St John's College Trust Board v Body Corporate 197230

[2012] NZHC 827

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2009-404-003025 [2012] NZHC 827

IN THE MATTER OF     186-202 Queen Street

BETWEEN  ST JOHNS COLLEGE TRUST BOARD Applicant

ANDBODY CORPORATE 197230 AND OTHERS

First and Other Respondents

Hearing:         10-12 and 17-19 October 2011

Counsel:         B W Morley and G J Luen for the Applicant

C Baker for the First Respondent
D R Bigio for the Hayden Tate

(Second to Twenty-Fourth, Twenty-Sixth to Thirtieth and Thirty-Second to Thirty-Fourth) Respondents

T J G Allan for the Grove Darlow

(Thirty-Fifth to Fifty-Seventh, Sixty-Third, Sixty-Ninth and Seventy-Third) Respondents

I F Williams for the Seventy-First Respondent
M C Harris and A T B Joseph for the Gilbert Walker
(Seventy-Seventh to Eighty-Sixth) Respondents

Judgment:      30 April 2012

JUDGMENT OF DUFFY J

This judgment was delivered by Justice Duffy on 30 April 2012 at 4.30 pm, pursuant to

r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

ST JOHNS COLLEGE TRUST BOARD v BODY CORPORATE 197230 and ORS HC AK CIV-2009-404-

003025 [30 April 2012]

[1]      The applicant is a unit title holder in an unusual strata title building complex located at 186 to 202 Queen Street, Auckland City.  The complex is made up of what were once four multi-storey buildings on separate properties each having its own freehold title; it now comprises 110 units plus common property.  The units have a mix of uses, with those at ground and lower levels having commercial/retail uses and those at the upper levels residential uses.  Most of the units are contained within the structure of the old buildings, but some are part of new structural additions that were added to the top levels of the old buildings.  Unfortunately, these additions and, to a much lesser extent, some of the renovated residential units in the old buildings have developed what has commonly come to be known as leaky building syndrome. Curing this problem is going to be expensive.  The parties are agreed on the nature and scope of the remediation works, as well as their estimated total cost of $4M, for which approximately 75 per cent relates to remediation of common property and 25 per cent to remediation of private property.   However, because of the unique characteristics of this complex, the unit owners have been unable to reach agreement on how the costs should be apportioned between them.  The applicant has applied to the Court to approve a scheme under s 48 of the Unit Titles Act 1972 (the Act) providing for the cost of repairing the leaky units to be apportioned among the individual title holders.  Some unit title holders support the scheme, whereas others oppose it; they have suggested alternative schemes for apportioning costs.

[2]      The dispute between unit title holders is due to the unique configuration of the unit titles in this complex.  The four buildings were, and largely still are, stand- alone buildings with a minimal degree of interconnection.   The body corporate is responsible for the maintenance and repair of common property.  A large part of the exterior cladding of these buildings is designated common property, as are the stairways and lifts and other such areas.  The practical effect of these designations is that under the statutory formula in the Act for apportioning costs relating to common property,  persons  responsible  for  paying  body  corporate  levies  will  have  to contribute  towards  the  repair  costs  of  the  exterior  cladding  of  units  and  other common areas located in a different building from the one they own and in circumstances where they see themselves enjoying little benefit from such work. Hence, their requests for the Court to approve a scheme under s 48 of the Act.

[3]      The stance taken by all parties regarding the need for a scheme and its estimated cost means that the sole focus of this judgment will be on how the cost of the remediation should be apportioned, which raises two questions for determination:

(a)      Whether the statutory formula for cost allocation provided in the Act should be followed; and if not

(b)How  the  remediation  costs  should  be  allocated  among  the  unit owners.

[4]      Like the applicant, the respondents are owners of the units.  Whilst owners of the commercial/retail units may have passed liability for payment of body corporate levies on to their tenants, they contend that this is irrelevant for this proceeding.  I agree.  Irrespective of the terms of leases, if body corporate levies for a unit went unpaid, the body corporate would be entitled to recover them from the owner.

[5]      During the hearing, apart from the applicant, various groups of respondents who took an active role in the proceedings referred to themselves and were referred to by others by the name of the legal firm acting for them:

(a)      The  second  to  twenty-fourth,  twenty-sixth  to  thirtieth  and  thirty- second   to   thirty-fourth   respondents   were   referred   to   as   the Hayden Tate respondents;

(b)The thirty-fifth to fifty-seventh, sixty-third, sixty-ninth and seventy- third respondents were referred to as the Grove Darlow respondents;

(c)      The seventy-seventh to eighty-sixth respondents were referred to as the Gilbert Walker respondents; and

(d)The remaining two respondents were simply referred to by their designation in the proceeding’s intituling as first and seventy-first respondents.

For ease of reference, I propose to adopt these references for the respondents.

Background

[6]      The four buildings were built in the early part of the last century, each having its own fee simple title.  Originally, the ground floors of these buildings were used for retail, and the upper levels would have had some form of commercial use.  In the latter part of the twentieth century, a developer acquired the buildings.   In this proceeding, when the need arose to refer to a particular building, it was referred to by its former name, being: Whitcombe and Tombes; Lewis Eady; Security; and the Annex.   The developer devised a scheme whereby the floors in these buildings would be formed into multiple strata titles in a single unit title scheme.   Some development was carried out on the first floors of the buildings, which caused the buildings to be interconnected to a minimal degree (at one level a retail mall was created through all four buildings, which linked an entrance on Durham Lane with the present Whitcoulls building), but otherwise their physical separation was preserved.  The upper levels of these buildings were converted for residential use. The developer also added two floors of units for residential use on the top of the old buildings.  The new additions to the Whitcombe and Tombes building are called the Met Apartments, and the additions to the Lewis Eady and Security buildings are called the Soho Apartments.   These new structural additions to the buildings are where the leaky building problems largely arise; to a much lesser extent, some of the residential conversions in the older parts of the building also have leaky problems.

