Whai Rawa Railway Lands LP v Body Corporate 201036
[2021] NZHC 2893
•1 November 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-1258
[2021] NZHC 2893
BETWEEN WHAI RAWA RAILWAY LANDS LP
Applicant
AND
BODY CORPORATE 201036
Respondent
Hearing: 12 October 2021 Counsel:
D Salmon QC and S Ma-Ching for the Applicant J Heatlie and J Wood for the Respondent
Judgment:
1 November 2021
JUDGMENT OF GORDON J
This judgment was delivered by me
on 1 November 2021 at 11.30 am, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Solicitors: Lee Salmon Long, Auckland
Court One, Auckland
Counsel: D Salmon QC, Auckland
WHAI RAWA RAILWAY LANDS LP v BODY CORPORATE 201036 [2021] NZHC 2893 [1 November 2021]
Introduction
[1] The Parnell Terraces residential development comprising 81 units in a body corporate structure is on leasehold land. The lessor is the applicant, Whai Rawa Railway Lands LP (Whai Rawa). The respondent, Body Corporate 201036 (Body Corporate) is the lessee. The ground rental is in arrears. Whai Rawa has applied for orders as lessor under ss 165 and 141 of the Unit Titles Act 2010 (the Act) for the appointment of administrators. Whai Rawa says not only has the rental been in arrears for 10 months, but the Body Corporate, as lessee, is dysfunctional and no longer operating as intended by the Act and is in breach of its obligations under the lease.
[2] Whai Rawa says the dysfunction arises because of the Body Corporate’s conscious and tactical decision to suspend levying and collecting ground rental from unit owners and paying it to Whai Rawa. Instead, the Body Corporate has directed owners to make payment of their share of the ground rental directly to Whai Rawa. Whai Rawa says the Body Corporate’s decision was made for the tactical and improper purpose of putting pressure on Whai Rawa to re-negotiate the terms of the lease.
[3] The Body Corporate says, while its decision may be criticised, it was not irrational. The Body Corporate also says the facts and circumstances of this case do not come even close to showing the type of cause required for the appointment of an administrator.
[4] What is agreed is that the ground rental is in arrears for more than the one month statutory requirement, which enables a lessor to make an application for the appointment of an administrator.1
Background
[5] The application concerns the land at 51 Ronayne Street, on the corner of Ronayne Street and The Strand in Parnell, and the development on the land known as Parnell Terraces. Ngāti Whātua Ōrākei Whai Rawa Ltd is the commercial investment arm of Ngāti Whātua Ōrākei Trust (Trust). Whai Rawa is a wholly owned subsidiary
1 Unit Titles Act 2010, s 165(1)(a).
of the Ngāti Whātua Ōrākei Whai Rawa Ltd group of companies (Group). The Group now manages a large asset base for the benefit of the Ngāti Whātua Ōrākei hapū. Whai Rawa is the entity within the Group that owns and manages the land concerned, and is now the ground lessor of Parnell Terraces under registered lease D184412.3. The Body Corporate is now the lessee under the lease. The original parties to the Deed of Lease dated 29 May 1997 were the Ngāti Whātua Ōrākei Māori Trust Board (the predecessor to the Trust) as lessor and Magellan Orakei Ltd, as lessee.
[6] The lease is for a term of 150 years commencing on 2 August 1996. At the time the lease was entered into, the land was undeveloped, having previously formed part of the railway. To encourage the development of the land, the parties agreed that the rental payable under the lease for the first 15 years would be 10 cents per annum.
[7] On 17 April 2000, a unit plan was deposited in respect of the leasehold estate in the land subdividing it into 81 units. The Body Corporate is the body corporate established in respect of and upon the creation of the unit title subdivision. The units were subsequently developed into three-storey townhouses arranged in six terraced blocks.
[8]Under the terms of the lease:
(a)the ground rental is payable on a monthly basis on the first day of the month;
(b)the rental payable is to be set at 6 per cent of the current freehold market of the land;
(c)rental reviews may be carried out every seven years to determine the current freehold market value of the land; and
(d)The lessee may challenge the assessment of the freehold market value of the land with any dispute to be determined through arbitration.
[9] Michael Rehm has sworn an affidavit in support of the Body Corporate’s opposition to the application. Mr Rehm has been a co-owner of one of the units since
2006 and a Committee member and Chair of the Body Corporate for over 12 years. Mr Rehm says that in 2008, it was discovered that the development had significant building defects. In his affidavit, Mr Rehm gives a detailed account of steps taken to remedy the defects, the problems encountered in doing so and the significant cost of remediation. Eventually Code Compliance was given by the Auckland Council in October 2019. A number of unit owners defaulted on the payment of levies and/or their contribution to the repair scheme, requiring the Body Corporate to take enforcement proceedings. Mr Rehm’s evidence about the building defects and remediation was not challenged and it is not necessary to recite all the detail for the purpose of this judgment.2 But it is part of the background leading up to the Body Corporate’s decision that has resulted in this application by Whai Rawa.
[10] The most recent rental review date was 2 August 2018. On 25 May 2018, Whai Rawa served a notice on the Body Corporate advising that its assessment of the current freehold market value of the land at Parnell Terraces was $24,690,000 (plus GST). The Body Corporate obtained its own valuation and gave notice that it disputed Whai Rawa’s assessment and considered that the land value was $18,350,000. After a period of negotiation the parties agreed to a new rental based on a freehold value of
$22,925,500 (plus GST). This followed the Body Corporate passing a unanimous resolution approving that amount at an extraordinary general meeting (EGM) on 17 December 2018.
[11] Based on that figure, the annual ground rental from 2 August 2018 has been set at $1,375,530, almost double the previous rental of $740,670. The average annual ground rental per unit is now $16,982. The average monthly rental for each unit went from $762 to $1,415.15.
[12] Mr Rehm says he endeavoured to speak to Whai Rawa about the effect of the increase. He says he believed that if Whai Rawa could be made to understand that the fixed formula of the rent review provisions had led to the ground rental becoming too onerous for many owners, and would likely become wholly unaffordable at the next review, then Whai Rawa might be willing to consider ways of alleviating the
2 Whai Rawa was not at fault in relation to the building defects. It was not the developer.
increasing pressure on owners. Mr Rehm thought the best solution for both Whai Rawa and the unit owners would have been to have agreed to a sum to pre-pay the ground rental for the rest of the term. He says that would have given Whai Rawa capital and would have increased the values of the units to close to their freehold value.
[13] Mr Rehm says the Body Corporate convened an EGM on 29 September 2020 and it was decided that as a contingency, the owners would empower the Committee of the Body Corporate (Committee) to suspend the ground rental levy and for those owners who could pay it, to make payment to Whai Rawa direct. Mr Rehm says the primary purpose of this was the protection of the owners who were paying their proportion of the ground rental in full and on time. In making that decision, Mr Rehm says the Body Corporate relied on the provisions of the Act (in s 163), making each owner a guarantor for their unit’s liability share of the ground rental.
[14] Mr Rehm says the Body Corporate hoped they would not need to take the action referred to above but they believed if Whai Rawa understood the owners’ predicament and how onerous it had become for the Body Corporate to continue collecting from defaulting owners, many of whom had little left to offer, Whai Rawa might be willing to reconsider its position.
