OM Hardware Ltd v Body Corporate 303662
[2015] NZHC 190
•17 February 2015
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2013-409-1729 [2015] NZHC 190
BETWEEN OM HARDWARE LIMITED
First Applicant
AND
N R SKJELLERUP Second Applicant
AND
BURGUNDY FLEUR INVESTMENTS LIMITED
Third Applicant
AND
T R BROWN and CAMBRIDGE TRUSTEE SERVICES LIMITED Fourth Applicants
AND
D C NOBES Fifth Applicant
AND
PANDORA PARNASSUS INVESTMENTS LIMITED Sixth Applicant
AND
BODY CORPORATE 303662
First RespondentAND
BBS GROUP ENTERPRISES LIMITED Second Respondent
AND
OURWAY TOWER LIMITED Third Respondent
Hearing: 9 and 10 February 2015 Appearances:
J V Ormsby and SMK Hoffman for Applicants
J E Bayley for RespondentsJudgment:
17 February 2015
JUDGMENT OF DUNNINGHAM J
OM HARDWARE LIMITED AND ORS v BODY CORPORATE 303662 AND ORS [2015] NZHC 190 [17 February 2015]
Introduction
[1] Chamber Towers was one of many older commercial buildings in the central business district of Christchurch which had to be demolished following the Canterbury earthquakes. Fortunately the building was adequately insured and the owners of the building were indemnified for their loss. They have received an insurance settlement which, with interest accrued, exceeds $5 million. They do not wish to rebuild the building, but to sell the land and go their separate ways.
[2] The building was a unit title development, having been subdivided into unit titles in 2002. There is no dispute that the unit plan should be cancelled under s 188 of the Unit Titles Act 2010 (the 2010 Act). However, a dispute has arisen between the owners of the two commercial units, and the owners of the six residential units, as to their relative ownership interests.1 Until that is resolved, the insurance proceeds cannot be fully distributed.
[3] The residential owners say the ownership interests recorded on the unit title plan have been incorrect since that plan was deposited in 2002. They seek a reassessment of the ownership interests to reflect the market value of the units as at
21 February 2011.
[4] The commercial owners say that the original ownership interests should remain in place, but that if reassessment is ordered, it should not apply to the distribution of the insurance proceeds.
[5] The essential question for this Court to determine is whether, on the cancellation of the unit plan following the destruction of the premises, it is just and equitable to order a reassessment of the parties’ ownership interests for the purpose of determining their entitlement to the insurance proceeds and, in due course, to the
proceeds of sale of land.
1 I use the term “ownership interest” throughout, being the terminology of the 2010 Act, although under the 1972 Act the equivalent term was “unit entitlement”.
Issues
[6] Helpfully the parties are agreed on the issues which will determine this question. These are:
(a) whether, as a condition of cancelling the unit plan under s 188(2) of the 2010 Act, it is appropriate for the Court to direct, pursuant to s 188(3) of the 2010 Act, that the ownership interests for deposited plan 303662 be reassessed;
(b)whether it is impracticable for reassessment to occur due to the demolition of the building that is the subject of the unit plan;
(c) whether the applicants are estopped from seeking reassessment of the unit entitlements as a condition of cancellation;
(d)if the Court were to order that a reassessment should occur upon cancellation:
(i)the appropriate valuation to be adopted for the purpose of reassessment;
(ii)whether new ownership interests should be applied for the purpose of distributing the insurance funds held by the First Respondent;
(iii)the impact, if any, the reassessment would have on body corporate levies and expenses incurred by the parties to date;
(iv) the impact, if any, the reassessment would have on the
respective parties’ land entitlements; and
(e) whether there should be any order for costs.
How did the dispute arise?
[7] The unit plan for Chamber Towers was deposited on 16 May 2002. The original ownership interests were assessed by the firm Gregson and Associates, who determined the ownership interest of each unit as follows:
(a) unit A 6.01 per cent; (b) unit B 45.11 per cent; (c) unit C 7.93 per cent; (d) unit D 8.19 per cent; (e) unit E 8.19 per cent; (f) unit F 9.98 per cent (g) unit G 5.89 per cent; (h) unit H 8.70 per cent.
[8] This meant that the relative ownership interests of the commercial and residential units was as follows:
(a) units A and B (“the commercial units”) comprised 51.12 per cent of
the total ownership interest; and
(b) units C to H (“the residential units”) comprised 48.88 per cent of the
total ownership interests.