[7]      In its present state, the complex has the following configuration:

(a)      Twenty-five units in the lower levels of the old buildings have retail, commercial and office uses and comprising 63.41 per cent of the total unit entitlement under s 6.  The proprietors of these units consider that they have received Final Code Compliance Certificates for them;

(b)Forty-nine residential units which are located in the old buildings and comprising 19.89 per cent of the total unit entitlement under s 6. These units do not have Final Code Compliance Certificates; and

(c)      Thirty-six residential units which are located in the new structural additions built on to the roof tops of the old buildings.  These units comprise 16.7 per cent of the total unit entitlement.  They do not have Final Code Compliance Certificates.

[8]      The unit boundaries of the lower ground floor and  level one of the  old buildings (which comprises retail/commercial units) are coincident with and thus render the “weatherproofing fabric” of the exterior walls of these units within unit property, as opposed to common property.   The unit boundaries of the remaining units (being the majority of the units) in both the old and new building structures are such that, generally, they are within the exterior walls and ceiling voids, which means that, in general, the weatherproofing fabric of those units is within common property and not unit property.

[9]      An image of the buildings showing the configuration of the various units within the buildings is annexed to this judgment.   The residential units that are leaking appear in the dark shaded top section of the image.  A street frontal view of the image from Queen Street shows the four buildings that make up this complex.

[10]     Everyone accepts that parts of this building complex leak, with roughly 75 per cent of the leaks affecting common property and the balance private property. The total remediation costs are approximately $4M.  Everyone is agreed on the need for and scope of remediation.  Everyone is also agreed that the extent of the damage qualifies for a s 48 scheme and that, given their failure to reach agreement on apportionment of remediation costs, a scheme is needed.   The dispute is entirely about how the cost of the works under any such scheme should be apportioned between them.

Legislation

[11]     This  proceeding  was  commenced  under  legislation  that  has  subsequently been repealed by the Unit Titles Act 2010.   Section 227 of the current legislation requires the proceeding to be continued and completed under the now repealed legislation.

[12]     Sections 6, 9 and 48 are material provisions of the Act.  Section 6 provides for how unit entitlement is to be fixed:

6        Unit entitlement

(1)       For the purpose of determining the matters specified in subsection (3) of this section, before the unit plan is deposited there shall be assigned to every principal unit and every accessory unit a unit entitlement, to be fixed by … a registered valuer within the meaning of the Valuers Act 1948 … on the basis of the relative value of the unit in relation to each of the other units on the unit plan.

(2)       Subject to paragraph (d) of section 19(5) and section 44(3) of this Act, no change shall be made in the unit entitlement of any unit after the unit plan is deposited.

(3)      The matters referred to in subsection (1) of this section are—

(a)       The proprietor's share in the common property in accordance with section 9 of this Act;

(b)      The extent of the proprietor's liability for damages and costs under section 14 of this Act;

(c)       The extent of the proprietor's obligation under section 15 of this Act in respect of contributions levied by the body corporate,  and  of  his  rights  under  that  section  on  a distribution of any surplus money or personal property;

(d)       The extent of the proprietor's obligation for payment of rent and other money under section 26 of this Act;

(e)       The  extent  of  the  proprietor's  share  of  the  value  of  any buildings, fixtures, and other improvements under section 30 of this Act;

(f)       The proprietor's voting rights on a poll pursuant to clause 27 of Schedule 2 to this Act;

(g)       Subject to section 48(5) of this Act, the proportion in which money (if any) received or held by the body corporate for distribution among the proprietors is to be distributed among them in accordance with section 45(7) of this Act; and

(h)       The share in the land which is to vest in the proprietor under subsection (5) of section 45 of this Act upon the cancellation of the unit plan.

[13]     Section 9 provides for how common property shall be held:

9        Common property

(1)       The common property shall be held by the proprietors of all the units as tenants in common in shares proportional to the unit entitlement in respect of their respective units:

Provided that nothing in this subsection shall  affect the interests among themselves of the proprietors of a stratum estate in an individual unit.

(2)       While the same person is proprietor of all the units, subsection (1) of this section shall apply as if there were different proprietors for each of the units.

(3)       The proprietors of all the units may sell or lease part of the common property or may grant an easement over the whole or any part of it.

[14]     Section 48 authorises the Court to approve a scheme for apportioning the costs of remediation work following destruction or damage of the buildings, or improvements associated with a unit title plan.  The section provides:

48       Scheme following destruction or damage

(1)       Where any building or other improvement comprised in any unit or on any land to which a unit plan relates is damaged or destroyed, but the unit plan is not cancelled, the Court may, on the application of the body corporate, an administrator, the proprietor or one of the proprietors of a unit, or a registered mortgagee of a unit, by order settle a scheme including provisions—

(a)      For the reinstatement in whole or in part of such building or other improvement; or

(b)      For the transfer of units to the proprietors of the other units so as to form part of the common property.

(2)       Where an order is made under paragraph (b) of subsection (1) of this section, the provisions of section 19 of this Act shall, so far as they are applicable, but subject to any order of the Court to the contrary, thereafter apply to any such transfer.

(3)       A notice of any application made under subsection (1) of this section shall be served on the Registrar who shall thereupon enter on the

supplementary record sheet a notification that application has been so made.