[15] The Body Corporate instructed Centurion Management Services Ltd (Centurion), the Body Corporate Manager, to write to Whai Rawa following the EGM. By letter dated 2 October 2020, Centurion did so. The letter included the following:
(a)Due to the inflexibility of the formula under the lease the terms had become unfair to the Body Corporate and unit owners, many of whom had not been in a position to pay their ground rental placing financial pressure on the other owners to pick up the shortfall;
(b)The comprehensive repairs, which the Body Corporate was obliged by the lease to undertake, for a number of owners involved substantial borrowing;
(c)Many owners were likely, for their own protection, to elect to make payment of their ground rental direct to Whai Rawa. (The letter noted the Body Corporate’s understanding that this was permissible under the Act);
(d)The Body Corporate had incurred considerable legal costs in pursuing defaulting owners and would not be in a position to continue to do so;
(e)The Body Corporate would be directing all owners to make payment direct to Whai Rawa and leave the collection of the shortfall to Whai Rawa; and
(f)The pre-payment option was again mentioned.
[16] The Chief Executive of Ngāti Whātua Ōrākei Whai Rawa Ltd responded in a letter of 2 November 2020 stating that while Whai Rawa was sympathetic to the circumstances experienced by the unit owners, Whai Rawa was obliged to make commercially prudent decisions enabling it to support its whānau and their future. Accordingly, the current terms of the lease needed to be met and there would be no renegotiation of the terms of the ground lease.
[17] Mr Rehm says that although the Committee had been empowered to suspend the collection of levies for the ground rental, the Committee thought it prudent to put the decision back to the owners as a whole. On 7 December 2020, there was an EGM at which it was confirmed that the Body Corporate’s decision was that it would cease the ground rental levies and that owners were to use Centurion as their agent to pass their proportion of the ground rental to Whai Rawa with details of which owners had paid.
[18] On 14 December 2020, Centurion wrote to Whai Rawa saying that the Body Corporate had expended significant time and resource in pursuing owners through the Tribunals and Courts in order to compel payment. The letter further stated that the Body Corporate could no longer do so and had instructed Centurion to cease collecting ground rental payments. The letter continued, saying that from that rental period
onwards, Centurion had been instructed that for those individual owners who did make payment to Centurion, Centurion should pay to Whai Rawa their share of the ground rental on their account.
[19] Mr Donnelly, the General Manager, Property Development at Ngāti Whātua Ōrākei Whai Rawa Ltd, who swore affidavits in support of the application, says that mindful Christmas was approaching, Whai Rawa sent a brief response on 22 December 2020. The letter said that all payments received would be applied to amounts due and payable by the Body Corporate (not held to the account of individual unit owners) and any shortfall or late payment of rent would be treated as a breach of the lease arrangement by the Body Corporate. The letter further stated that Whai Rawa was seeking advice and would be in touch in the New Year.
[20]Mr Donnelly says that by the end of February 2021 the rental arrears stood at
$117,110.57. On 15 March 2021, Whai Rawa responded to Centurion. In its letter, Whai Rawa:
(a)requested payment of the outstanding rental, which by that stage was
$156,860.06 together with interest on the unpaid amounts;
(b)stated that failure to remedy the default might result in Whai Rawa making an application for the appointment of an administrator and/or taking steps to cancel the lease under s 165 of the Act;
(c)stated that the Body Corporate was in breach of its obligation under s 84 of the Act including an obligation under s 87(2) to pay the ground rental from any levies collected before the Body Corporate made any other payments; and
(d)requested information, including Body Corporate minutes, latest signed annual financial statements, management accounts and a summary of the steps taken and a timeline to pursue unpaid levies from individual unit holders.
[21] The Body Corporate’s solicitors responded on 26 March 2021, saying it had become too expensive for the Body Corporate to take action to recover unpaid levies from defaulting unit holders and the “only option” was for it to make the decision to stop levying and collecting ground rental. The letter further stated that the Body Corporate did not consider it was open to Whai Rawa to take steps to seek the appointment of an administrator or cancellation of the unit plan. Instead, it suggested that Whai Rawa was required to resort to the implied guarantees by each unit owner in s 163 of the Act and pursue unit owners individually for their share of the ground rental.
[22] The letter again invited Whai Rawa to agree to pre-payment of the balance of the lease at a reduced rate. The letter did not respond to Whai Rawa’s request for information about its financial position and decision-making but it did indicate that the Body Corporate had access to non-levy funds to allow it to continue to operate.
[23] On 19 April 2021, Whai Rawa’s solicitors responded. The letter included a statement that Whai Rawa considered the Body Corporate’s position left it with no option other than to bring proceedings under the Act. The letter noted the terms of the lease and Whai Rawa’s obligations to its members.
[24] On 10 June 2021, the solicitors for the Body Corporate filed an application in this Court to have the review provisions in the lease declared harsh and unconscionable. That application has yet to be heard.
[25] Mr Donnelly says that since the Body Corporate determined not to collect levies for ground rental payments in December 2020, the amount of rental received steadily decreased for several months.
[26] As at 5 July 2021, when Whai Rawa filed the originating application, the rental was $225,179.55 in arrears. Mr Rehm, in his affidavit of 10 September 2021, says the Body Corporate passed a “make-up levy” to recover the ground rental from December 2020 to August 2021. He said the Body Corporate also passed a monthly levy for the ground rental going forward. Mr Rehm says even though the Body Corporate does not consider there to be any grounds for the appointment of an administrator, they took
these steps to avoid getting into a dispute with Whai Rawa until the Body Corporate’s application in relation to the terms of the lease is heard and determined. Mr Salmon QC, for Whai Rawa, characterises all of that as the Body Corporate having “blinked” as its tactical strategy had failed.
[27] Mr Rehm also says the Body Corporate’s solicitors wrote to the owners that were in default and many subsequently paid their shares. He says that on 10 September 2021, in the absence of payment, the Body Corporate commenced an omnibus proceeding in the High Court against the owners who had not paid as of that date.3
[28] Whai Rawa issued a notice of default seeking payment of $156,860.06 in rental arrears and interest under s 165(4)(a) and (b) of the Act on 15 March 2021.
[29] As at the date of the hearing, the Body Corporate’s position was that the outstanding rental was $194,307.26. Whai Rawa’s figure was marginally different, but it agreed that the figure of $194,307.26 could be accepted by the Court as the outstanding amount.
The application
[30] Whai Rawa seeks orders appointing Rees Logan and Andrew McKay, chartered accountants of BDO Auckland (who have both consented to their appointment), jointly and severally as administrators of the Body Corporate on the following terms:
(a)The administrators may exercise all of the powers of the Body Corporate to the exclusion of the Body Corporate and Body Corporate Committee and is [sic] subject to all of the duties of the Body Corporate;
(b)The appointment is to continue until further order of the Court;
3 With the exception of three units with monies outstanding, which had not been included in the omnibus proceeding for reasons explained by Mr Rehm.
(c)The administrators are entitled to be remunerated by the Body Corporate for their reasonable attendances at a rate of $550.00 per hour plus GST and reasonable disbursements;
(d)The administrators may be assisted by staff and employees of their firm acting under their direction and supervision, as appropriate, whose hourly rates (excluding GST and disbursements) are:
·Associate $475
·Senior Manager $400
·Manager $325
·Senior Analyst $250
·Analyst $200
·Administrator $180
(e)Leave is granted to the administrators to seek directions from the Court relating to remuneration and any other matters arising from the administration; and
(f)Such other orders as the Court deems fit.
Submissions in support of application
[31] Mr Salmon submits that the significant arrears of themselves warrant an appointment of administrators, particularly given the circumstances in which the arrears have arisen, namely the Body Corporate’s deliberate decision to stop collecting ground rental and paying it to the lessor for tactical reasons and in breach of its statutory functions and obligations under the lease to ensure the ground rental is collected and paid.