[9] There is no dispute that the relative ownership interest of each owner as at
2002 was calculated simply on the floor area of each unit, rather than on that unit’s relative value. I accept that this contravened the requirements in s 6 of the Unit Titles Act 1972 (“the 1972 Act”) which requires such interests to be fixed on the basis of the “relative value of the unit in relation to each of the other units”. The
valuation evidence I heard was unanimous in saying that the relative floor area of a unit was not an appropriate indicator of its relative value.
[10] The minutes of the Body Corporate’s annual general meetings first recognised this issue in November 2003, where it was recorded that the owner of the commercial units had had a meeting with a solicitor to “discuss re-allocation of unit entitlements”.
[11] In 2004 the Body Corporate obtained a valuation from the firm Fright Aubrey, which was to “assess the Unit Entitlements for the property”. That firm concluded that the commercial units made up 32.31 per cent of the total ownership interest and the residential units the remaining 67.69 per cent. The same firm did a further assessment in March 2006 which maintained approximately the same relative
valuations.2
[12] The issue of the need to reassess the allocations was aired at each of the following three annual general meetings of the Body Corporate and, in 2006, appeared to get as far as instructing a surveyor to prepare a new Unit Title Plan incorporating the revised assessments. No witness at this hearing could shed light on why the process did not proceed at that stage.
[13] The second respondent then purchased unit A in May 2008 and the third respondent purchased unit B in August 2008. These two respondents are related entities, with BBS Group Enterprises Limited owning nearly 20 per cent of the shares in Ourway Tower Limited and the two companies having the same directors,
Mr Paul Bradley and Mr Jon Webb.3
[14] Chamber Towers was severely damaged in the earthquakes of
4 September 2010 and 22 February 2011 and had to be demolished.
2 With the two commercial units making up 32.15 per cent of the total ownership interest and the six residential units, the remaining 67.85 per cent.
3 This accounts for the common position of the second and third respondents, even though, on the reassessment proposed by the applicants, the second respondent’s ownership interest would increase as well.
[15] The Body Corporate held a material damage policy with IAG NZ Limited which indemnified it for earthquake damage to Chamber Towers. The insurer engaged Colliers International New Zealand Limited to assess the market value of the units as at 21 February 2011. That valuation, carried out in September 2011, arrived at valuations which meant that, at 21 February 2011, the commercial units made up 38.15 per cent of the ownership interest by value and the residential units the remaining 61.85 per cent.
[16] Subsequently the residential unit owners instructed Ford Baker, another firm of valuers, to assess the correct relative values of the units in Chamber Towers. On
30 July 2013 Ford Baker completed a valuation which assessed the relative value of the units, both as at the date of the original assessment in 2002 and immediately prior to the February 2011 earthquake. As at 2002, the residential units were considered by Ford Baker to make up 75.28 per cent of the ownership interest, and the two commercial units the remaining 24.72 per cent. As at 21 February 2011, the relative values of the commercial and residential units were assessed at 38.52 per cent and 61.48 per cent respectively, noting that the value of the commercial units, relative to the residential units, had increased at a greater rate between 2002 and
2011.
[17] On 13 August 2013, the Body Corporate settled its insurance claim, with the agreement of all owners, and received a payment reflecting the total sum insured of
$4,720,000. Because, by then, there was a dispute as to how the settlement proceeds should be distributed, they were deposited in the trust account of the Body Corporate’s solicitor. A sum has been paid out pursuant to a deed of interim distribution, but otherwise the settlement proceeds remain undistributed while this issue is resolved.
[18] Since the insurance settlement was received, the residential owners have also engaged another experienced valuer, Mr Peter Mahoney, to provide a further valuation and to comment on the practicality of doing a retrospective valuation, which is what is required in the present circumstances. Mr Mahoney considered the commercial units made up 37.18 per cent of the total ownership interest by value and the residential units comprised the remaining 62.82 per cent.
[19] When the ownership interests under the various valuations are compared, as set out in the table below, three observations can be made. First, the Gregson assessment used when the unit titles were created stands out as departing significantly from all the other valuations in ascribing a very high relative value to the two commercial units. Second, if one leaves aside the Gregson valuation, the commercial units have progressively increased in relative value when compared with the residential units. Finally, the relative values of the commercial units and the residential units as at February 2011 are remarkably consistent, with a variation of
only 1.34 per cent between the Mahoney and Ford Baker assessments.
Valuation Commercial Units
Residential Units
Gregson (2002)
51.12%
48.88%
Ford Baker (2002)
24.72%
75.28%
Fright Aubrey (2004)
32.31%
67.69%
Fright Aubrey (2006)
32.15%
67.85%
Colliers (2011)
38.15%
61.85%
Ford Baker (2011)
38.52%
61.48%
Peter Mahoney (2011)
37.18%
62.82%
The respective parties’ positions
[20] The applicants, being the owners of the six residential units, say that the problems with the initial allocation of ownership interests were recognised from the outset as evidenced in the Body Corporate minutes. However, rectifying that mistake under the 1972 Act meant the deposit of an entirely new unit plan. That required the agreement of all the owners, and it can be assumed from the fact it did not proceed, that the impediments to doing that were just too great. However, the
consequences of the Canterbury earthquakes brought the issue into sharp focus again.