(4)       On any application to the Court under subsection (1) of this section, any person having or claiming to have any estate or interest in any unit or in the land or in any part of the land or any insurer who has effected   insurance   on   the   buildings   or   other   improvements comprised in any unit or in the land or any part thereof shall have the right to appear and be heard.

(5)       In the exercise of its powers under subsection (1) of this section, the Court may make such orders as it considers expedient or necessary for giving effect to the scheme, including orders—

(a)      Directing the application of any insurance money;

(b)      Directing payment of money by or to the body corporate or by or to any person;

(c)      Directing the deposit of an appropriate new unit plan; or

(d)      Imposing such terms and conditions as it thinks fit.

(6)       The Court may from time to time cancel, vary, modify, or discharge any order made by it under this section.

(7)       On any application under this section the Court may make such order for payment of costs as it thinks fit.

[15]     The  main  part  of  the  remediation  work  will  be  in  relation  to  the  new structures that were added to the top levels of the existing buildings.  In a practical sense, the greatest benefit of the remediation work will go to the owners of those units  in  that  their  leaky  units  will  be  made  weather-tight.    However,  if  the remediation costs are apportioned according to the statutory formula determined in accordance with s 6 of the Act, the greatest portion of the costs of these works will fall on the owners of the other units.  This is because most of the remediation work will involve common property and so, in accordance with ss 6 and 9 of the Act, the costs would be apportioned as follows:

(a)      63.41 per cent of the costs would be borne by the owners of the 25 units in the lower levels of the old buildings (the applicant and the Gilbert Walker respondents);

(b)19.89 per cent of the costs would be borne by the owners of the 49 residential   units   located   in   the   old   buildings   (including   the Grove Darlow respondents); and

(c)      16.7 per cent of the costs would be borne by the owners of the units in the new structural additions to the buildings (the Hayden Tate respondents).

Applicant/Gilbert Walker scheme

[16]     Initially the Gilbert Walker respondents were suggesting a scheme that was slightly different from that of the applicant.    As they are all owners of commercial/retail units in the old buildings, they had common interests.  During the course of the hearing, they were able to reach a common position, which resulted in them proposing a joint scheme.  Under this scheme, costs would be apportioned as follows:

(a)      Applicants/Gilbert  Walker  respondents,  17.94  per  cent  (common property only);

(b)      Grove Darlow respondents, 11.16 per cent (common property only);

and

(c)      Hayden Tate respondents, 70.91 per cent (common property only), with these owners bearing 100 per cent of private property costs.

Grove Darlow scheme

[17]     The Grove Darlow respondents have proposed two alternative schemes for apportioning costs.  Under the first scheme, the apportionment is as follows:

(a)       The applicant, 28.30 per cent (common property only);

(b)      Gilbert Walker respondents, 22.40 per cent (common property only);

(c)       Grove Darlow respondents, 15.90 per cent (common property only);

and

(d)Hayden Tate respondents, 33.40 per cent (common property only), with these owners bearing 100 per cent of private property costs.

[18]     Under the second scheme, the apportionment is as follows:

(a)       The applicant, 21.20 per cent (common property only);

(b)      Gilbert Walker respondents, 16.79 per cent (common property only); (c)      Grove Darlow respondents, 11.91 per cent (common property only);

and

(d)Hayden Tate respondents, 50.10 per cent (common property only), with these owners bearing 100 per cent of private property costs.

Hayden Tate scheme

[19]     Under the Hayden Tate scheme, the apportionment is as follows:

(a)       Applicant, 35.39 per cent common property and 35.39 per cent private property;

(b)      Gilbert Walker respondents, 28.02 per cent common property and

28.02 per cent private property;

(c)       Grove  Darlow  respondents,  19.89  per  cent  common  property  and

19.89 per cent private property; and

(d)Hayden Tate respondents, 16.70 per cent common property and 16.07 per cent private property.

Each scheme reflects the perception of the proponents’ respective cost-benefit analysis of how the remediation costs will affect them.

[20]     The focus of the scheme promoted by the applicants and the Gilbert Walker respondents is very much on the practical physical benefits of the repairs of the unit owners.  From that perspective, the units of the applicants and the Gilbert Walker respondents are little affected by the leaks and, therefore, the consequences of remediation.  Some of the units being repaired will be located in a separate building: for example, the applicant has ground floor units in the Security and Lewis Eady buildings, whereas some of the required remediation of weatherproofing fabric is for new residential units that are part of the Met apartments which are in the Whitcombe and  Tombes  building.     The  actual  units  owned  by  the  applicant  and  the Gilbert Walker respondents are largely sound, weather-tight and well-functioning. For the most part, they and their tenants can probably operate in the complex without needing to set foot in the areas where the new residential units are located.  Nor does it  seem  that  the  present  leaky building  problems  pose  any risk  to  the  physical integrity of their units.

[21]     The scheme promoted by the Hayden Tate respondents focuses primarily on the legal  benefits  that  will  flow from  the  remediation.    These  respondents  will undoubtedly enjoy the most practical benefit from the remediation works as units that are not presently weather-tight and without Final Code Compliance Certificates will have those benefits once the works are carried out.   Nonetheless, these respondents  argue  that  since  legally the  weatherproofing  fabric  of  much  of  the buildings’ exterior structures are common property, it is in the interests of all unit owners that any faults pertaining to those areas be remediated.  In this regard, they argue that until the remediation is completed, the potential legal liability all owners face for remediation costs relating to common property, wherever it may be located in the complex, will reflect poorly on the values of all units.