[32] As a related point there was the Body Corporate’s instruction to its manager, Centurion, not to use existing funds to pay ground rental, even if failing to do so would be in breach of s 87(2) of the Act. The minutes of the Body Corporate meeting of 7 December 2020 record a resolution that Centurion was to be instructed:
“… not to pay the rent due to Whai Rawa LP from Body Corporate Funds notwithstanding the provisions of s 87(2) of the Unit Titles Act 2010, and waives any claim it might have against Centurion in respect of this instruction”.
[33] Mr Salmon also points to inconsistencies in the Body Corporate’s position in that Mr Rehm’s affidavit contradicts correspondence to Whai Rawa4 in which the Body Corporate claimed it could no longer afford steps to pursue collection of ground rental, including because efforts were resulting in little or no recovery in an increasing number of cases. However, in his first affidavit of 20 August 2021, Mr Rehm confirms that $3,994,803 of unpaid levies had been successfully covered from taking proceedings against some unit holders. Further, Mr Rehm now says in his affidavit that the Body Corporate “has the ability and intention to actively collect and pursue the payment of ground rental from its members”, contrary to the position conveyed to Whai Rawa when the Body Corporate resolved to stop collecting rent.
[34] As to the statement by Mr Rehm, in his 10 September 2021 affidavit, saying that the Body Corporate has now commenced recollection efforts, Whai Rawa submits that this change has come about solely in response to this proceeding and is an attempt to avoid the appointment of administrators. Having regard to the Body Corporate’s disregard for its obligations to date, the Court cannot have confidence that the Body Corporate will act properly and take all reasonable steps to secure payment of ground rental without ongoing supervision of administrators.
[35] Mr Salmon submits that Mr Rehm’s affidavits do not provide any assurance on this issue. He says Mr Rehm simply asserts that the finances of the Body Corporate are confidential and there is no “factual basis for Whai Rawa’s concerns”. Whai Rawa, however, says there are clear reasons for concern given the limited information that the Body Corporate has been prepared to supply to date.
[36] In circumstances where the Body Corporate has refused to provide information about its finances, Whai Rawa says there is a solvency concern. It says the Body Corporate has for months claimed to be without funds to afford to take steps, was in default of ground rental under its lease and failed to make payments when due for at
4 Letters of 2 October 2020, 14 December 2020 and 26 March 2021.
least 10 months. Whai Rawa notes Mr Rehm’s affidavit evidence regarding the cost for weathertightness repairs increasing from an estimated $9.1 million to over
$26.5 million. Whai Rawa also refers to Mr Rehm’s evidence about failures of unit holders to pay repair levies, numerous proceedings against its members for unpaid levies, bankruptcies, mortgagee sales, and steps taken by the Body Corporate to take secure vesting orders for units of bankrupt owners.
Response by Body Corporate
[37] Ms Heatlie for the Body Corporate submits the Body Corporate is patently functional and well administered. She says it has managed to overcome extreme adversity over an extended period of time, referring in that regard to the significant building defects and steps undertaken in an effort to obtain recovery from the only viable party and the significant remedial work undertaken at a cost of over $30 million. She also refers to the Body Corporate’s efforts in pursuing defaulting owners and the collection of close to $4 million in outstanding levy payments since 2017.
[38] Ms Heatlie notes that the decision to suspend levying and collection of ground rental was made by the owners in an EGM. She says the Body Corporate has experienced and reputable advisers and Body Corporate manager. It is now levying and collecting ground rental and paying Whai Rawa the rental that is collected.
[39] Ms Heatlie says, however, that the sustainability of the current lease terms does remain an issue of concern to the Body Corporate and she refers to the Body Corporate’s application to the Court to declare certain terms of the lease harsh and unconscionable. She says if that application is successful the ground rental is likely to be significantly reduced.
[40] As to arrears, Ms Heatlie says that an amount of $182,671.60 is owed by 14 of the 81 units with most of this sum due to one family that owns eight units. Ms Heatlie effectively acknowledges that the decision made at the EGM to suspend levying owners for ground rental with the direction that they pay directly to Whai Rawa was a tactical one. She says the decision was made in an effort to make Whai Rawa aware of the very real difficulties owners were experiencing in continuing to pay what she describes as the onerous ground rental increases.
[41] Ms Heatlie says that the ground rental was not in arrears at the time of the decision to suspend levying. Although a number of individual owners had by then defaulted on paying their ground rental levy, other owners had covered the shortfall pending recovery from the defaulters. This placed additional financial pressure on paying owners. The majority of owners have, since December 2020, continued to pay their share of the ground rental direct to Whai Rawa.
[42] Ms Heatlie notes that since the institution of this proceeding, the Body Corporate has resolved to recommence levying and collection of ground rental and since such recommencement it has collected and paid $321,333.99 to Whai Rawa. She also refers to the omnibus claim against defaulting owners filed on 10 September 2021. Ms Heatlie submits it is speculation on Whai Rawa’s part when it suggests that defaults will increase. But even if that is the case, she says the Body Corporate will continue to pursue defaulters.
[43] Ms Heatlie submits apart from the arrears in ground rental, there is no other justifiable basis for the appointment of an administrator.
[44] She says that ground rental has not been withheld or used to pay other expenses. She submits that s 87(2) of the Act does not give the landlord preference to or security over all other operational levies collected. She further submits that individual unit owners are liable for their share of the ground rental levied and are able to discharge their liability to both the landlord and Body Corporate by making payment direct to the landlord. She says the recourse for the Body Corporate and the landlord is to enforce ground rental against the defaulting owners and not to use monies specifically raised for other purposes. She says Whai Rawa has taken no steps to recover the outstanding ground rental from the defaulting owners and she criticises Whai Rawa for not doing so.
[45] In relation to information requested, she submits that Whai Rawa has all the relevant information in relation to ground rental collected. It is not entitled to the Body Corporate’s general financial accounts or other operating accounts.
[46] Finally, as to concerns about the Body Corporate’s solvency, she says the Body Corporate is not subject to the Companies or Insolvency legislation. She acknowledges that the solvency of individual members will invariably affect payment of Body Corporate levies but she says the Body Corporate will continue to enforce levies against defaulting owners.
Statutory provisions and legal principles
[47] Section 84 of the Act sets out the powers and duties of a body corporate and relevantly provides:
84 Powers and duties of body corporate
(1) The body corporate has the powers and duties set out in—
…
(e)section 87 (which requires the payment of ground rental to a lessor):
…
[48]Section 87 provides:
87 Payment of ground rental by body corporate
(1)This section applies in relation to a unit development on leasehold land.
(2)The body corporate must pay the lessor the ground rental from any levies collected from the unit owners before making any other payments.
(3)For the purposes of subsection (2), in a layered unit title development the body corporate referred to in that subsection is the head body corporate.
[49] The parties disagree over the meaning of s 87(2) and counsel made detailed and careful submissions to support their respective positions. I will return to this issue.
[50] Where the rental is in arrears for one month or the Body Corporate is in breach of its obligations in the lease, the lessor may apply to the Court for an appointment of
an administrator (or cancellation of the unit plan, which is not sought here). Section 165 relevantly provides:
165 Lessor may apply for appointment of administrator or cancellation of unit plan
(1)This section applies if—
(a)rent is in arrears for the space of 1 month; or
(b)the body corporate has failed to perform or observe any of the covenants, agreements, or stipulations contained or implied in the lease to be performed or observed by the lessee.