[21] As it is clear that the original allocation of ownership interests was flawed, they say the “just and equitable” approach mandated by s 188 of the 2010 Act now in force means that the ownership interests should be revalued, at least for the purposes of distributing the settlement proceeds on cancellation of the unit title plan. They say that any unfairness to the owners of the commercial units who have shouldered the lion’s share of Body Corporate fees in the past can, if necessary, be addressed by reimbursing them for any overpaid fees. In any event, they say these comprise relatively small amounts compared with the entitlements on the insurance settlement.
[22] In opposing the application, the second and third respondents say that they acquired the property, at least in part, in reliance on having a majority of the ownership interests and that this was an important factor in the decision to purchase as it ensured they had control of the Body Corporate.4 They have paid Body Corporate fees accordingly and rents for their tenants were set taking into account the share of the Body Corporate fees which had to be paid. Higher rents might have
been charged had the Body Corporate levies been less. They therefore say that they have ordered their affairs in reliance on the status quo and it would undermine certainty of property rights and the reasonable expectations of owners if the distribution of insurance money was not in accordance with the existing assessment of ownership interests. In short, they resist a reallocation of the ownership interest on cancellation of the unit plan if it is to apply to the distribution of the insurance proceeds.
Relevant law
Statutory framework
[23] The application is brought under s 188 of the 2010 Act which provides that a unit owner may apply to the High Court for the cancellation of a unit plan.
[24] The relevant parts of that section provide:
4 The First Respondent, the Body Corporate, understandably takes a neutral position.
188 Cancellation of unit plan by High Court
…
(2) The High Court may authorise that the unit plan be cancelled if—
(a) the High Court is satisfied that it is just and equitable that the body corporate be dissolved and the plan cancelled having regard to—
(i) the rights and interests of any creditor of the body corporate; and
(ii) the rights and interests of every person who has any interest in any unit or in the base land or in any part of the base land; and
(b) no principal unit in the unit title development to which the plan relates contains a subsidiary unit title development.
(3) If the High Court makes a declaration authorising the cancellation of a unit plan under subsection (2), the High Court may by order impose any conditions and give any directions as it thinks fit, for the purpose of giving effect to the declaration, including—
(a) directions for the payment of money by or to the body corporate; or
(b) the distribution of the assets of the body corporate; or
(c) a direction to modify or extinguish, in whole or in part, any registered interest or caveat or notice of claim entered on the register in relation to any unit, the common property, or the base land.
…
[25] Subsection 4 enables the Court to vary or modify the terms of its decision at any time before cancellation of the unit plan is effected, while subs 5 empowers the Court to make such order for payment of costs as it thinks fit.
[26] Section 189 sets out default provisions which apply on cancellation. These include the requirement under s 177(7) to reassess the ownership interests unless the High Court directs otherwise.
The scheme and purpose of the 2010 Act
[27] The preliminary provisions of the 2010 Act include a purpose section. Section 3 provides:
3 Purpose
The purpose of this Act is to provide a legal framework for the ownership and management of land and associated buildings and facilities on a socially and economically sustainable basis by communities of individual owners and, in particular,—
(a) to allow for the subdivision of land and buildings into unit title developments comprising units that are owned in stratum estate in freehold or stratum estate in leasehold or licence by unit owners, and common property that is owned by the body corporate on behalf of the unit owners; and
(b) to create bodies corporate, which comprise all unit owners in a development, to operate and manage unit title developments; and
(c) to establish a flexible and responsive regime for the governance of unit title developments; and
(d) to protect the integrity of the development as a whole.
[28] As part of the intended purpose to bring greater flexibility to the administration of unit titles, it is clear the 2010 Act made it easier than it was under the 1972 Act to reassess ownership interests during the life of the unit plan or following cancellation.
[29] The rationale for this change was expressed in the Law Commission Report, Shared Ownership of Land. 5 The report observed that a problem with the existing legislation was that:6
… relative values may change during the life of the building. A view from a particular unit, for example, may be built out. There may be zoning changes which allowed ground floor units to be used as shops or upper levels to be used as serviced residential apartments or a hotel. A building that is only part of the polyhedron that comprises a principal unit, may be extended horizontally or vertically.
