s 7.14 The UTA also provides for redevelopment which may require deposit of a new unit plan.15
[20] The bundle of rights afforded to a holder of stratum estate is circumscribed by the various rights and obligations in the UTA and the division of obligations between owner and the body corporate. There is provision for voting by majority on decisions of the body corporate and for a super-majority of 75 per cent for certain, more significant, decisions. There are provisions for minority and majority relief.16
[21] Owners are required to repair and maintain their own unit17 and not make additions or structural alterations that materially affect other units of the common property without body corporate consent.18
[22] The body corporate has the obligation to repair and maintain the common property and building elements and infrastructure that relate to or serve one or more unit (the cost of which is recoverable from unit holders).19 The obligation on the body corporate to repair and right to have access to repair is matched by an obligation on the unit holder to provide access for these purposes.20
[23] The UTA provides for cancellation of a unit plan;21 and for a Court ordered scheme for reinstatement where there is damage to or destruction of any building.22 These are the provisions of the UTA under which the applications before me are made.
Cancellation of a unit title plan
[24] The UTA provides two means of cancelling a unit plan. First, a body corporate can apply directly to the Registrar General of Land under s 177. The body corporate must agree to such by resolution of more than 75 per cent of eligible voters and give notice to all registered interests. Those in the minority can apply to the Court for relief
14 Section 32.
15 Part 2, subpt 10.
16 For example, ss 210 and 211.
17 Section 80(1)(g).
18 Section 80(1)(i).
19 Section 138(1).
20 Section 80(1)(a)(ii) and (iii).
21 Part 4, subpt 2.
22 Section 74.
on the grounds that the effect of the resolution would be unjust or inequitable for the minority, the onus being on them to prove this.
[25]The alternative mechanism for cancellation in s 187 provides:
187 Application to High Court for order of cancellation of unit plan
(1)Any 1 or more of the following persons may apply to the High Court for the cancellation of the unit plan:
(a)the body corporate for the unit title development to which the unit plan relates, after a special resolution to do so; or
(b)an administrator; or
(c)1 or more unit owners.
[26] The majority apply under s 187 for an order under s 188. Section 188 authorises the Court to cancel a unit plan if the Court is satisfied that it is just and equitable to do so having regard to the rights and interests of any creditor of the body corporate and every person who has an interest in any unit or base land. If the Court authorises the cancellation of a unit plan, it may impose any conditions as it thinks fit.23
[27] Under s 188, I am required to be satisfied that it is just and equitable to make an order cancelling the unit plan. The applicants must demonstrate affirmatively that it is just and equitable.24 Assessing what is “just and equitable” is to consider “equitable justice, the justice of the individual case”.25 The evaluation is to be conducted with regard to the scheme and purpose of the UTA.26
[28] Although cancellation is a last resort remedy, there are some cases in which the court has found such an order would be just and equitable:
(a)In Body Corporate 21016 v Respondents As Set Out in Schedule 1 to the Application Campbell J ordered cancellation of a unit title plan for
23 Section 188(3).
24 Lake Hayes Property Holdings Ltd v Petherbridge [2014] NZHC 1673, (2014) 15 NZCPR 590 at [47].
25 At [48].
26 At [48].
12 residential apartments.27 The apartments were uninhabitable, the unit owners could not afford to remediate and no unit owners formally opposed the application.
(b)In Lake Hayes Property Holdings Ltd v Petherbridge Panckhurst J held it was just and equitable to cancel a unit title plan of a former motel complex where one owner was against the site being sold for redevelopment.28 The body corporate had effectively been defunct for 30 years, the motel units were past their economic lifetime, the site required redevelopment and renovation was not a viable option.29
(c)In Dominion Finance Group Ltd (in rec and liq) v Body Corporate 382902 two blocks of apartments were damaged in the Christchurch Earthquake Sequence.30 The body corporate received a $16 million insurance settlement. As required by the UTA, the units were revalued for the purpose of distribution of the settlement. A valuer engaged by the body corporate concluded significant adjustments were required to the ownership interest percentages. Cancellation of the unit plan was supported by the majority but disputed by the minority. Fogarty J allowed cancellation to give effect to the parties’ original intention.
[29] The above cases demonstrate the range of circumstances in which cancellation may be justified. However, each case turns on its individual facts and none of the decided cases is directly comparable to the present.