[22]     Initially, these respondents contended that because some of the units in the complex did not have Code Compliance Certificates, this detrimentally impacted on the legal status of the entire complex.  However, during the course of the hearing, building experts instructed by the Hayden Tate respondents (Roger Cartwright) and

the Gilbert Walker respondents (David Clifton) reached an agreed position on the impact of not all units having Code Compliance Certificates.  Their agreed view was that the commercial units have obtained Code Compliance Certificates for all consented works previously issued within the commercially designated areas, despite the current defects and lack of Code Compliance Certificates in new residential units.   They also agreed that the commercial units can obtain further Code Compliance Certificates for future consented works within the commercially designated  areas,  despite  the  current  defects  and  lack  of  Code  Compliance Certificates in new residential units.

[23] They agreed that, in general, territorial authorities approach the issuing of Code Compliance Certificates on the basis of the specific building consent application lodged with the authority and the works that are the subject of that building consent, not compliance of the whole building. They also agreed that the only exception to this approach is under s 112(1)(a) and (b) of the Building Act 2004 (which relate to fire exits and disabled access), where a territorial authority can enforce building-wide upgrades. However, their view was that, so far as they were aware, such works did not form part of the proposed residential remedial works outlined in the agreed schedule of work prepared by Hampton Jones.

[24]     The  experts’  agreement  on  these  matters  led  them  to  agree  that  the commercial units are not significantly impacted by the current defects and lack of Code Compliance Certificates in new residential units due to the physical separation, lack  of  physical  impact  of  defects  and  the  ability  of  the  commercial  units  to undertake new consentable works and achieve Code Compliance Certificates within the commercially designated areas.   But they also agreed that the owners of the commercial units had a vested interest, as part of a building community and as members of the body corporate, in the reduction of building stigma and the reduction in envelope disrepair.  In this regard, they considered that a purchaser obtaining only a Land Information Memorial (LIM) could be dissuaded from a purchase of a commercial unit due to the perceived outstanding Code Compliance Certificates in other areas of the building.  However, they agreed that the normal commercial due diligence process would  explore the full contents of the council’s property file, which would allow a purchaser to gain a full understanding of the current situation,

including the physical separation between the commercial units and new residential units, which would enable an informed commercial decision to be made about the purchase.

[25]     None of the other parties had experts who provided an opinion on this issue. The two experts have between them significant experience of building consent matters.  The measure of agreement they have reached reflects what I consider to be a sensible appraisal of how territorial authorities go about issuing Code Compliance Certificates.  In the absence of any evidence to the contrary, I am persuaded that the agreed position outlined by Messrs Cartwright and Clifton is an accurate reflection of how the entire complex is affected by the current status of the Code Compliance Certificates.    I consider,  therefore,  that  the  only  owners  who  will  benefit  from remediation that results in the issue of Code Compliance Certificates are the owners of the residential units (the Hayden Tate and Grove Darlow respondents).

[26]     The Hayden Tate respondents have adopted a pragmatic approach when it comes to the division of responsibility for common and private property.   They envisage that identifying where common property ends and private property begins when it comes to remediating the units will prove so troublesome and time- consuming that the resulting expense will not be worth the effort.   Hence, their suggestion that the burden of paying for private property remediation should be shared in a proportionate way among all unit owners.

[27]     The  Grove  Darlow  respondents  have  proposed  two  alternative  schemes. These schemes attempt to provide a “middle ground” approach that for apportioning remediation costs of common property starts with the unit entitlements as determined by s 6.  This is then adjusted to achieve what these respondents consider to be a more equitable  outcome.    The  adjustment  attempts  to  give  some  recognition  to  the practical physical benefits of remediation that the owners of the new residential units will enjoy.  The Grove Darlow respondents take the view that for every dollar spent on remediating common property, the owners of units in the new structures will benefit most.   This is because once the remediation is completed, they will have practical physical benefits of weather-tight units, along with the legal benefits that flow  from  their  units  achieving  the  status  of  being  fully  compliant  with  the

Building Act’s requirements and the extinguishment of the present legal liability of all unit owners to do something to remedy the present leaky problems with the common property.

[28]     In short, the Grove Darlow respondents contend that the owners of the units in the new leaky structures will receive corporeal and incorporeal benefits, whereas, for the others, the remediation costs will give them only incorporeal benefits.  Thus, the Grove Darlow respondents have used a sliding scale measure for adjusting the costs apportioned under the s 6 unit entitlements to reflect the differences in benefits that they have identified.

[29]     The Grove Darlow respondents contend that unit owners should individually bear the costs for remediation of their private property.

Valuation evidence

[30]     Following a meeting of experts, the valuers called by the parties were able to reach a considerable measure of agreement on the valuation issues relevant to this proceeding.  Five valuers provided evidence.  They were Gary Cheyne (applicant’s witness),    Ian    McGowan    (Gilbert    Walker’s    witness),    Matthew    Taylor (Grove Darlow’s   witness),   Victoria   Nettleship   (Hayden   Tate’s   witness)   and Robert Yarnton (Hayden Tate’s witness).  Not all valuers addressed the same issues, which was the result of the instructions each had received from the instructing party.

[31]     Messrs Cheyne and McGowan and Ms Nettleship were the only valuers who were instructed to value the commercial units.  They were able to reach agreement on the units’ post-remediation value.  Messrs Cheyne and McGowan were the only valuers instructed to value the residential units post-remediation value and they have reached agreement on those values.

[32]     What would have been helpful is if the parties’ valuers could have agreed on the units’ value before the remediation is undertaken.   In that way, the difference between the values before and after remediation would have provided a reliable objective indicator of the benefit each unit owner would enjoy from the remediation.