[30] To address that problem s 41 of the 2010 Act provides a simple mechanism for reassessment of ownership interests after a unit title development is established. Furthermore, the 2010 Act also anticipates, under two statutory avenues for cancellation of a unit title plan, the potential for reassessment and adjustment of
ownership interests on cancellation.
5 Law Commission Shared Ownership of Land (NZLC R59, 1999).
6 At [39].
[31] The first of these avenues is under s 177 where the plan is cancelled by application from the Body Corporate. In those circumstances, the application for cancellation of the unit plan “must be accompanied by a certificate from a registered valuer reassessing the ownership interests and proposed ownership interests (if any) of all the units in the unit title development”.7 Under s 180 the effect of cancellation of the unit plan is that the relevant estate in the land vests in the persons who were the owners of the units immediately before the cancellation “in shares proportional to what was, at that time, their ownership interest”.8
[32] The second avenue for cancellation of a unit plan is that invoked in the present case, being cancellation of a unit plan by the High Court under s 188. In those circumstances, the requirement under s 177(7) to have a registered valuer reassess the ownership interests applies, as does vesting of the relevant estate in the land, in shares proportional to those ownership interests under s 180(2), “unless the
High Court directs otherwise”.9
[33] Turning back to the test in s 188, cancellation can be ordered if it is “just and equitable” for the Body Corporate to be dissolved and the unit title plan cancelled.10
As the applicants point out, the present case does not directly engage that test because the parties agree that those orders should be made. Rather the dispute between the parties relates to the appropriate conditions or directions to be made under s 188(3), when that section simply provides a broad discretion for the Court to impose any directions or conditions “it thinks fit”.
[34] I accept the applicants’ submission that where there is a question as to what directions to make under s 188(3), the same test is engaged as under s 188(2)(a), as the determination of whether cancellation is just and equitable, depends on the consequences that it will have for the parties. In other words, s 188(2) drives the exercise of the discretion in s 188(3) so that the Court should be satisfied that the directions it makes under that subsection ensure the circumstances of cancellation
are “just and equitable”.
7 Section 177(7).
8 Section 180(2)(a).
9 Section 189(5)(b).
10 Section 188(2)(a).
The just and equitable test
[35] The just and equitable test invoked by s 188, was recently discussed in Lake Hayes Property Holdings Ltd v Petherbridge.11 In that decision Panckhurst J summarised the test as follows:12
The phrase “just and equitable” means equitable justice, the justice of the individual case. All matters relevant to the rights and interests of creditors or interest holders must be considered. And importantly, the evaluation must be conducted with proper regard to the scheme and purpose of the Act.
[36] In Petherbridge, the applicant had acquired just over 90 per cent of the ownership interests in a unit title development on the shores of Lake Hayes, in its capacity as second mortgagee. Ms Petherbridge, the only other owner, was concerned to retain ownership of her single unit in order to enjoy the aesthetic values of the lakeside area.
[37] In applying the just and equitable test the Court concluded that in view of the fact the Body Corporate had been effectively defunct for 13 years, the units were past their economic lifetime, and renovation was not a viable option, it was just and equitable to authorise cancellation of the unit plan. In terms of protecting Ms Petherbridge’s interests, the Court considered, but rejected, creating a separate lot to contain Ms Petherbridge’s unit. The Court concluded that doing so would substantially erode the available land for redevelopment, would require a non-complying subdivision consent and would add significantly to cost. Instead, Ms Petherbridge’s property was to be acquired by the applicant owner at a sum
exceeding its registered valuation but which the applicant had offered to pay.13
While the primary issue in that case was whether the unit title plan should be cancelled, it illustrates that all the relevant circumstance should be taken into account in making an order under s 188 and that considerations of unfair burden or benefit
resulting to any of the owners is relevant to that consideration.
11 Lake Hayes Property Holdings Ltd v Petherbridge [2014] NZHC 1673.
12 At [48].
13 And with provision for a “top up” to reflect her 9.15 per cent ownership share if the property
sold for more than $3 million in the next 12 months.
[38] The test was also recently applied in a case involving a unit title dispute following demolition of a building in Christchurch.14 In that case the High Court declined to order a reassessment of ownership interests in circumstances where the owners had already passed a unanimous resolution to cancel the unit plan pursuant to s 177 of the 2010 Act and had distributed the insurance proceeds in accordance with existing ownership interests. It was only when they came to complete the legal
formalities of applying to the Registrar for cancellation, that the owners identified the requirement under s 177(7) to have a registered valuer reassess the ownership interests of the units. That reassessment differed from the apportionment of ownership interests which had been used for the distribution of the insurance proceeds.