Sale of co-owned land
[30] Upon cancellation of a unit plan, the body corporate is dissolved.31 Unit owners become co-owners of the land in shares proportional to their ownership
27 Body Corporate 21016 v Respondents as set out in Schedule 1 to the Application [2022] NZHC 255, (2022) 22 NZCPR 808.
28 Lake Hayes Property Holdings Ltd v Petherbridge, above n 24.
29 At [53].
30 Dominion Finance Group Ltd (in rec and liq) v Body Corporate 382902 [2012] NZHC 3325, (2012) 7 NZ ConvC 96-003.
31 UTA, s 185.
interests.32 Where the owners cannot agree, any owner who wants to sell the land must apply to the court for an order for sale under s 339 of the PLA. That section provides:
339 Court may order division of property
(1)A court may make, in respect of property owned by co-owners, an order—
(a)for the sale of the property and the division of the proceeds among the co-owners; or
(b)for the division of the property in kind among the co-owners; or
(c)requiring 1 or more co-owners to purchase the share in the property of 1 or more other co-owners at a fair and reasonable price.
…
[31] Section 342 sets out the matters a court must consider before making an order under s 339(1):
342 Relevant considerations
(1)A court considering whether to make an order under section 339(1) (and any related order under section 339(4)) must have regard to the following:
(a)the extent of the share in the property of any co-owner by whom, or in respect of whose estate or interest, the application for the order is made:
(b)the nature and location of the property:
(c)the number of other co-owners and the extent of their shares:
(d)the hardship that would be caused to the applicant by the refusal of the order, in comparison with the hardship that would be caused to any other person by the making of the order:
(e)the value of any contribution made by any co-owner to the cost of improvements to, or the maintenance of, the property:
(f)any other matters the court considers relevant.
32 Body Corporate 21016 v Respondents as set out in Schedule 1 to the Application, above n 27, at [19].
[32] The regime for ordering sale of land under ss 339 and 342 is broad and discretionary.33 There have been a number of cases where an application for cancellation of a unit plan is accompanied by an application for an order for sale of the land under s 339.34
Scheme for repair under s 74 UTA
[33] Section 74 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.” The section provides for a scheme to be settled by the High Court which may include provisions for “the reinstatement in whole or in part of the building or other improvement”.
[34] As I discussed above, a body corporate has responsibility for repairing infrastructure/building elements serving more than one unit and common property. The responsibility to repair individual units rests with individual unit holders. Where consensus between owners cannot be reached as to the appropriate steps to be taken to repair a building straddling these respective responsibilities, a scheme under s 74 becomes necessary to enable work to embrace both. A scheme also addresses division of cost responsibility for the work.
[35] The Court of Appeal in Tisch v Body Corporate No 318596 set out the approach to be taken to an application under s 74.35 Although Tisch was decided under the Unit Titles Act 1972, its approach remains relevant to the UTA 2010. There is a three-step test for determining whether a scheme should be ordered under s 74:36
(a)the Court must be satisfied that the building has damage or has been destroyed;
33 Body Corporate 177422 v Allen [2024] NZHC 121 at [10] citing, Bayly v Hicks [2012] NZCA 589, [2013] 2 NZLR 401.
34 See for example, Body Corporate 177422 v Allen, above n 33; Body Corporate 128255 (Cowan Street) v Walden-Jones [2023] NZHC 2223; Re Body Corporate 368694 [2021] NZHC 2731, (2021) 22 NZCPR 637; and White v VXJ Holdings Ltd [2019] NZHC 3095.
35 Tisch v Body Corporate No 318596 [2011] NZCA 420, [2011] 3 NZLR 679.
36 At [35] quoting, Fraser v Body Corporate S63621 (2009) 10 NZCPR 674 (HC) at [97].
(b)the Court must decide whether settlement of a scheme is appropriate in the circumstances; and
(c)the Court must decide what the terms of the scheme should be.
[36] Like cancellation of the unit plan, an order under s 74 has also been described as a remedy of last resort.37 The discretion of the Court in the settlement of the scheme is wide.38
[37] An order settling a scheme involving complete demolition and full rebuild is not novel. Such a course was directed in Body Corporate 212050 v Lee,39 however this was with the unanimous consent of the owners and occurred in context where the decision to do so occurred part way through remediation works. No authority was cited to me where such a scheme was settled on an opposed basis.