(2)The lessor may—
(a)apply to the High Court for the appointment of an administrator, in which case section 141 applies with any necessary modifications;
…
(4)No application may be made under subsection (2)(a) or (b) in respect of a failure described in subsection (1)(b) unless—
(a)the lessor serves on the body corporate and the bodies corporate described in section 187(2)(b) and (c) a notice—
(i)specifying the particular breach complained of; and
(ii)if the breach is capable of remedy, requiring the body corporate to make compensation in money for the breach; and
(b)the body corporate fails within a reasonable time to remedy the breach, if it is capable of remedy, and to make reasonable compensation in money to the satisfaction of the lessor.
…
(7)If the High Court grants relief it may grant it on such terms (if any) as to costs, expenses, damages, compensation, penalty, or otherwise, including the granting of an injunction to restrain any like breach in the future, as the High Court in the circumstances of each case thinks fit.
[51] Whai Rawa relies on both s 165(1)(a) and (b). It has given notice, as required under s 165(4)(a), and the Body Corporate has not remedied the breach nor made reasonable compensation in money to the satisfaction of the lessor.5
5 Unit Titles Act, s 165(4)(b).
[52] There is limited authority on s 165. Both counsel referred to Wellington City Council v Body Corporate 51702,6 in which the Court of Appeal granted orders for the cancellation of a unit plan under s 28 of the Unit Titles Act 1972 (the predecessor to s 165), where there had been a failure to pay ground rental. By the time of trial, the amount of arrears was approximately $500,000. Since its acquisition of the ground lessee’s interest, the lessee had only paid $38,000 of ground rental.
[53] The Court of Appeal stated “the Court had jurisdiction to order cancellation because rental was far more than one month in arrears”, although the Court of Appeal noted that a Court retained a discretion whether or not to order cancellation.7 Mr Salmon submits that cancellation of a unit plan is a far more draconian remedy than that which is sought by Whai Rawa.
[54] Section 141 of the Act provides for creditors of a Body Corporate to apply to the High Court for the appointment of an administrator. By virtue of s 165(2), s 141 applies, with any necessary modifications, to an application by a lessor for the appointment of an administrator. Section 141 provides in relevant part:
141 Appointment of administrator
(1) The body corporate, a creditor of the body corporate, or any person having a registered interest in a unit, may apply to the High Court for the appointment of an administrator.
…
(3) The High Court may, in its discretion on cause shown, appoint an administrator for an indefinite period or for a fixed period on such terms and conditions as to remuneration or otherwise as it thinks fit.
…
[55] As is apparent from s 141(3) the Court has a broad discretion to consider the appointment of an administrator but the Act is silent as to the grounds that would constitute “cause”. Counsel referred the Court to previous cases where this Court has considered what would amount to cause.
6 Wellington City Council v Body Corporate 51702 [2002] 3 NZLR 486 (CA).
7 At [45].
[56] First, in Low v Body Corporate 384911,8 the High Court was asked to appoint an administrator for the development operating as the Westin Hotel. Some unit holders had refused to pay the amounts levied on them for ground rental and insurance premiums because of their mistrust of the committee of the Body Corporate. The applicant, Mr Lowe, owned a stratum estate in leasehold in the Westin Hotel. He, together with 113 co-applicants, sought an order appointing a chartered accountant as administrator. The application was opposed by both the Body Corporate and receivers of two associated companies that owned other units in the building or had other interests associated with the hotel’s operations. The applicant claimed that the Body Corporate was dysfunctional and would not be run in the best interests of the unit owners.
[57] The application was brought under s 40 of the 1972 Act (the predecessor of s 141). In that case, Heath J said:9
[33] Because s 40 envisages a less critical situation than does s 46,10 it would be unwise to attempt to define exhaustively the circumstances in which the discretion to appoint an administrator should be exercised. Parliament has provided an open-textured approach for the Court to apply, by using general words as a threshold test. All that is required is for the Court, “on cause shown”, to exercise its discretion to appoint an administrator. The nature of the discretion is emphasised by the ability to appoint a person for a fixed or indefinite period and on such terms as the Court thinks fit. The Court’s ability to limit those powers of a body corporate and the committee that the administrator may exercise supports that view.
…
[37] … In my view, the general discretion (while it must be exercised in a principled way) should not be fettered. Everything turns on the facts of the particular case, with the Court’s discretion being informed primarily by the functions of a body corporate and the ability of those with responsibility for its affairs to carry out their duties fairly, against the background of the underlying principles on which the Act is based.
(citations omitted)
8 Low v Body Corporate 384911 (2010) 12 NZCPR 142 (HC).
9 At [33] and [37].
10 Section 46 of the Unit Titles Act 1972 enabled the Body Corporate, an administrator or the proprietor or one of the proprietors of a unit to apply to cancel the unit plan.
[58] Heath J referred to the comments of Bongiorno J in the Supreme Court of Victoria when considering similar legislation. Bongiorno J said that to justify appointment of an administrator, a Body Corporate:11
… must be affected by some incapacity, or must be acting so dysfunctionally as to render the provision of appropriate services to unit holders and/or care of the common property either non-existent, or so beset by difficulties as to render the body corporate unable to function at what the Court considers to be a satisfactory level.
[59] Heath J commented that despite the language used by the Australian Judge, he did not think the Judge intended to limit the circumstances in which the discretion to appoint an administrator should be exercised but rather, the observation should be read in the context of the particular dispute under consideration.12
[60]On the facts in Low, Heath J stated:13
[38] I am not satisfied that the affairs of the Body Corporate are being conducted in a dysfunctional manner. Whatever complaints the applicants may have about decisions being made by the committee, it cannot be said that those decisions are being reached irrationally. Although criticism has been made of the way in which the committee has dealt with outstanding debts to Viaduct and the insurer, I agree with counsel for the Body Corporate and the receivers that those problems have arisen because of the failure of the applicants to pay due levies to the Body Corporate. While understanding the reasons for withholding those payments, it is inappropriate for the applicants to criticise the committee for failing to pay those debts when they have lacked money to do so.
[61] A second case is Gibson v Body Corporate 384911.14 Ellis J considered a further application for the appointment of an administrator for the unit title complex from which the Westin Hotel operated after continued infighting within the Body Corporate. Ellis J reviewed a number of authorities, including those referred to above, and summarised factors potentially relevant to an appointment of an administrator, under s 40 of the Unit Titles Act 1972. Those factors included: the existence of any undemocratic or ultra vires decisions; dysfunctionality or deadlock; or a majority decision that had been brought about by the improper influence of a third party; or majority decisions that deliberately or unnecessarily harmed the interests of the
11 McKinnon v Adams [2003] VSC 116 at [20].
12 Low v Body Corporate 384911, above n 8, at [37].
13 At [38].
14 Gibson v Body Corporate 384911 [2012] 1 NZLR 84 (HC).
minority.15 Like Heath J, Ellis J did not consider this list to be either exhaustive or necessarily applicable in all cases. Ellis J said:16
[67] … Even if democracy can be regarded as the model of governance most likely to further the common good that does not mean that the good of each of its members will or can in all cases be furthered. It is no doubt for that reason that Miles CJ held in Filaria that a body corporate is not rendered ripe for the appointment of an administrator simply because it has failed to act in the interests of a certain group of unit holders. There is thus an additional requirement that its failure to do so be in some way “improper”.