However, this was never a possibility, which is understandable because assessing any unit’s pre-remediation value will involve taking into account the liability for remediation costs that attaches to that unit.  Until the scope of that liability is known, it is difficult to place a market value on a particular unit.

[33]     Ms Nettleship attributed a pre-remediation value to each commercial unit that was based on using the statutory formula in s 6 of the Act for apportioning common property costs as between unit owners.   In this way, her valuations allow an assessment  of  the  value  each  commercial  unit  owner  will  enjoy  following remediation if the statutory formula for apportioning costs is applied.  The valuations show that for some commercial units, the difference between pre- and post- remediation works is somewhere between $200,000 to $300,000, whereas with other commercial units, the difference is between $17,000 to $100,000.

[34]     Messrs   Cheyne   and   McGowan   used   a   different   methodology   from Ms Nettleship for determining pre-remediation value of the commercial units.  What they did was to take the post-remediation values (which are agreed by the relevant valuers) of each unit as a starting point; then they attributed as a percentage a figure that they considered reflected the weather-tightness benefit for each unit; and finally, they deducted this figure from the post-remediation value.   The percentages they adopted showed a two per cent benefit for the most valuable ground floor retail units; a 3.75 per cent benefit for the less valuable retail/commercial units; a 7.5 per cent benefit for the residential units located in the old building structure; and a 60 per cent benefit for the residential units in the new leaky structures.   In this way, Messrs Cheyne and McGowan attempted to give a pre-remediation value to each of the commercial units.   The percentage they applied as representing the weather- tightness benefit was derived from their analysis of a range of market sales of units that were affected by leaky building syndrome.

[35]     The totality of the valuation evidence that was before the Court has led me to conclude that assessing the pre-remediation value of any unit in this complex is a difficult exercise, as the value of any one unit will necessarily reflect the legal liability to be attributed to that unit for contributing to the remediation costs of the common property.   To take any commercial unit, for example, its pre-remediation

value will necessarily be affected by whether this Court orders the owners’ contribution to the remediation costs will be determined by s 6 of the Act, or, at the other  end  of  the  spectrum,  by  the  scheme  for  which  the  applicant  and  the Gilbert Walker respondents seek approval, or something in between those two.

[36]     Under   Ms   Nettleship’s   approach,   CT   reference   160559,   which   is   a Queen Street ground floor retail unit, has an unaffected (no weather-tight issues) value of $7,671,431 and a value as is of $7,280,000.   Thus, the adjustment for remedial works is $387,063; whereas on the approach Messrs Cheyne and McGowan have adopted, the same unit has an unaffected value of $7,670,000 and a weather- tightness impact benefit  of two percent,  which  reduces the value to $7,516,000 (being post-remediation value less weather-tightness benefit).  On this approach, the adjustment for the remedial works for this unit is $153,400.  The difference between

$387,063 on the one hand and $153,400 is significant.

[37]     It therefore becomes evident that any attempt to inform the Court of the benefits that any unit will enjoy from the remediation of the common property will necessarily  entail  circular  reasoning,  as  the  valuation  exercise  will  necessarily involve a hypothesis of how the liability might be apportioned either under s 6 of the Act, or under any proposed s 48 scheme.  Because the concerns of this complex are unique, there are no comparable sales that would allow the valuers to arrive at a pre- remediation value based on the usual approach to valuation involving analysis of comparable market sales.

Law

[38]     Given the discretionary nature of s 48, and the different factual circumstances pertaining to the applications for approval of s 48 schemes that have come before the courts, each such application will inevitably turn on the facts relating to the application: see Tisch v Body Corporate No 318956 [2011] NZCA 420, [2011] 3

NZLR 679 at [66]. However, from the relevant case law, some common principles have emerged that are to be applied to these applications.

[39]     First,  the  Act  gives  ownership  of,  and  thus  responsibility  for,  common property to the body corporate, while unit proprietors own and have responsibility for their own units: see Tisch at [29].

[40]     Secondly, the discretion to settle a scheme under s 48 of the Act must be exercised having regard to the scheme of the Act and, in particular, the provision in the Act limiting a body corporate’s repair and maintenance responsibility to common property: see Tisch at [28]-[31]. At [31], the Court of Appeal said:

The rationale of the general rule is that unit owners purchase knowing the property is subject to the Act. They purchase also knowing they are subject to the body corporate rules. Those rules are a contract between the unit holders. The starting point must be that unit holders should adhere to the statutory scheme they bought into, and to the body corporate rules they agreed to abide by. We see the scope of s 48 as limited to a situation where the best interests of unit owners as a whole dictate a departure from the scheme of the Act and from the body corporate rules.

[41]     Thirdly, it seems clear from Tisch that save for exceptional cases where a clear majority of unit owners approve a scheme that makes a body corporate liable for costs of remediation of private property, a court will not approve a scheme based on this approach.

[42]     Fourthly, the discretion in s 48(5) for the Court to make such orders as it considers expedient or necessary for giving effect to a s 48 scheme is relevant to how the Court exercises its discretion, having decided to settle a scheme, rather than whether it should exercise the discretion to do so: see Tisch at [38].

[43]     Fifthly,   in   shaping   a   scheme,   the   Court’s   focus   is   on   pragmatic

considerations: see Tisch at [39].

[44]     Sixthly, when settling a scheme under s 48(5), a court should attempt to strike a balance between the interests of the unit holders in a way that achieves the fairest outcome for all unit holders: as the Court of Appeal stated at [44], “The aim should be to balance the interests of each unit holder in a way that imposes terms that achieve the outcome fairest to all unit holders”.