[39] Taking into account the common mistake of the owners that the distribution of the insurance monies would be final and in accordance with the existing split of ownership interests, the financial detriment which would occur if the reassessment of values applied, the problems with reassessing the values given the circumstances of the earthquake and the fact the date of valuation would have to differ from the date of cancellation because the units had been destroyed, the Court concluded that it would not be just and equitable to order a reassessment.
[40] It is clear from both these examples, that the application of the “just and equitable” test in s 188, must be responsive to the particular fact situation occurring. While the 2010 Act generally envisages a reassessment of ownership interests on cancellation of a unit plan, there is wide scope to depart from that to ensure that the circumstances of the cancellation are “just and equitable”.
Is it just and equitable to reassess the ownership interests for Chamber Towers?
[41] The applicants submit that there are a number of reasons making it just and equitable for the ownership interest to be reassessed. These include that:
(a) the ownership interests were unlawfully formulated and incorrect from the outset;
14 Dominion Finance Group Ltd (In Receivership and Liquidation) v Body Corporate 382902
[2012] NZHC 3325, [2012] 7 NZCONVC 96-003 [Gallery Apartments case].
(b) the mistake in the original assessment was known by the Body
Corporate from early on;
(c) given the significant difference between the current relative values and the existing ownership interests, the residential owners will suffer significant detriment and Ourway Tower Limited would receive a significant windfall, if ownership interests are not reassessed;
(d)a reassessment is consistent with the scheme of the 2010 Act where, in the usual circumstances, ownership interests would be reassessed upon cancellation of the unit plan; and
(e) the respondents’ estoppel argument is not borne out on the facts. [42] In contrast, the respondents say:
(a) the mere fact that the existing ownership interests were determined using an incorrect methodology is not, in itself, grounds for reassessment;
(b)that is particularly the case when the original residential owners were aware of the issues associated with the assessment of unit entitlements but had failed to carry through a reassessment when that was advocated;
(c) the parties proceeded to regulate the affairs according to the existing unit entitlements, assuming liability for levies and insurance premiums based on the existing ownership interests and, for that reason, the owners of the residential units must be bound by their conduct and estopped from advocating for a reassessment based upon a known historical error;
(d)in any event, once the land is sold, the payment which the residential owners will receive will be similar to, or slightly greater than the Ford Baker 2011 assessment of market value. The residential owners
therefore cannot claim they are “deprived of the opportunity to realise
the full market value of their units”;
(e) it is inappropriate to suggest that commercial owners will overall receive a “windfall” when the payments received simply reflect their entitlements under the insurance policy taken out by the Body Corporate; and
(f) the commercial owners also rely on the decision in Gallery Apartments, to say that “a backdated reassessment is not legally in contemplation on cancellation”, regardless of whether a backdated valuation can feasibly be undertaken, particularly where the units have been demolished long before the proposed cancellation.
[43] In my view, the combination of factors arising in this case make it appropriate that the ownership interests are reassessed. I consider it is relevant that the ownership interests were incorrectly calculated at the outset and have never reflected the relative values of the commercial units as compared with the residential units. Indeed, the relative ownership interests of the commercial units has always significantly exceeded their actual relative value, although that gap has closed somewhat over time. The fact that it is a significant difference, which will result in the residential owners receiving approximately $640,000 less than they would based on a current assessment of their relative values, is also a circumstance which I
consider leans in favour of a reassessment being directed.15
[44] It is also relevant that there is no significant dispute between the valuers who gave evidence over the relative proportions of ownership interests. Thus the difficulties which arose in the Gallery Apartments case in terms of valuing the ownership interests do not arise here. The only other question is whether it is appropriate to adopt the 21 February 2011 date for valuation, which is a matter I
discuss below.
15 The sum of $640,000 is calculated based on the adjustments which would occur to the payout
(which, at 11 April 2014, less the contingency sum of $357,000, totalled $5,094,611) if the 2011
Ford Baker valuation was used to determine ownership interests, instead of the existing ownership interests.
[45] Finally, I consider directing reassessment, and payment of the insurance proceeds and land sale proceeds on the basis of that reassessment, to be consistent with the scheme and purpose of the 2010 Act. In an uncontested cancellation under s
177, that is a requirement, and it is the default position under s 188 unless the Court orders otherwise.
[46] While the second and third respondents argue that the applicants should be estopped from asserting that the ownership interests should be reassessed, I am not satisfied that the core elements to found an estoppel have been satisfied. Those elements are, of course, that: 16
(a) there has been an unambiguous representation by a party;
(b)the representation has been relied on by the representee in circumstances where it would now be unconscionable for the representing party to resile from that representation; and
(c) by reason of its reliance the representatee has suffered detriment.