[68] While not going so far as to suggest that the “cause shown” threshold in s 40(2) will always need to involve the existence of impropriety in the conduct of the affairs of the relevant body corporate, the concept of impropriety nonetheless constitutes a useful starting point in what otherwise risks being a somewhat rudderless analytical exercise. But if that is to be adopted as a starting point, a question then arises about what might constitute “impropriety”.
[69] First, it might be thought that there is a presumption that decisions made by a body corporate both democratically and intra vires are not improper. On the other hand, if there are questions about the means by which the proprietors have been persuaded to lend their vote to the majority (for example if questions of deception, misinformation or coercion arise) then that presumption would be unlikely to prevail. That then is one further matter that may bear further scrutiny in the present case.
[70] Secondly, a focus on impropriety might also suggest consideration of whether a body corporate’s actions or decisions were taken or made in bad faith or for an illegitimate purpose. …
[62] In TBS Remcon Ltd v Body Corporate 354994,17 Courtney J considered an application for the appointment of an administrator to enforce a debt. The applicant had obtained a determination under the Construction Contracts Act 2002 (CCA) requiring the respondent to pay $2,263,091.81. The respondent paid part of that sum but refused to pay the balance. The applicant applied to the High Court under s 141(3) of the Act for the appointment of an administrator for the express purpose of causing the respondent to pay the outstanding balance. At issue was whether the Court should exercise its discretion to appoint an administrator in those circumstances. Courtney J said:18
[10] I agree that, whilst dysfunction is the most likely circumstance to produce an application for the appointment of an administrator, the scope of
15 Gibson v Body Corporate 384911, above n 14, at [71].
16 At [67]–[70].
17 TBS Remcon Ltd v Body Corporate 354994 [2016] NZHC 1689, (2016) 18 NZCPR 261.
18 TBS Remcon Ltd v Body Corporate 354994, above n 17, at [10]–[11].
s 141(3) is not limited to that. Section 141(3) clearly contemplates a flexible response to the potentially wide variety of circumstances that might confront body corporate members and creditors of the body corporate. However, Heath J is right that the discretion must be exercised in a principled way. This must mean, at least, that the exercise of the discretion should not conflict with the scheme of the UTA 2010 and should reflect the statutory functions and powers of the body corporate.
[11] The body corporate lies at the heart of the scheme created by the UTA 2010 and UTA 1972. It provides the democratic means by which unit owners operate and manage unit title developments. The appointment of an administrator would take that control away from the unit owners to a greater or lesser extent, depending on the terms of the appointment. The appointment of an administrator therefore has serious consequences for the rights of the unit owners whose only means of expressing their wishes and exercising the full range of their statutory rights is through the body corporate. Whilst acknowledging the wide discretion conferred by s 141(3) I would nevertheless expect that it would only be in the most unusual circumstances that the appointment of an administrator would be justified where a body corporate is capable of functioning in the manner expected by the UTA 2010.
[63] I will return to the TBS Remcon Ltd decision later in this judgment as Ms Heatlie places some reliance on the statements of Courtney J. Mr Salmon, however, submits that the decision must be read carefully in relation to its particular facts and the statutory scheme under consideration, which is to be contrasted with the circumstances in this case involving a lessor rather than a general creditor.
[64] In Body Corporate 198900 v McCallion,19 Churchman J considered an interlocutory application without notice for interim orders appointing an administrator for a development in Customs Street West, Auckland known as “The Quays”. Pending determination of its substantive application to appoint an administrator, the applicant sought an appointment on an interim basis for the purpose of paying the ground rental outstanding. The grounds of the application were that the management had become dysfunctional, having not paid operating expenses or raised levies sufficient to meet expenses. There were allegations that the Body Corporate had made decisions which were ultra vires the Act, had managed funds otherwise than in accordance with obligations under the Act, failed to audit accounts and there was evidence of funds in the contingency fund account.
19 Body Corporate 198900 v McCallion [2018] NZHC 1831.
[65] Churchman J made a short-term appointment of an administrator and authorised him to transfer funds from the contingency fund account to the ground rental account so as to provide the Body Corporate with sufficient funds to pay the ground rental. Churchman J was satisfied that it was clear the Body Corporate was dysfunctional and in breach of its obligations. It was in the interests of all unit holders that ground rental was paid to avoid potential penalties, interest, court costs or similar sums.
Discussion
What was the extent of the breach?
[66] It is necessary to consider the meaning of s 87(2) to determine the extent (if any) of the Body Corporate’s breach of its statutory responsibilities. Section 87(2) is set out in [48] above, but for ease of reference I repeat it along with s 87(1) for context, below:
87 Payment of ground rental by body corporate
(1)This section applies in relation to a unit development on leasehold land.
(2)The body corporate must pay the lessor the ground rental from any levies collected from the unit owners before making any other payments.
…
[67] Ms Heatlie submits that s 87(2) requires the Body Corporate to pay ground rental from any levies collected from the unit owners before making any other payments. She says it has done so. Ms Heatlie submits the subsection must be interpreted to mean payment from ground rental levies collected not all levies. She submits the landlord does not have preference to, or security over, all other operational levies collected. She submits that had Parliament intended such protection it would have made it express.
[68] Mr Salmon submits that the plain meaning of the words of the subsection is clear and that “any levies” means what it says. He submits the interpretation advanced by the Body Corporate requires the insertion of the words “ground rental” between the
words “any” and “levies”. Words will only be implied if there is ambiguity and there is no ambiguity here. Further he submits, on the interpretation advanced by Ms Heatlie, the words “before making any other payments” would have no meaning.
[69] Mr Salmon submits the consequence of the Body Corporate’s incorrect interpretation of s 87(2) is that Whai Rawa and now the Court have no visibility as to the extent of the breach by the Body Corporate. That is because the Body Corporate has provided Whai Rawa with details of levies for ground rental but not in relation to its accounts as they relate to other levies.
[70] Counsel were not aware of any cases that discuss s 87(2). My research has similarly not turned up any relevant authorities. So I start from first principles. First, having regard to the words of the section, I do not consider there is any ambiguity in the wording. On a plain reading of the words of the section, the meaning is clear. To adopt the respondent’s interpretation would, as Mr Salmon submits, involve inserting the additional words “ground rental” between “any” and “levies”. Second, the words at the end of the subsection “before making any other payment” would lack meaning.
[71] However, that is not the end of the matter, as the meaning of legislation must be ascertained from its text and in the light of its purpose and context.20 One of the purposes of the Act is to protect the integrity of the development as a whole.21 On a purposive interpretation, the obligation to pay ground rental to the lessor first, makes sense. The obligation to the lessor is the foundation for an entire unit title development on leasehold land.
[72] Where there is harmony between grammatical meaning and purpose and in the absence of ambiguity, the Court would not resort to other aids as argued for by Ms Heatlie. However, I mention those other aids and address the submissions on the merits. First, Ms Heatlie refers to reg 29 of the Unit Titles Regulations 2011. That regulation provides:
20 Legislation Act 2019, s 10(1).
21 Unit Titles Act, s 3(d).
29 Operating account
(1)This regulation applies to a body corporate that has not established an optional contingency fund under section 118 of the Act.
(2)A body corporate to which this regulation applies may meet an unbudgeted expense out of its operating account provided that,—
(a)after paying the unbudgeted expense out of the operating account, the body corporate will be able to continue to pay its debts as they become due in the normal course of operation; and
(b)the amount required to meet the expense is less than 10% of the amount determined by the body corporate to be raised for the operating account under section 121 of the Act in that financial year.
[73] Ms Heatlie submits that if s 87(2) has the meaning Whai Rawa argues for, then one would expect reg 29 to be subject to s 87(2) of the Act and it is not.