[45]     Finally, ordinarily a scheme will be fair and equitable in terms of s 48 when it follows the Act and the body corporate rules: see Tisch at [55].

[46]     In Tisch, at [44]-[49], the Court of Appeal identified five guiding principles. Those of which are material to the present application are:

(a)      A scheme with broad support is to be preferred; so that the greater the level of support from the owners for the scheme, the more likely that it will do justice between owners ([45]);

(b)Work should normally be done to the same standard and at the same time ([48]); thus, where the work involves private and common property, it should ordinarily be the subject of a single managed building contract; and

(c)      The terms of the s 48 scheme should depart from the scheme of the Act and from the body corporate rules no more than is reasonably necessary to achieve what is fair as between unit owners in the circumstances; an exception being when a scheme that departs from this principle has been unanimously agreed by the unit owners ([49]).

Analysis

[47]     At first blush, the arguments of the applicant and Gilbert Walker respondents are attractive.  Whatever valuation exercise is undertaken, it seems clear to me that there are minimal practical benefits for these owners from remediation of the leaky common property.  The benefit for them of remediation of the damaged areas lies in the  removal  of  the  present  legal  liabilities  for  such  costs.     At  present,  any hypothetical purchaser of a commercial unit in this complex would want to build into the price he or she was willing to pay for the unit an allowance to cover how the liability for remediation  costs would be apportioned.   There may be theoretical benefits for owners in having weather-tight common property in access-ways, such as stairways and lift wells.  But in many respects, some of these areas are going to be

located in buildings that are separate from some of the commercial units, so that it is hard to see how these benefits will have any real impact in such circumstances.

[48]   However, when the arguments of the applicant and the Gilbert Walker respondents are given further attention in the light of the legal principles to be drawn from Tisch, I do not think that their arguments withstand scrutiny.

[49]     First, the scheme for which the applicant and the Gilbert Walker respondents seek approval is a marked departure from how the Act envisages that liability for common property will be apportioned, which is not permissible unless reasonably necessary.

[50]     Secondly, it is hard to see how such a significant departure from the scheme of the Act could be seen to be fair and equitable in terms of s 48.  From the outset, it would have been apparent to those who purchased units in this complex that the configuration of common property would result in unit owners in one part of the complex (for example, the Security building) being liable for costs for common property repairs and maintenance located in other buildings (for example, the Whitcombe and Tombes building).  Thus, the statutory scheme as it relates to this complex will always lead to occasions where individual unit owners who ostensibly derive little or no practical benefit from work to common property are liable nonetheless for the cost of such work.  The scheme promoted by the applicant and the Gilbert Walker respondents seeks to avoid what is a fundamental feature of ownership of a unit in this complex.

[51]     Finally, this scheme relies on apportioning liability in accordance with a formula that is based on a cost-benefit analysis of who stands to gain the most from the remediation.  However, I consider that there are dangers in this way of looking at things.  Once such a cost-benefit analysis is undertaken with costs being apportioned in accordance with the result of that analysis, it becomes difficult to see why this approach would not always follow where expenditure of significant costs associated with common property was required.  For example, if major expensive earthquake proofing of the exterior walls of the Whitcombe and Tombes building were to be required, but not of the other buildings, the owners of units located in the other

buildings could well make the same argument that on a strict cost-benefit analysis, there was little practical direct benefit for them of such work.   Such an argument would surely be open to owners of units in the Security and Annex buildings, as these  units  are  separated  from  the  Whitcombe  and  Tombs  building  by  the Lewis Eady building.

[52]     Insofar as it may appear to be unfair that owners of units in one building must contribute to costs of common property located in another building, the answer is that this is a fundamental element of this strata title development.  The likelihood of this occurrence has been present from the outset.   Anyone who did not want to subscribe to this type of liability need not have acquired a unit in this complex.  With the benefit of hindsight, it may be that the amalgamation of four existing buildings into a single strata title complex having mixed uses was always going to be problematic for the individual unit owners.  On the other hand, it can also be said that the legal liabilities that are attendant on this strata title scheme have always been evident.  As stated in Tisch at [64], “if the Act and the body corporate rules assign responsibility … to owners, the relative benefits just spelt out must be assumed to have been taken into account”. Anyone who failed to see them must have done so through a failure to understand the legal consequences of this scheme.

[53]     In addition, given that it is not possible to confine ownership of a strata title to private property, this type of title ownership must always carry a mix of private and common benefits and liabilities.   It is, therefore, unhelpful to focus on how individual unit owners might be affected by proposed work to common property. This way of viewing property ownership is more relevant to individual ownership of a fee simple title.  Once elements of common property ownership are unavoidably present, the better approach would be to abandon traditional perceptions of how benefits are enjoyed and liabilities are borne.  Since everyone who owns a unit in this complex owns a share of its common property, they all have an interest in seeing it remediated.  If a party enjoys the incidents of ownership in all other respects, it should not, in principle, be able to extract itself from an incident of ownership on a one-off basis merely because it is detrimental to its interests.

[54]     For all these reasons, I consider that the scheme promoted by the applicant and  the  Gilbert  Walker  respondents  is  too  great  a  departure  from  the  statutory scheme for this complex, and from the scheme and purposes of the Act.   Such a departure could not lead to fairness to all unit owners.   It follows that I am not persuaded that this scheme will meet the requirements of s 48(5) of the Act.