Sequence
[38] A preliminary issue arises as to the order in which I should address the applications. Section 74 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.” The emphasised words suggest that in the context of damage or destruction to the building/s, if cancellation of the unit plan is sought, that should be considered before turning to whether a scheme is appropriate. I propose to take that course.
[39] Of course, whether I am satisfied it is just and equitable to order cancellation is a contextual enquiry. It makes no sense to be blinkered in assessing that application without regard to the overall perspectives of the owners, the other option, and the likely outcomes of each scenario.
37 At [37].
38 Hannam v Body Corporate 126001 [2024] NZCA 274 citing, Body Corporate 198072 v Bank of New Zealand [2011] 3 NZLR 249 (HC) at [13] and Fraser v Body Corporate S63621, above n 36, at [88]–[91].
39 Body Corporate 212050 v Lee [2016] NZHC 2526.
Material in support of the applications
[40] As noted above, the Administrator has filed his report and an addendum. His recommendations are not binding on the minority, or the Court. The recommendations have been somewhat overtaken by the Administrator’s two further affidavits. There is also a further affidavit by Patrick Hanlon, a quantity surveyor, filed on behalf of the Administrator.
[41] I received affidavits from or on behalf of each of the owners outlining their respective positions and the consequences for them of the scenarios before the Court. The majority have also filed an affidavit from Mr Levie. Attached to the affidavits are various market appraisals and estimates of costs plus analyses of these by the Administrator and Mr Levie.
[42]I address three preliminary issues about the evidence:
(a)First, the Administrator and minority challenged that Mr Levie has qualified himself as an expert on matters on which he gives an opinion. They stress that he has not acted as an administrator, is not a valuer, and has no construction or quantity surveyor expertise. He does not purport to have this experience. However, Mr Levie does have significant experience in consulting on body corporate projects including remediation projects and situations where owners have determined to cancel the unit plan. He uses evidence from others (such as the quantity surveyor information) to assess the scenarios, as has the Administrator. He has experience as chairperson of a body corporate involved in a remediation project. I consider he does hold relevant real-world expertise in the areas in which he comments. His comments are evaluative in nature. I was assisted by the evidence.
(b)Second, I accept that all the owners’ positions are genuine. Mr Stephenson for the minority says the majority have insufficient corroborating documentation for their individual circumstances (such as financial statements). He says the evidence before me is insufficient to meet the “just and equitable” test for cancellation of a unit plan.
None of the majority was called for cross-examination.40 I am entitled to accept their sworn statements in assessing whether I am satisfied that the statutory test is met. I do so.
(c)Third, the majority contest the Administrator’s independence and objectivity. They point to his financial interest in being appointed to a scheme. I accept that the Administrator is independent, and that his recommendations were made objectively. However, I did find his affidavits and submissions somewhat overly adversarial, primarily in his position towards the majority’s views.
Respective positions of unit owners
[43]I now summarise the owners’ respective positions.
Owners in favour of demolition and rebuild
[44] The owners in favour of demolishing and rebuilding are John Mather (unit C), Mr Douglas (unit A) and Ian Petry (unit B).
(a)Mr Mather is a 76-year-old criminal barrister. He purchased his unit in 2000 and has lived there since. He bought the property because it was in an inner-city suburb. He plans to have a mortgage free house to fund retirement and to create an asset to pass to his children. He opposes a sale because “those seeking it want to walk away from their obligations as Body Corporate members to advance their interests to [his] detriment”.
(b)Mr Douglas purchased his unit in 2010 and he has lived there since 2013. Despite weathertightness issues including rotting carpet, holes in interior walls and rotting timber framing, Mr Douglas continues to reside at the property. He says a rebuild is preferable for him economically and socially and that the unique combination of factors that makes the unit suitable for him, including a swimming pool, will
40 One notice was issued but it was out of time.
not be replicated elsewhere in full. He wishes to retain the property he has shared with his partner for many years and to continue to live next door to Mr Petry, his brother-in-law.
(c)Mr Petry purchased his unit in February 2022 for $1,015,000. He was aware of the weathertightness issues and expected to pay further substantial levies to fund a rebuild. His purchase was heavily motivated by the opportunity to live next to Mr Douglas, his brother-in-law. He says Mr Douglas is the last of his immediate family and the opportunity to live close to him is important. Mr Petry does not currently live in the unit as he is travelling. He is opposed to a sale both because it would result in a financial loss for him and because the object of living next to Mr Douglas would be lost.