[74] I do not accept Ms Heatlie’s submission. Subsidiary legislation, such as a regulation, is subsidiary to the statute. Further, a regulation passed after the statute is a reflection of the statute rather than being a provision that controls Parliament’s prior intended meaning. Therefore, the fact that reg 29 does not say anything either way about s 87(2) is of no moment and can be put to one side.
[75] Ms Heatlie also submits that while many of the provisions now seen in the Act had their genesis in the Unit Titles Act 1972, there was no equivalent of s 87(2) in the 1972 Act. She submits one would have expected to see reference to it in the Parliamentary debates if the priority to the lessor is as extensive as Whai Rawa submits. And there is nothing in Parliamentary papers.
[76] First, and as a general observation, it is not always the case where there are new and material provisions in legislation that have significant meaning, that there will be extrinsic materials to assist in interpreting those new provisions. Second, and as I have already mentioned, that is not the way in which extrinsic materials, including Hansard, operate as aids to interpretation. The correct process is first, to ascertain whether there is ambiguity in the meaning of the section under consideration, and if there is, then regard may be had to extrinsic materials to see if they explain the ambiguity. As I have already stated, there is no ambiguity about whether there is at
least some form of priority intended by s 87(2). And finally, given that it is clear that at least there is a priority of some sort, in other words something new and material was intended by s 87(2), the absence or presence of comments from Hansard, is not of any particular moment.
[77] Ms Heatlie also referred to a number of provisions in the 1972 Act and the lease itself and submitted that from those provisions and the lease, the lessor had the necessary protection. As a consequence, she submitted that in light of the previous statutory provisions and the lease, s 87(2) does not create any priority.
[78] I do not consider that an examination of the provisions in the 1972 Act assists in interpreting s 87(2). There had not been an equivalent section before and Parliament plainly intended an addition to the regime for ground lessors and their rights. In other words, it does not assist to consider a prior Act that did not have such a provision to assist in understanding what the particular provision in a later Act means.
[79] However, there is a submission made by Ms Heatlie that requires closer consideration. She refers to s 117 of the Act which provides in subs (1) and (2) as follows:
117 Long-term maintenance fund
(1)A body corporate must establish and maintain a long-term maintenance fund unless the body corporate, by special resolution, decides not to establish a long-term maintenance fund.
(2)The fund may only be applied towards spending relating to the long- term maintenance plan.
[80] Ms Heatlie submits that the requirement in s 87(2) that the Body Corporate must pay the lessor the ground rental from “any levies” cannot mean that there is a requirement to pay ground rental from all Body Corporate funds because, by virtue of s 117(2), the long-term maintenance fund may only be applied towards spending relating to the long-term maintenance plan. Ms Heatlie submits that if there were to be a priority as between the sections, it would be expected that s 87(2) would be subject to s 117(2) or vice versa. She submits, in the absence of any stated priority in the Act, s 87(2) must have the meaning contended for by the Body Corporate, that is that the priority is over ground rental levies collected not all levies. In other words, the
landlord does not have preference to or security over all other operational levies collected.
[81] I agree with Mr Salmon that when s 117(2) is brought into the picture there are three possible interpretations of s 87(2). I address each in turn. The first is the Body Corporate’s interpretation. The proposition is that because s 117(2) suggests there might be a restriction on the use of funds that are in the long-term maintenance fund that means there is no priority or protection or favourability given to ground rental funds over all other funds. That interpretation cannot be right because it would give no meaning to s 87(2). It would be rendered benign and would require violence to be done to the words of s 87(2).
[82] The second interpretation, which Mr Salmon referred to as a “middle ground” between Whai Rawa’s interpretation and the Body Corporate’s interpretation, would be that s 87(2) gives priority to payment of ground rental over all funds except for the long-term maintenance fund. Both the middle ground and Whai Rawa’s position require consideration of further provisions of the Act.
[83] Subpart 13 of the Act has the heading “Financial and property management”. There is then a subtitle “Long-term maintenance plans, funds, and ancillary matters”. The first provision in this subpart is s 115, which requires a Body Corporate to establish and maintain an operating account. Section 115(2) then sets out the expenses to be met from the operating account. Short-term maintenance is provided for in s 115(2)(e). Section 115(1) and (2) read as follows:
115Operating account
(1)A body corporate must establish and maintain an operating account for the purpose of meeting the expenses described in subsection (2).
(2)The expenses are—
(a)those relating to the management and governance of a unit title development:
(b)those relating to provision of services and amenities for the benefit of the unit title development:
(c)costs associated with statutory or regulatory compliance:
(d)any ground rental or licence fees relating to the base land:
(e)those incurred at least once a year relating to the maintenance of the unit title development.
[84] The Body Corporate is also required to establish and maintain a long-term maintenance plan, which is for maintenance beyond the short-term maintenance referred to in s 115(2)(e). Section 116 provides:
116Long-term maintenance plan
(1)A body corporate must establish and regularly maintain a long-term maintenance plan.
(2)A long-term maintenance plan must cover a period of at least 10 years from the date of the plan or the last review of the plan.
(3)The purpose of a long-term maintenance plan is to—
(a)identify future maintenance requirements and estimate the costs involved; and
(b)support the establishment and management of the funds; and
(c)provide a basis for the levying of owners of principal units; and
(d)provide ongoing guidance to the body corporate to assist it in making its annual maintenance decisions.
[85] That then leads on to a requirement in s 117 for the Body Corporate to establish a long-term maintenance fund.
[86] Thus far it can be seen there are two different baskets of funds. One is the operating account and one the long-term maintenance fund. A Body Corporate has the further ability to establish an optional contingency fund and an optional capital improvement fund as set out in ss 118 and 119 respectively.
[87] Then s 120 requires the Body Corporate to establish either separate bank accounts for each of the funds or a single bank account in which the respective funds are kept entirely separate and are able to be identified.
[88] The overall picture from the above provisions is that from the levies levied on the unit holders, the Body Corporate is required to then demarcate funds for various
identified purposes and hold those funds either in separate bank accounts or together in one account but in a way that enables the amounts for particular funds to be identified.
[89] That all leads to the “middle ground” argument, which is that s 87(2) may be read as saying the Body Corporate must pay the lessor the ground rental from any levies collected from the unit owners which are in the operating account before making any other payments from the operating account.
[90] Mr Salmon submits that the above more limited priority in the “middle ground” position, than the priority he advances, still does some violence to the wording of s 87(2). He further submits that the wider interpretation, which he submits is the correct one, is supported broadly for three reasons. First, the language of s 87(2) is more than just accidentally broad. It is unequivocal and without caveat, that ground rental comes first.
[91] The second reason Mr Salmon submits that supports Whai Rawa’s interpretation is that s 87(2) is not limited to the operating account or to a particular fund but to any levies collected from the unit holders before making any other payments. Mr Salmon submits the notion of levies is a distinction that matters. He submits it is common practice that unit owners are not asked to make payment in discrete separate tranches and to separate bank accounts. Rather the Body Corporate will levy in one sum, and then allocate the amount across separate accounts or separate ledgers within one account. Levies are received and then put into either separate funds or accounts and s 87(2) is focusing on the levies. In other words, s 87(2) requires the Body Corporate to seize the funds at the point of levying or to utilise them at that point.