[55]     The scheme promoted by the Hayden Tate respondents is contrary to the principle in Tisch that, save for occasions where there is unanimous support for the approach, the terms of a scheme should not require the body corporate to assume responsibility  for  costs  relating  to  private  property.     Here,  apart  from  the Hayden Tate  respondents,  there  is  no  support  for  the  body  corporate  assuming responsibility for the costs of remediation of private property.  I consider that in the absence of unanimous support for this approach, it would not be just and equitable to include it as part of a s 48 scheme.  It follows that I am not persuaded that this aspect of the Hayden Tate respondents’ scheme should be adopted.

[56]     The remaining options are:

(a)       To  adopt  either  of  the  schemes  promoted  by  the  Grove  Darlow respondents; or

(b)      To adopt the part of the Hayden Tate respondents’ scheme that applies

the statutory formula in s 6.

[57]     The two schemes promoted by the Grove Darlow respondents are based on a view that the Hayden Tate respondents stand to benefit in more ways than the other owners with the proposed remediation.  To a lesser extent than the scheme promoted by the applicant and the Gilbert Walker respondents, these two schemes also apportion liability for remediation costs on the basis of a cost-benefit analysis.  The adjustments these two schemes make to the statutory formula provided for in s 6 are for the purpose of placing a heavier responsibility for payment of remediation costs on those who are perceived by the Grove Darlow respondents to benefit most from that  work.    Thus,  these  schemes  suffer  from  the  same  defects  as  the  scheme

promoted by the applicant and the Gilbert Walker respondents.  For the same reasons that I rejected their scheme, I reject these schemes too.

[58]     I am left in a position where I consider that the only outcome that achieves fairness for all unit owners is one that apportions liability for costs of remediating common property in accordance with s 6 of the Act.   Whilst on this occasion the application of the statutory formula for apportionment of common property costs appears to result in owners who derive little practical benefit individually from remediation being responsible for a large share of the costs, it will not necessarily follow that this will always be the case if the statutory formula is adhered to.  On the other hand, if the statutory formula is departed from on this occasion and replaced with an approach that attempts to apportion liability for common property costs on the basis of a cost-benefit analysis, it is hard to see why a similar analysis would not be undertaken when other significant common property costs were required to be apportioned.   But if this were the case, the manner of apportionment of common property costs would become uncertain.  There would always be the likelihood that when one group of owners was seen to benefit in more ways than others from work done to common property that the others would perceive the need for a s 48 scheme to readjust this benefit.  Such an outcome is contrary to the scheme of the Act, which has as its purpose a degree of certainty when it comes to assessing how liability for repair and maintenance costs relating to common property will be apportioned.   I recognise  that  the Act  has  now been  repealed,  but  since the  current  legislation requires me to determine this application under the former legislation, I must have regard to the purposes and policy of that legislation.

[59]     All parties, in differing ways, addressed the use of s 33 of the Act as an argument for using s 48 to depart from the statutory formula for apportioning costs for repairing common property.   However, I do not consider that this is a proper approach for me to take.

[60]     First, the Court of Appeal in Tisch at [25] held that s 33, which enables a body corporate to recover money it expends on repairs and other work, bears no cross-reference with s 48. This is clear on a plain reading of the Act, and in any event, I consider that I am bound by this finding.

[61]     Secondly, I am not persuaded by the merits of this argument.  The parties use s 33 to support the submission that the Act does envisage circumstances where a cost-benefit analysis should be undertaken to achieve a commercially fair result. They submit that it would seem arbitrary to allow the Court to re-allocate costs on the basis of substantial benefit under s 33 after remedial work has been done but not, as in the case of s 48, before remedial work has been undertaken.

[62]     However, this submission overlooks the fact that under the Act, the body corporate could be legally responsible for more than common property.   Under s 15(1)(g), the body corporate must:

... comply with any notice or order duly served on it by any competent local authority or public body requiring repairs to, or work to be performed in respect of the land or any building or improvements thereon.

And under s 16, the body corporate is given all such powers as are reasonably necessary to enable it to carry out duties imposed under the Act.  The responsibilities for maintenance and repair that the Act imposes on the body corporate are not, therefore, limited to common property.   There can be occasions when the body corporate may be held responsible for maintenance of private property.

[63]     For example, where a unit holder cannot be found, but his or her private property is in such disrepair that a local authority requires repairs to be effected, that authority could require the body corporate to carry out the repairs.   In such circumstances, s 33 provides the body corporate with authority to recover the repair costs from the unit holder.   That s 33 sits with s 34, which allows for similar recovery where the repairs are due to the fault of persons connected with the repaired unit, provides further support for this reading of s 33.  In this way, the ability of the body corporate  under s  33  to recover costs  according to  the substantial  benefit enjoyed by the subject unit holder/s is consistent with the interpretation applied in Tisch to s 48.

[64]     Thus, it does not necessarily follow that s 33 allows recovery of repair costs for  common  property  based  on  a  cost-benefit  analysis  of  which  unit  holder

substantially  benefits  from  the  repairs.    I  consider,  therefore,  that  the  parties’

interpretation of the scope of s 33 is too broad.

[65]     In the alternative, even if s 33 is available to a body corporate to allow it to apportion repair costs for common property on the basis of a cost-benefit analysis regarding substantial benefits for particular units, it does not necessarily follow that s 48 should be read in this way as well.  First, s 33 expressly refers to apportioning costs according to who benefits, whereas s 48 does not.  Secondly, as noted in an article by Alan Stones “Unit Titles Act 1972: Recovery of Outgoings for Office Tower Complexes” (1992) 6 BCB 53 at 54, the Act provides no flexibility as to the basis for determining liability to contribute to the body corporate fund as between proprietors except in the limited circumstances of ss 33 and 34.  Although Mr Stones is critical of this rigidity, stating that this is inconsistent with market expectations, even he concedes that the 1972 Act does not in fact allow the flexibility to be extended beyond s 33.