Owners in favour of selling
[45] The remaining owners are in favour of selling: Maud Johns Ltd (unit F), Joanna Underdown (unit E), Le Mans Property Ltd (unit G) and Veer Charan (unit D).
(a)Nicola Johns is the sole director of Maud Johns Ltd, which she says she set up to hold her retirement assets. The company purchased the unit in 1985. It is the company’s only investment. Because of its poor condition, the unit has been untenanted since 2020. Ms Johns estimates the loss from not having tenants between June 2020 to June 2024 as
$133,900. She says she supports the option to sell because that is the only option available to her, given her financial resources. She says she cannot afford the levies necessary to finance a rebuild and her bank has advised it would not lend to her company for the purpose of a rebuild.
(b)Ms Underdown purchased her unit in 2011. Since 2022 she has also rented a unit from Le Mans Property Ltd. Ms Underdown lives and works from the units. She deposes that her family’s financial position is “tight” and that redevelopment is not financially possible for them. She says she has no savings and there is “no way” she could fund the additional borrowing required for the development and associated
moving and rent costs. Even if she were able to borrow the money, she says she would be unable to service the debt. She describes the development proposal as “financially crippling”.
(c)Mr Jimmieson and his wife’s family trust acquired their unit in 2014 and subsequently transferred it to Le Mans Property Ltd in March 2016. This is a company in which he and his wife are the two directors and shareholders. The unit is the only property of the company, whose sole income comes from the rent of that unit. Mr Jimmieson deposes that the company is running at a loss due to an increase in costs and reduction in rental income due to the poor condition of the unit. He says he and his wife are actively preparing their family home for sale because they will shortly run out of funds to retain it due to the ongoing losses from the unit. He says he and his wife oppose the rebuild option because of concern about financial losses and the level of risk involved. Their bank has advised that Mr Jimmieson and his wife are unable to secure additional funding to refinance a rebuild project.
(d)Ms Charan purchased her unit in 1985. She currently lives in Australia and is unemployed because of her mental health. She currently earns
$750 per week in rent from the unit. This is a reduced rate due to its condition. She says she does not have the funds available to organise a rebuild and nor would she be able to pay a levy or service debt to fund such. She says the fear and uncertainty is difficult to deal with, given her mental health and that the situation is “unbearable”.
[46] The majority all express concerns at the significant stress of a rebuild scenario or (effective) forced sale.
[47] Mr Stephenson raised that the owners of two of the majority (Le Mans Property Ltd and Maud Johns Ltd) are corporate entities. He says I should put to one side the effects on the human agents behind them as they are not relevant interests under the UTA. The evidence is that the corporate entities may be forced to sell, hence there is
a substantial impact even focussing on the entity.41 Additionally, although the human factors affecting Ms Johns and Mr Jimmieson and his family are strictly separate from their company entity, I regard the jurisdiction under s 188 as capable of embracing these in the context of a closely-held single purpose investment vehicle.
Information parameters
[48] Several parameters feed into the outcome for the owners on scenarios of a cancellation/sale versus scheme/rebuild.
Collective sale
[49] The body corporate has received an offer for a sale of the whole property “as is” from a developer [redacted].42 The same developer has recently proposed [a lesser price] and has indicated its ongoing interest. The price is broadly within range of market value assessments by Jones Lang LaSalle (JLL) [redacted] as at February 2024; and by Bayleys [redacted] as at April 2024.
Costs of demolition and rebuild
[50] The Administrator’s first report adopted Reid Homes’ February 2024 costings [redacted] for the demolition and rebuild. In July 2024 Reid Homes provided a revised (higher) estimate [redacted] because the first was not for a build on the same footprint. The figures otherwise remained the same.
[51] Earlier estimates obtained for demolition and rebuild were well in excess of these. Strachan Group Architects (SGA) provided an estimate [redacted] in December 2022. DMP Quantity Surveyors subsequently provided an estimate, which on a like- for-like analysis with SGA came in at [a lower figure].43
41 Alternatively, there is the heavy impact of financing the rebuild, if that proved possible.
42 Interim redactions have been made to protect commercial sensitivity.
43 There is no provision in the DMP estimate for price escalation. The estimate is now 18 months old. The majority put in hearsay evidence through Mr Levie that the capital goods price index has increased by 3.9 per cent since March 2023. Reid Homes added $100,000 for price escalation for the period between April 2023 and February 2024.