[92] Mr Salmon’s third point, which is in fact an elaboration of his second point, is that there is a distinction in language between s 87(2) and s 117(2). Whereas 87(2) refers to “levies”, s 117(2) refers to “the fund” (being the long-term maintenance fund). He submits s 87(2) takes the ground lease share out of the entire levied sum before it is allocated across individual funds. By contrast s 117(2) is directed at
amounts that have actually entered the long-term maintenance fund because s 117(2) is indexed to the fund.
[93] I accept that Whai Rawa’s interpretation enables, to use Mr Salmon’s words, “a reasonably elegant cohabitation” of the two provisions. The priority in s 87(2) does not require any additional wording or violence to the language. The statutory wording of “levies” in s 87(2) instead of “the fund” and vice versa in s 117(2) is made sense of.
[94] Also, it is an interpretation that recognises a schematic priority within the Act. Section 87 appears in the group of sections in subpart 12 which set out the primary duties and powers of a body corporate. Subpart 12 is headed “Powers and duties of a Body Corporate”. Then, subpart 13, in which s 117(2) is found, contains the sections dealing with the mechanics of the operating account and the various funds.
[95] That schematic priority means that s 87(2) is a primary obligation, the purpose and effect of which is to “tax” levies received to ensure ground rental is paid before any other payment, including any payments into the long-term maintenance fund or the other funds. So, the restriction in s 117(2) is to be read as a subordinate priority or restriction to be applied to funds once they have been deposited in the long-term maintenance fund.
[96] Finally, as I accept that at the very least the priority in s 87(2) must relate to the operating account, I cannot see a reason to make a distinction between short-term maintenance costs, which are met out of the operating account, and long-term maintenance. I cannot see there is coherent reason why ground rental would be statutorily prioritised ahead of regular maintenance but not long-term maintenance.
[97] For all those reasons, I accept the applicant’s submission that s 87(2) applies to all levies including levies for expenses referred to in s 115(2) and levies for the long-term maintenance. That brings me back to the issue I posed at the beginning of this section, and that is the degree of breach by the Body Corporate of its obligations under s 87(2) to pay ground rental to the landlord. Even on the “middle ground” reading it is clear on Mr Rehm’s evidence that the obligation is still being breached.
On the correct reading of s 87(2), that which is advanced by Whai Rawa, the breach is greater.
Is Whai Rawa wrongly using the application as a debt collection exercise?
[98] The Body Corporate criticises Whai Rawa for making an application for an administrator to be appointed in order to recover money owed. In support of that position, Ms Heatlie relies on statements by Courtney J in TBS Remcon Ltd v Body Corporate 35499422, and of Palmer J in Naylor Love Construction Ltd v Body Corporate 200012.23
[99]In TBS Remcon Ltd v Body Corporate 354994, Courtney J said:24
[12] TBS did not suggest that the Body Corporate is dysfunctional, nor that it has made decisions that are ultra vires, nor that it has failed to perform any of its statutory duties. The basis for TBS’ application is simply that the Body Corporate has not paid the amount determined by the adjudicator to be payable. But TBS does not hold a judgment against the Body Corporate; it seeks to have the Court appoint an administrator in the place of a functioning body corporate merely in order to procure payment of the amount outstanding under the CCA determination. I do not consider that these circumstances show cause to appoint an administrator.
[13] First, although creditors of bodies corporate have standing to apply for the appointment of an administrator, this is not the usual means by which debts are enforced. I do not see any basis on which to conclude that s 141(3) was intended as a general method of enforcing debts against a properly functioning body corporate.
[100] The second reason given by Courtney J was that the use of s 141(3) to procure payment seemed to the Judge to run counter to the CCA itself.25 Courtney J noted that the CCA provided a mechanism for the enforcement of determinations.26 She further stated that the appointment of an administrator is not a recognised method of recovery under the CCA.27
22 TBS Remcon Ltd v Body Corporate 354994, above n 17.
23 Naylor Love Construction Ltd v Body Corporate 200012 [2019] NZHC 120.
24 TBS Remcon Ltd v Body Corporate 354994, above n 17, at [12]–[13].
25 At [14].
26 At [15].
27 At [19].
[101] The facts of Naylor Love Construction Ltd v Body Corporate 200012 are, briefly, that Naylor Love had been contracted by the respondent Body Corporate to repair units affected by leaking. A dispute arose between Naylor Love and the Body Corporate, which was referred to adjudication under the CCA. Naylor Love received adjudication determinations in its favour. The Body Corporate refused to pay. Naylor Love then applied under s 141 of the Act to appoint an administrator to the Body Corporate in order to force payment. The Body Corporate opposed the application but before it was heard paid the outstanding amounts. Naylor Love discontinued its application but costs remained in dispute.
[102] The comments made by Palmer J relied on by the Body Corporate are in the context of the costs decision of Palmer J. The Judge expressed agreement with Courtney J’s judgment in TBS Remcon Ltd v Body Corporate 35499428, and said:29
[17] … Appointment of an administrator under s 141 of the UTA is simply not a debt recovery proceeding, as Low and Gibson demonstrate. It is not reasonable to think Parliament envisaged such an application to be a debt recovery proceeding under s 59(2)(a).
[18] If a plaintiff wishes to have the benefit of actual and reasonable costs of recovering a debt, it should pursue a debt recovery action, rather than apply to appoint an administrator. …
[103] Mr Salmon submitted that the discretion in a “ground rental” application such as the present is to be applied in a different way or with regard to different factors than the discretion where other types of creditors make the application.
[104] I accept that submission and I accept that the two cases above relied on by the Body Corporate can be distinguished. First, s 165 of the Act specifically provides for an application to be brought by a lessor for the appointment of an administrator, not if there are material debts, but simply if there is one month’s late payment. The Act specifically differentiates ground lessors from other creditors by s 165. I accept Mr Salmon’s submission that there is a policy and legislative distinction to be drawn between an arm’s length creditor and the owner of the land on which the development is constructed. Other creditors have rights, including the right to terminate an
28 TBS Remcon Ltd v Body Corporate 354994, above n 17.
29 Naylor Love Construction Ltd v Body Corporate 200012, above n 23, at [17]–[18].
agreement. The ground lessor is in a unique position where it is has most of those rights limited either in practical terms or by the Act.
[105] Second, the Body Corporate’s suggestion that Whai Rawa should have tried to seek judgment on the debt and then enforce the judgment highlights why a ground lessor may properly seek the appointment of an administrator as a meaningful remedy. In terms of debt collection proceedings, first, this is not a disputed debt. Second, when the time comes to enforce any judgment, there would not be available assets of the Body Corporate against which the debt could be enforced and seized, except the levies that the Act has said should be paid as ground rental in the first place.
[106] The Act should not be read as regarding the appointment of an administrator or the cancellation of the plan as extreme remedies by a lessor. The reality is that for Whai Rawa, those remedies are the only meaningful remedies. They are presumptively available under the Act the moment a month’s rent is in arrears.
[107] A further distinction between TBS Remcon Ltd v Body Corporate 354994 and the instant case is that in the former, as noted by Courtney J, there was no suggestion that the Body Corporate was dysfunctional nor that it had made decisions that were ultra vires, nor that it had failed to perform in any of its statutory duties.30 In the instant case, the deliberate and considered failure to collect and pay ground rental was a breach of the Body Corporate’s statutory duty in s 87(2).
Is it open to the Body Corporate to direct individual unit holders to pay ground rental for their units direct to Whai Rawa?