[47] The representation relied on by the second and third respondent appears to be a combination of the fact of the existing ownership interests being recorded on the unit title, and the inaction by the owners of the residential units to “correct” the position. Because the owners of the residential units knew about the issue but took no steps to correct the error or formally reserve their position, the respondents say they should now be bound by their conduct and estopped from advocating for a reassessment.
[48] However, as the evidence before the hearing demonstrated, at least, Ms Woods, who was a director of two of the residential owners, was not aware of the historical problem, so the basis for suggesting her inaction amounted to a
representation was not established.
16 Gillies v Keogh [1989] 2 NZLR 327.
[49] Equally, Mr Bradley, the director of the second and third respondents, deposed that he too was unaware of any issue with the unit entitlements when his companies purchased the two commercial units. He could hardly therefore claim that any “inaction” constituted a positive representation that the residential owners would not, at some point in the future, seek to have the incorrect ownership interests reassessed. Furthermore, throughout the existence of the unit title development, there was a legal method for altering the assessment of unit entitlements, albeit, it was a more cumbersome process under the 1972 Act than is now the case under the
2010 Act. It, therefore, cannot be said that the respondents could never have expected the possibility of a reassessment.
[50] Strictly speaking, therefore, it is unnecessary to go on to consider reliance and detriment but I do so for completeness. The commercial owners say they bought in reliance on the ownership interests being 51 per cent and therefore a majority interest which gave them effective control of the Body Corporate and they paid Body Corporate levies based on that determination of ownership interest. However, the ownership interests as recorded on the title cannot amount to a representation that they will never alter so the act of purchasing did not demonstrate an act of reliance on such a representation. Similarly the requirement to pay Body Corporate levies in proportion to the existing ownership interest was simply the owner’s legal requirement. It cannot be said, in those circumstances, that the respondents altered their position in reliance on representations made by the applicants.
[51] Finally, with the question of detriment, the payment of Body Corporate levies in accordance with the relevant ownership interests was simply a fulfilment of the respondents’ obligations under the Body Corporate rules. With that came the benefit of holding a controlling 51 per cent interest in the unit title development which Mr Bradley deposed was important to his companies, so overall, I am not satisfied that detriment necessarily arose.
[52] In a similar vein, the second and third respondents argue that a reassessment “having retrospective effect” is not just and equitable. They say that the residential owners are contending that the distribution of the insurance proceeds should be
according to a reassessment which was undertaken after the loss giving rise to the insurance claim was incurred.
[53] Similar arguments to those raised on the estoppel issue were mooted here. In particular, the commercial owners say they have contributed towards insurance premiums in accordance with the original unit entitlements and it is reasonable to expect that the proportional return to each owner should reflect the contribution they have made. They also say that this unfairness is not remedied by a refund of Body Corporate fees/insurance premiums which have been “overpaid”. The residential owners are effectively taking a benefit in hindsight that they were not prepared to take in advance by proactively adjusting their ownership interests. However, again I note that reassessment is contemplated by the 2010 Act in a number of circumstances and there is no provision to retrospectively alter the Body Corporate levies paid by owners when that occurs. The question of whether it is fair to order repayment is something I address below.
[54] The commercial owners also say that the 2010 Act was not in force when the damage was sustained, and it is inappropriate to apply the 2010 Act’s provisions to justify a distribution of insurance proceeds when the entitlement to the insurance proceeds arose before the Act came into force.17 However, that is to overlook the fact that the event which triggers this application is the desire to cancel that unit title plan and that has occurred since the repeal of the 1972 Act. I therefore must give the
2010 Act full effect and not read down its provisions in any way. While the earthquake is relevant in that it is the event which triggered the desire to cancel the unit title plan and it has had practical implications for how the reassessment process could be undertaken, neither of those elements make the application itself retrospective to avoid or read down the broad discretion in the 2010 Act.
[55] Accordingly, I am satisfied that it is just and equitable to make directions for the distribution of the assets of the Body Corporate, including the insurance monies and land, that reflect a reassessment of the relative ownership interests. That then leads on to the practical question of undertaking that reassessment when the building
that is the subject of the unit plan has been demolished.
17 It came into force on 20 June 2011.
Is it impracticable for reassessment to occur when the building that is the subject of unit plan has been demolished?
[56] One of the grounds relied on by the second and third respondents for resisting a reassessment of the ownership interests is that it is now impracticable for reassessment to occur because the building that is the subject of the unit plan has been demolished. In this regard, they rely heavily on the Gallery Apartments decision where Fogarty J held that it was inappropriate to undertake a backdated
assessment when the building had been destroyed. In particular, he observed that:18
At the time of the cancellation … the buildings had gone. There were no longer any units. There is a significant argument therefore that there were no units for which the ownership interests were to be reassessed.