[52] The Administrator engaged Mr Hanlon of BQH Ltd to undertake an independent assessment of the rebuild cost without reference to Reid Homes’ costs, but including additional civil work required for the foundations. As at 26 June 2024 he estimated rebuild costs [substantially in excess of the] Reid Homes’ [figure]. He met with Reid Homes to compare and discuss the estimates.
[53]The difference [between the two] is made up primarily of the following:
(a)Reid Homes’ construction estimate is 15 per cent lower. Mr Hanlon says this is due to Reid Homes’ more aggressive discounting based on its nationwide buying power.
(b)Mr Hanlon’s assumed professional costs of a straight 10 per cent of the construction cost [redacted] relative to Reid Homes using specific inputs. Mr Hanlon explains this as Reid Homes using more of their own design and supervision functions. Mr Hanlon concluded that the Reid Homes costs reflect its “competitive edge”.
(c)Mr Hanlon took a more conservative approach to contingency [redacted]. Mr Hanlon concluded that the Reid Homes’ lesser contingency was reasonable in the circumstances.
[54] In his affidavit, Mr Hanlon relayed that Reid Homes assured him that it could deliver within their proposal. He concluded the Reid Homes proposal was an attractive deal.
[55] The various analyses suggest that about $1,000,000 will be required from each owner to fund a demolition and rebuild.
Resale value of units following rebuild
[56] JLL provided a market estimate of the resale value of the units as rebuilt of upwards of $2,250,000 as at February 2024. A comparative market analysis by Prestige Real Estate also suggested a likely sale range of $2,000,000 to $2,500,000 as at March 2024. In July 2023, Ray White expressed the view that the value of new
build townhouses at the site was between $1,650,000 to $1,850,000 on the basis that the townhouses would be converted to freehold fee simple titles.
Sale of individual units prior to any rebuild
[57] Only one of the majority owners obtained an appraisal of what their unit might attract “as is”. Ms Charan obtained an appraisal at $600,000 to $800,000 as at May 2023. Individual sales of units “as is” will involve a significant discount which will only be partially mitigated if the sale is at a point where rebuild design and costings are more certain.44
Analysis of the parameters
[58] The above parameters were subject to analyses by the Administrator and Mr Levie to compare outcomes between the owners proceeding to demolish and rebuild as against a collective sale.
[59] Based on the sale price [offered by the developer], Mr Levie’s latest analysis showed there was a net total benefit of $415,876 from a collective sale. This adopted the Administrator’s assumptions apart from allowing for a contingency on the demolish and rebuild scenario of $695,616, being 9.8 per cent.45
[60] The Administrator’s response to Mr Levie removed any further contingency on Reid Homes’ estimate.46 He provided three different scenarios by reference to [differing] sale prices [based on the developer’s offers]. The Administrator’s summary depicted three of the owners being worse off in a collective sale scenario at [the developer’s best offer], with all being worse off, and progressively so, at the lower sale figures. [redacted]
44 JLL noted that the buyer market for each townhouse would be confronted with many risks, contingencies and reliance on all their new neighbours to collaborate. They advised that a buyer of an individual unit would heavily discount the offer price on each property.
45 Mr Levie added a 10 per cent contingency but this was applied to the Reid Homes pricing [redacted] which had been supplanted with Reid Homes’ [subsequent] estimate (for the same footprint), hence an effective contingency of 9.8 per cent.
46 The Administrator had adopted a $200,000 contingency in his first report on the earlier [redacted] pricing.
[61] With the above analyses and parameters outlined, I turn to the assessment under s 188.
Assessment of application under s 188
[62] Unlike some other statutory contexts where dissolution can be ordered on the “just and equitable” ground, the owners are not in a joint undertaking or enterprise.47 Nor are there solely commercial objectives. The respective units are “home” to a number of the owners, and others are investment properties for the purposes of security in their retirement by individuals directly or through single-purpose companies. The owners have disparate circumstances, values, aspirations, and expectations.48
[63] The owners here are all seriously adversely affected by the situation they find themselves in. Resolving the deadlock between them will involve forcing either the three in the minority or four in the majority to do something they vehemently do not want to do, contrary to what they see is in their best interests. That reality is the backdrop against which I need to assess whether I am satisfied that it is just and equitable to cancel the unit plan having regard to their rights and interests. I am sympathetic to the position of all owners.