[66]     In M Chapman-Smith, “Unit Titles Act 1972: Management of Leased Non-

Residential Units” (1993) 6 BCB 137, Stones notes:

[E]ven if s 33 has application, it does not permit: (a) prospective expenditure to be levied in advance; nor (b) the unit entitlement approach to be departed from by the body corporate (except with the sanction of a Court order and then only by reference to relative benefits).

[67]     By expressly prescribing the limited situations in which the Court might have the discretion to re-apportion costs, Parliament can be understood to have intended that no other situations should allow the same analysis.   On these principles, the procedural fairness of contractual freedom outweighs substantive fairness because of the importance of certainty in commercial dealings.   This is supported by the principles expounded by the Court of Appeal in Tisch.

[68]     Another distinguishing feature between s 33 and s 48 is that s 33 works because the debt is determined at a point where the costs and benefits have been rendered certain, i.e. after the repairs.  Any cost-benefit analysis would be based on real figures that were easy to compare.  The main problem with applying the same analysis to s 48 is the argument of circularity: that one cannot determine what costs

or benefits are involved unless the scheme is determined first.  This would make it less appropriate to apply the same principles to s 48.

[69]     I consider that the view I have taken of the need for certainty when it comes to unit holders’ responsibility for common property costs is consistent with the scheme and purpose of the 1972 Act and of the Court of Appeal’s interpretation of s 48 in Tisch.

[70]     Insofar as it might be argued that the current legislation has as one of its purposes a “flexible and responsive regime” (see s 3(c) of the Unit Titles Act 2010), that in turn would allow the Court to take a more flexible approach under s 74, the present equivalent of s 48, this argument does not overcome the reasoning in Tisch.

[71]     First, at [26] in Tisch, the Court of Appeal noted that s 74 of the current legislation is essentially the equivalent of s 48, which caused the Court of Appeal to conclude that the way in which s 48 had been employed up to the passing of the current legislation “did not prompt Parliament to make any change”.   This tells against the notion that s 74 would permit a more flexible approach.

[72]     Secondly, given the reference to flexibility in s 3(c) of the 2010 Act, had Parliament intended to permit the Court more flexibility under s 74 when approving a scheme under that provision, it would also have been open to Parliament to extend that flexibility to applications that were commenced under the former legislation but that fell to be determined after its repeal.   Parliament could have stipulated in the

2010 Act’s transitional provision that applications commenced under s 48 of the

1972 Act would be dealt with as if they had been brought under the 2010 Act.  In that way, the benefit of a purposive reading of s 74, which took into account s 3(c), and so perhaps allowed greater flexibility for apportioning costs than was the case under s 48, would have been available to the parties in this proceeding.   But Parliament did not do so.  This to me is a clear indication that Parliament wanted applications like the present to be determined in accordance with the intent and purpose of the 1972 Act’s legislative scheme.  Since flexibility was not an evident policy factor in the 1972 Act, whereas certainty of liability was, I consider that I

must approve a scheme under s 48 that is consistent with the scheme and purpose of the 1972 Act.

[73]     The  view  I  have  reached  means  that  the  task  of  dividing  the  costs  of remediating private property from those of remediating common property will need to be undertaken.  I consider that the remediation of the leaky problems associated with this complex should be undertaken under a single managed building contract. If the parties cannot agree on a means of separating the private property remediation costs from common property remediation costs, leave is reserved to the parties to return to Court to determine this aspect of the s 48 scheme.

[74]     Insofar as the approval of a s 48 scheme for remediating common property in accordance with apportioning liability between unit owners in accordance with s 6 of the Act necessitates determination of other provisions, leave is reserved to the parties to return to Court, if they are unable to agree any such provisions.

Result

[75]     The application by the Hayden Tate respondents, insofar as it promotes a scheme that applies the statutory formula in s 6 to apportion common property costs, is successful.  The balance of this application (insofar as it would apportion liability for private property costs among all unit owners) is dismissed.

[76]     The applications by the other parties are dismissed.

[77]     Leave is reserved to the parties to return to Court, should they be unable to agree the outstanding issues referred to in [73] to [74] herein.

[78]     If the parties are unable to resolve the question of costs arising from these applications, they have leave to apply to the Court to determine costs.

Duffy J

ANNEXURE

Counsel:      D R Bigio P O Box 4338 Shortland Street Auckland 1140 for the Hayden Tate (Second  to Twenty-Fourth, Twenty-Sixth  to Thirtieth  and Thirty-Second  to Thirty-Fourth) Respondents

I F Williams P O Box 4338 (DX CX10258) Shortland Street Auckland 1140 for the Seventy-First Respondent

Solicitors:    Hesketh  Henry  Private  Bag  92093  (DX  CP24017)  Victoria  Street  West

Auckland 1142 for the Applicant

Price   Baker   Berridge   P   O    Box   21463   (DX   DP92509)   Henderson

Waitakere 0650 for the First Respondent

Grove Darlow and Partners P O Box 2882 (DX CP24049) Shortland Street

Auckland 1140 for the Grove Darlow (Thirty-Fifty to Fifty-Seventh, Sixty- Third, Sixty-Ninth and Seventy-Third) Respondents

Gilbert Walker P O Box 1595 (DX CP20524) Shortland Street Auckland 1140

for the Gilbert Walker (Seventy-Seventh to Eighty-Sixth) Respondents