The text of s 177(7) presumes the continued existence of the units, that they are there to be valued. But in this case they were not.
[57] The impediments to undertaking a backdated assessment in the Gallery Apartments case were both legal and practical. On top of the obvious difficulty that the apartments had been demolished prior to cancellation of the unit plan, there was also a paucity of relevant sales, and a significant number of the sales before the February 2011 earthquake were forced sales. That, coupled with the presumption that a reassessment under s 177(7) should be at the time of the cancellation of the unit plan, militated against a reassessment.
[58] However, in that case the 2007 values used to set the respective ownership interests were not patently wrong as in the present case where there is compelling evidence to disturb the 2002 values used. Recognising that the existing values are flawed, the valuers have chosen to assess the relative values as at 21 February 2011, being “the last practical date when the individual unit properties could have been marketed and/or sold in the pre-crash state and indeed when a recognised market existed for the development”.
[59] Mr Naylor, the Ford Baker valuer who gave evidence, has had a long association with the Chamber Towers building having undertaken valuations of the
property at various stages through its conversion into apartments and also subsequent
18 At [118].
valuations of some of the residential units for mortgage purposes. While it was common ground that none of the valuation evidence relied on for the reassessment was based on an inspection of the property as at 21 February 2011, the valuations were not undertaken on an entirely hypothetical basis.
[60] Furthermore, as Mr Naylor confirmed, physical inspection was of less significance for the valuation of the commercial properties because value was based on income stream and a capitalisation rate that could be attracted to that income stream. While Mr Bradley, the director of the commercial owners, said the valuations had not taken account of improvements undertaken by tenants, the valuers were aware of the arrangements with the tenants, and they had copies of the lease arrangements, so to the extent this impacted on the values, it could be taken into account.
[61] As already noted, there was no real dispute between the valuers as to the relative values as at 2011 so, unlike the Gallery Apartments case, there was not a significant dispute arising from the valuation evidence.
[62] Finally, the valuers who gave evidence were also satisfied as to the practicality of valuing the units as at 21 February 2011, noting, of course, that valuations are often required to be done on a date that is different from the date of inspection.
[63] For all these reasons I am satisfied that it is not impracticable to undertake a reassessment of the respective ownership interests, even though the unit development has been destroyed.
What is the appropriate valuation to be adopted for the purpose of reassessment?
[64] The Court was provided with three assessments of the value as at
21 February 2011 and the applicants’ case was that this was the most appropriate date to undertake the valuation as it was the last date of a functioning property market in the Christchurch CBD.
[65] I accept that it is appropriate to reassess the ownership interests as at this date. That is because the purpose of the assessment is to determine the relative market value of the units for the purpose of distributing both the proceeds of the insurance claim, and in due course, the proceeds of sale of the underlying land. I have concluded this because it was the last date on which the buildings had any practical existence for the purpose of determining their market value. Any attempt to assess a market value at a later date would be a completely hypothetical exercise with no sales data whatsoever to support the reassessment. Using an earlier date would create other distortions given the relative changes between the commercial and residential property markets over time.
[66] The next issue is how to determine which valuation the reassessment should use, when the three valuations, while consistent, nevertheless do vary slightly between them. Mr Bayley for the two respondents urged acceptance of the Ford Baker valuation in that situation, which attributes the highest combined value to the two commercial units, noting that of all the valuers, he was probably most familiar with the premises prior to their demolition.
[67] Given my view that a valuation at this date is appropriate, and the valuations are very consistent, I could either select one valuation as prevailing, or look at some form of averaging of the valuations, for the purpose of the reassessment.
[68] In all the circumstances, I am content to adopt the Ford Baker valuation primarily on the basis that this firm, and in particular Mr Naylor, was very familiar with the subject property. No criticisms were raised of the Ford Baker valuation methodology. Mr Mahoney acknowledged Mr Naylor’s long association with the building and agreed he would “be happy with the Ford Baker [valuation]”. Accordingly, I consider it is the most appropriate valuation to be adopted for the purpose of reassessment.
What are the consequences of adopting the Ford Baker valuation for the purpose of reassessment?
[69] The discussion above is premised on the assumption that it is appropriate that the ownership interests should be reassessed for the purpose of distributing the
insurance funds held by the Body Corporate. Indeed, it is because the reassessments more fairly reflect the respective market values of the units that I have decided it is just and equitable to adopt them. It is therefore appropriate that the reassessment is used to distribute the insurance funds to ensure each owner is fairly compensated in terms of the policy for the loss they have suffered.