[64] The submissions for the minority and the Administrator were to the effect that I should start with a presumption in favour of preserving the property rights of the owners who do not wish the plan to be cancelled. As the Administrator put it, the minority preference to “repair their building and continue to live in their units does not trammel on the property rights of other owners.” This is overly simplistic. Those who acquire unit title property do so on the basis of the statutory scheme which entitles them to rights to their stratum estate. But the statutory scheme also encompasses that in appropriate circumstances, the unit title can be cancelled against the will of other owners.
47 See, for example, the Partnership Law Act 2019, s 72(f) which permits the court to declare a partnership to be dissolved if it is just and equitable to do so; and Companies Act 1993, s 174(2)(g) which permits the court to put a company into liquidation if it is just and equitable to do so.
48 World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673 (HC) at [85].
[65] The relevant “presumption” is captured in the requirement that I need to be satisfied that the statutory test is met and the gravity of a decision to cancel the plan. Like the liquidation of a company, this is a last resort measure. The Administrator describes it as the nuclear option: but here it is a nuclear option in an exceptional context. This includes that the buildings are at the end of their economic life. The buildings are no longer fit for their intended purposes as residential units. The unit title development is going to be demolished with the site brought down to the base land. What is proposed is in substance the full redevelopment of the site, with the hope of building in accordance with the unit plan deposited on the original subdivision.
[66] The Administrator also submitted that I should approach the application on the basis that the provisions relating to repair would otherwise apply because what is proposed is not a capital improvement but an economic alternative to repair.
[67] As discussed earlier, s 138 addresses the body corporate repair obligations. Section 138(5)(c) provides that for the purposes of the section “the duty to repair and maintain includes (without limitation) a duty to manage (for the purpose of repair and maintenance), to keep in a good state of repair, and to renew where necessary.”49 In my view the word “renewal” in s 138 relates to the common property or building element in question for which the body corporate has responsibility. That is, there is an obligation to renew a building element or specific common property where that is necessary.
[68] I do not find it useful to consider the body corporate’s repair obligation as driving a preference for a scheme, as I understood to be suggested. The minority and the Administrator emphasise that the obligation of “repair” means that the body corporate cannot simply “do nothing” here. The Administrator also says that inability or unwillingness of individual owners to commit to repair has not been recognised as a sidestep of the obligation of the body corporate to do so. Both these propositions are correct. But that is not to say that the “principles relating to repair apply.” On any view, the circumstances of this case will require an application to the Court in the
49 This provision was introduced by the Unit Titles Amendment Act 2013 when s 138(2) was repealed which had stated: “The body corporate must maintain, repair, or renew all building elements and all infrastructure that relate to or serve more than 1 unit.”
absence of the requisite majority. There is more than repair by the body corporate required, in that the work extends to all the unit holders’ property. That directs me back to whether I am satisfied that it is just and equitable to order cancellation of the unit plan here where the damage is so extensive as to require a complete rebuild. I do not consider it steers me towards a scheme.
[69] In World Vision of New Zealand Trust Board v Seal, Heath J dismissed an application to cancel a unit plan. In doing so, he posited circumstances that might justify that course:50
[86] Nevertheless, circumstances might arise where it becomes necessary for the Court to intervene under [s 188]. If a building has deteriorated through inadequate maintenance or cannot through the unavailability of funds be maintained properly, an order might be sought because the building is no longer fit for its original purpose. Similarly, if a disparate group of proprietors, together comprising a body corporate, interact so dysfunctionally as to require intervention from the Court, the jurisdiction may well be exercised on similar principles to those applied in company or partnership law where deadlock ensues.
[70]Heath J held that cancellation was not justified because:51
This is not a case in which it is necessary for World Vision to demolish the office building for health or safety reasons. Neither is it a case in which the proprietors forming the body corporate are acting in a dysfunctional manner. While the [respondents] disagree with the [applicant’s] proposals, there is no deadlock of a type which would justify intervention from the Court.
[71] Those observations are prescient. Cancellation of the unit plan will drastically alter the property rights of the owners. However, it will do so in context where it is recognised by the parties that there is already required to be a drastic change in the parties’ opportunity to enjoy those rights, in light of the economic necessity to demolish and rebuild. The body corporate and owners find themselves in the position of developers, in circumstances where it is acknowledged that the body corporate will need to continue in administration to effect the development. There is serious dysfunction and antipathy brought about over almost a decade of indecision combined with the need for a complete rebuild. The building is not now fit for purpose and not economically viable to repair.
50 World Vision of New Zealand Trust Board v Seal, above n 48.
51 At [95].
What is just and equitable in the context of these circumstances?
[72] I am satisfied that it is just and equitable to cancel the unit plan in these circumstances having regard to the rights and interests of the owners for the above reasons and as I outline below.
[73] On the face of the Administrator’s analysis, on the delayed settlement offer received, of those who oppose sale only Mr Douglas is worse off financially in a sale scenario. On the other two sale price scenarios modelled the margin in favour of rebuild is relatively small for all but Mr Douglas. With respect to Mr Douglas, the David Reid estimate used for the analysis does not include any allowance for work associated with his swimming pool. Mr Hanlon allowed some $250,000 for this. Costs at that level would make a sale scenario a better financial option (although this estimate may have contemplated a complete pool rebuild).
[74] In any event, the Administrators’ fine analysis is also artificial given the uncertainties discussed below. The analyses are only as good as their inputs and those inputs represent only part of the story. The financial difference to the individual owners between rebuild or sale may well turn out the opposite way to that modelled. Mr Levie’s assessment demonstrates that adding 10 per cent to the cost side can change the economics. Moreover, an assumption that individual owners are better off in a rebuild scenario ignores the evidence that the majority owners cannot raise funds to complete it.
[75] I discussed the various parameters earlier. A range of uncertainties and risks bear on the two scenarios of rebuild and sale:
(a)Whether [either of the developer’s offers] will proceed, and if not, what price will be obtained for the land, is uncertain. The minority criticises the standing of the offeror company, although recent exchanges suggest the purchaser still wants to proceed and is a legitimate developer. The offer is also conditional [redacted] and has a sunset clause [requiring cancellation within 12 months of the agreement]. Even with those uncertainties, the offer does give some confidence as to value, whether it proceeds or not.
(b)Mr Hanlon’s opinion expresses some confidence in Reid Homes’ rebuild estimate. While that is comforting, estimates are just that. Moreover, there seems to me to be elements that create a risk of blow out:
(i)Reid Homes’ February 2024 costings provided $100,000 for pricing escalation since its original estimate it provided in April 2023. No further contingency for price escalation pending contract or commencement is provisioned.
(ii)Reid Homes’ estimate appears to be for a “base specification” on which I do not have detail.
(iii)Reid Homes may not have factored in provision for addressing the placement of stormwater services or risks around stormwater diversion.
(iv)The preliminary geotechnical advice the body corporate obtained back in February 2022 emphasised the need for detailed investigation of the ground conditions once the buildings were removed. That investigation involved only three bore tests. The earthworks and associated geotechnical consultancy fees are included in Reid Homes’ base costings and in a $200,000 contingency for earthworks. It may not have provided for any significant earthworks. There is an issue whether the costings will be sufficient.
Although estimates have been obtained, the majority’s concerns are valid that there has been insufficient provision or contingency included. I do not rest my decision on the specific issues in (i)-(iv) above.
(c)The analysis does not factor in the cost of financing the rebuild. This will impact the owners’ specific outcomes, which will vary depending on their individual position.
(d)The value of the units on completion is relevant to assessing the rebuild scenario. There are differing market appraisals [redacted] for value on completion, however what the position of the market will be at the end of a build process is uncertain.
(e)The sale price achievable for individual owners that will be forced to sell is uncertain. There will be a significant discount, even with some risk to a purchaser taken away with firmer costing. There is a prospect of several owners needing to sell if they cannot fund a rebuild, which is liable to further affect the realisable price.
(f)Whether the units can be lived in prior to sale/work being undertaken is uncertain. Owners continue to live there now despite their condition.
(g)Administrators’ fees and any legal disbursements going forward are not factored into the analyses I received on the position on a rebuild. Nor does the analysis include body corporate fees. The majority’s strong opposition to Mr Woodworth being appointed to administer any scheme is not a good platform for the discretion he is contemplated as having in the demolish and rebuild scenario. It creates a considerable risk of further Court process/supervision with the prospect of cost and delay. On the other hand, a new administrator would need to get up to speed, also resulting in cost and delay.
[76] In short, a crystal ball is required on both scenarios. However, in my view there is significantly more risk in the demolish and rebuild scenario. That is not surprising. Development involves risk. The demolition and rebuild places this risk on the owners whereas a collective sale now passes that to a developer.