[70] I have also signalled that the reassessment should apply to the respective parties’ land entitlements. I consider that this is consistent with the scheme of the
2010 Act and the provisions that apply on cancellation. Under s 180, the usual outcome when the unit plan is cancelled is that the fee simple estate is owned in shares proportional to what was each party’s ownership interest. For the same reasons as I have determined that the ownership interest determined by the Ford Baker valuation should apply to the insurance proceeds, I direct that they should apply to the respective parties’ land entitlements as well.
What impact should the reassessment have on Body Corporate levies and expenses already incurred by the parties to date?
[71] As discussed above, one of the key arguments raised by the respondents against a reassessment was that they had paid Body Corporate levies that were commensurate with their larger ownership interest. It would be unfair therefore, to be denied a proportionate benefit from the insurance proceeds.
[72] The applicants responded by proposing that, if the Court thought it necessary to ensure the outcome was “just and equitable”, there could be a reimbursement of Body Corporate levies which had been paid by the respondents since purchasing the commercial properties in 2008, through to 2011 when the parties stopped paying Body Corporate levies. However, the applicants pointed out that the adjustments required would be modest and did not urge the adjustment as necessary to achieve a just and equitable outcome.
[73] The applicants presented evidence which demonstrated that the combined adjustment as between the commercial owners and the residential owners, if the 2011
Ford Baker ownership interests were adopted, would be $3,850.37 for the year 2009
to 2010.19 The levies were apparently the same for the period 1 June 2010 to
31 May 2011, and the figures are not available for the June 2008 to 31 May 2009 period. The only complication to a reassessment is that one of the current residential owners did not acquire its unit until 2009, after the Second and Third Respondents had acquired their commercial units.
[74] Relying on that evidence, it appears that the commercial unit owners have paid approximately $10,000 more in Body Corporate levies than they would have paid had the Ford Baker assessments applied from when they acquired the properties in 2008. The question is whether I order a readjustment of the distribution of the insurance proceeds to reflect that a more accurate division of ownership interests would have reduced the commercial unit owners’ Body Corporate levies by that amount.
[75] On balance I have decided not to. I have four reasons for doing this. They are:
(a) the amount involved, in the context of a distribution of assets which is likely to exceed $6,000,000, is not large;20
(b)there are some practical complications in making the adjustment because of missing information prior to 1 June 2009, and the fact that one of the residential owners bringing this application purchased its unit after the commercial units were purchased;
(c) adjusting the Body Corporate levy payments introduces further distortions. The commercial owners had the benefit of holding the majority ownership interest since purchase. That was acknowledged to be an advantage to them and that majority vote was exercised by
them on at least one occasion to stymie the election of a new Body
19 This is calculated on the aggregate of units A and B, Body Corporate levies changing from
$11,082.82 to $8,351.13. The figure of $2,731.69 given in the separate table prepared by the applicants is incorrect.
20 Taking into account the combined value of the land and the insurance settlement.
Corporate chairperson when Mr Bradley’s late nomination for
chairperson was not accepted; and
(d)finally, I note that it is not anticipated under the 2010 Act that when reassessments are made on cancellation, there is a retrospective adjustment to body corporate levies. The impact of a reassessment on cancellation is prospective only, to determine relative interests in the assets of the Body Corporate on cancellation. There is nothing in the circumstances of the present application which persuades me that this case should be different.
Outcome
[76] Accordingly, I make the following orders:
(a) that the unit plan for Body Corporate 303662 be cancelled under s 188(2) of the Unit Titles Act 2010;
(b)that the ownership interests of all units in the unit plan be reassessed pursuant to s 188(3) of the Unit Titles Act 2010 in the following proportions:
(i) unit A – 11.17 per cent (ii) unit B – 27.35 per cent (iii) unit C – 10.33 per cent (iv) unit D – 10.33 per cent (v) unit E – 10.33 per cent (vi) unit F – 11.60 per cent (vii) unit G – 7.92 per cent
(viii) unit H – 10.97 per cent
(c) that insurance settlement sums held by Body Corporate 303662 be distributed amongst the unit owners pursuant to the above proportions;
(d)that the balance of the assets of Body Corporate 303662, including the base land, is to be held in shares proportionate to the reassessed
ownership interests set out above.
Costs
[77] Costs are reserved. If costs cannot be agreed, I direct as follows:
(a) within 15 working days of the date of this judgment, the applicants are to file a memorandum setting out its submission on costs and disbursements sought;
(b)within a further 10 working day period, the second and third respondents are to file a memorandum setting out their submissions on those issues.
[78] I will then deal with the issue of costs on the papers unless I require the assistance of counsel.
Solicitors:
Wynn Williams, Christchurch
Rhodes & Co., Christchurch
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