[77] The minority say that uncertainty associated with a rebuild can be mitigated once a detailed design and fixed costing is obtained. They emphasise that a vote to proceed with a concept design was defeated by the majority, which could have given more certainty (at a cost of $48,950).
[78] Contrary to the minority’s submissions I do not agree this means the application for cancellation is premature. Rather, I have considered it as a factor going to whether I should grant the application. The possibility that proceeding to further design and pricing would alleviate some of the majority’s concerns has to be viewed in the context of further years of stress, cost and uncertainty and in light of the discord in the body corporate.
[79] Given the uncertainties on a rebuild scenario, the majority observe that, purely financially, an owner would be better off putting the necessary cost of a rebuild in a term deposit, rather than risk doing worse by using those funds on a rebuild. Although the situation of each owner is different, there is an opportunity cost in having
$1,000,000 applied to a rebuild. Money from a collective sale plus funds that would otherwise go to a rebuild could go to acquiring an alternative equivalent property. These points have some merit although do not factor in the human dimension:
(a)For the three resident owners who do not wish the plan to be cancelled and to instead rebuild, they may not find comparable properties elsewhere. On both scenarios they will lose their home because it will be demolished. If I cancel the plan and order a sale, their property rights will be extinguished and they will lose the place they wish to live in.52 The consequences of this are particularly acute for Mr Douglas and Mr Petry who prize living adjacent to each other.
(b)However, the four owners who wish to sell will face a significant loss on sale if they cannot afford the rebuild. Even if not forced to sell, they are forced into taking the risk of being a developer against their wishes. What is more, the ultimate decisions about that development will be in the hands of the Administrator.
[80] Mr Stephenson characterises the present position as the result of a failure by the body corporate to raise and deploy funds for long term maintenance over the years.
52 It has some relevance, although is not highly persuasive given the uncertainties, that the proposed purchaser of the property contemplates building units of a similar nature as are there already but with two secured covered carparks. The purchaser has advised that it would be happy to meet with those wishing to stay on site with a view to accommodating them.
He contends that longstanding owners such as Ms Charan and Ms Johns have extracted value over time by using the property and if funds were not paid towards repair and upkeep in the meantime, they should not be able to say they need cashflow to sell up. He says that the work could have been budgeted by setting up a sinking fund over the last several decades. I do not consider that how the owners have, or have not, budgeted towards funds for repair is material, in light of the type of issues affecting these buildings.
[81] Finally, I have had regard to the purposes of the UTA. The purposes include to provide for the ownership and management of land on a socially and economically sustainable basis and to preserve the integrity of the development.53 Here, the social cohesion of the owners of the Napier Street development has been lost. Neither option presents as a realistic way of ameliorating the division between the factions. The development is required to be taken down to its bare land state. The financial difference between the two options is sufficiently marginal: having regard to the uncertainties at play that there is no clear superior “economic sustainability” achieved by a scheme.
[82] In summary, while there are significant impacts of both a collective sale and a proposal to demolish and rebuild, there is a greater risk of a worse outcome for all in the rebuild scenario. The amenity, personal and social issues the minority raise are important. I am acutely conscious of the effect of my decision on those who wish to remain at the property. However, ultimately, I am satisfied the just and equitable course is to cancel the unit plan when the buildings are no longer fit for purpose, require a full rebuild, and there is significant hostility between the owners. It is also in favour of cancellation that the numerical and ownership interest majority favour cancellation (four of seven owners and 58.5 per cent of the ownership interests).
Application for sale under s 339
[83] Because of the nature of the analysis above, it is evident that I consider a sale order under s 339 of the PLA is appropriate. I have considered the factors in s 339. In particular, my assessment above takes into account the hardship that would be caused
53 UTA, s 3.
to the majority owners by refusal of the order, in comparison with the hardship that would be caused to the minority by making the order, in the overall circumstances in which such an order is being considered.
Result
[84] I have found that the unit plan should be cancelled under s 188 and an order under s 339 should be made. It is appropriate that I give the parties the opportunity to address issues consequential on this interim judgment to assess what level of agreement can be reached for detailed orders to be made.
[85] I direct that the parties file a joint memorandum or separate memoranda by 5 pm on Wednesday, 18 December 2024 proposing a process and timetable for next steps.
Anderson J
Solicitors: Lane Neave, Auckland
Court One, Auckland
Alexander Dorrington Limited, Auckland
Douglas v Body Corporate 102029 [2024] NZHC 3695
0
0
1