[108] Ms Heatlie submits the landlord’s protection lies in the implied guarantee of owners provided for in s 163(1) of the Act in relation to the share of ground rental owed by each owner. Section 163(3) provides:
163 Implied guarantee by unit owners
…
(3)The liability of each owner under the guarantees under subsections (1) and (2)—
30 TBS Remcon Ltd v Body Corporate 354994, above n 17, at [12].
(a)is limited to the proportion of the rent or other money payable as the ownership interest of that owner’s unit bears to the aggregate ownership interest of all the units shown on the plan; and
(b)relates only to rent and other money due or accruing due while he or she is the owner of that unit.
[109] Ms Heatlie submits the effect of this and other provisions in the Act is that owners are liable for their share of the ground rental levy and are able to discharge their liability to both the landlord and Body Corporate by making payment to the landlord direct. She submits the recourse for the Body Corporate and the landlord is to enforce ground rental against the defaulting owners.
[110] I do not accept that the Body Corporate can rely on the “guarantee” provision to say that the landlord should collect the ground rental. The Body Corporate has an obligation to do that under both the lease and the Act. To abandon that is an abandonment of a key obligation on the part of the Body Corporate. While it is theoretically possible for Whai Rawa to pursue individual unit holders under an implied statutory guarantee under s 163, that section does not provide for an election on the part of the Body Corporate to disavow its obligations and pass them on to the ground lessor. Additionally, the s 163 guarantee, while it is a guarantee of the portion of the ground rental for the particular unit-holder, there is no indemnity as to recovery costs.
Is the Body Corporate dysfunctional?
[111] Ms Heatlie submits the Body Corporate is not dysfunctional, having regard to all the steps it has taken since 2008 to address and then remedy the building defects and steps it has taken to pursue unit holders who have defaulted on the levies for the remedial work and other levies.
[112] That submission rather misses the point. The dysfunction alleged by Whai Rawa is in relation to the Body Corporate’s decision to stop raising and collecting levies for ground rental. That is an entirely different situation from say a Body Corporate where some of the members disagree with a decision of the committee of
the Body Corporate31 or where a minority of unit holders disagree with a decision of the majority. That is democracy in action, as is the case in any democratic vote-based organisation. A Court would not intervene in those circumstances (unless there were other relevant considerations such as deception or coercion).32
[113] In this case, the decision of the Body Corporate goes to the heart of a core function and responsibility of the Body Corporate and that is to collect and pay ground rental. It is no answer to say that the Body Corporate reached that decision in a democratic way. Further, not only does the decision go to the heart of a Body Corporate’s duties and responsibilities, but the Body Corporate knew that was the case. That is apparent from the resolution in the 7 December 2020 minutes where it was agreed that Centurion would be instructed not to pay the rental due to Whai Rawa “notwithstanding the provisions of s 87(2) of the Unit Titles Act 2010”. This was not a Body Corporate taking a legitimate commercial position without being in breach of legislation. The decision was a deliberate and considered one to breach a statutory duty and the terms of the lease for the purpose of putting pressure on Whai Rawa, as a negotiating tactic, to try and reduce the ground rental. That was done knowingly. It was highly improper.
Undertaking by Committee
[114] On 14 October 2021, after the hearing, the Committee (which has a general delegation of all the powers of the Body Corporate and is capable of giving an undertaking) filed an undertaking in the following terms:
Body Corporate 201036 undertakes to the Court:
1.To continue levying its members under section 115 for funds for the payment of ground rent and to use those funds for the payment of ground rent only;
2.To continue to actively pursue those owners who have not paid their portion of ground rent and to pay any ground rent recovered from those owner [sic] to Whai Rawa when received.
3.In the event the Court determines that section 87(2) requires a body corporate to pay its lessor from any other particular fund/s or from any particular levies, the body corporate will then:
31 See Low v Body Corporate 384911, above n 8.
32 See Gibson v Body Corporate 384911, above n 14, at [69].
(a)Provide the Court and Whai Rawa confirmation of the amounts, if any, held in respect of such funds and or levies; and
(b)Forthwith pay from such funds or levies, any arrear ground rental then outstanding to the extent such fund or levies allow; and continue to act in accordance with the section as interpreted by the Court while such interpretation remains the law.
[115] In her covering memorandum, Ms Heatlie submits that cls 1 and 2 of the undertaking merely serve to confirm what the Body Corporate is already doing. She says cl 3 of the undertaking is not a concession by the Body Corporate that it agrees with Whai Rawa’s interpretation of s 87(2). It maintains its position in relation to the meaning of s 87(2).
[116] Whai Rawa filed a memorandum in response and confirms it still pursues its application. Mr Salmon submits that while the undertakings represent some welcome progress in the Body Corporate’s position, they contain limitations that mean Whai Rawa and the Court cannot be assured that the Body Corporate will now meet its obligations. Mr Salmon submits the first undertaking is essentially a restatement of a legal obligation that has already been willingly breached. As to the second undertaking, Mr Salmon submits that while an undertaking to the Court gives more gravity to assurances previously given, they remain vague. An obligation to “actively pursue” makes it difficult for Whai Rawa or the Court to measure compliance. Mr Salmon says Whai Rawa does not have confidence that the Body Corporate will pursue all steps with appropriate priority given the Body Corporate is pursuing proceedings to challenge rental under the lease.
[117] In relation to the third undertaking, Mr Salmon notes that there is no assurance that separate funds from levies will not be used to pay expenses other than ground rental in breach of s 87(2) while the judgment is pending.
Exercise of discretion
[118] Whai Rawa has established that the ground rental is in arrears for more than one month. There is no issue over that. I have also accepted that the Body Corporate behaved in a way that was dysfunctional when it decided not to continue collecting
and paying ground rental to Whai Rawa. Is that sufficient cause for the Court to exercise its discretion to appoint administrators and are there any other factors that would count against the exercise of discretion?
[119] I approach my discretion having regard primarily to the functions of a body corporate and the ability of those with responsibility for its affairs to carry out their duties fairly.33 In this case, the dysfunction goes to the Body Corporate’s core functions. There has been impropriety in the conduct of the affairs of the Body Corporate.34 The Body Corporate’s decisions were made for an illegitimate purpose.35
[120] This was not a properly functioning Body Corporate. It made decisions that were ultra vires and failed to perform statutory duties.36 It was in breach of its obligations.37
[121] I have given careful thought to the undertakings now filed. It is clear from the memorandum of counsel for the Body Corporate, which accompanied the undertakings, that they were filed in response to exchanges at the hearing, between the Court and Mr Salmon. It appears the Body Corporate mistakenly understood that Whai Rawa’s position was that the need for an administrator might be dispensed with if the Body Corporate gave an undertaking to the Court regarding the collection of levies for ground rental.
[122] Even with the undertakings, the Court still does not have visibility into the other funds. The Body Corporate says it will provide that information but only if the Court’s decision is that s 87(2) requires a Body Corporate to pay the lessor from any other particular funds or levies. I also take into account the background and degree of impropriety and the Body Corporate’s inconsistent position over its ability to pursue defaulting units owners. Bearing in mind the previously stated inability to pursue defaulting unit owners, it is not at all clear what is meant when the Committee says it will now “actively pursue” those unit owners. Notwithstanding the undertakings now
33 Low v Body Corporate 384911, above n 8, at [37] per Heath J.
34 Gibson v Body Corporate 384911, above n 14, at [68] per Ellis J.
35 At [70] per Ellis J.
36 TBS Remcon Ltd v Body Corporate 354994, above n 17, per Courtney J.
37 Body Corporate 198900 v McCallion, above n 19, per Churchman J.
filed, I will exercise my discretion to appoint administrators. I accept Whai Rawa’s submission that administration is necessary to restore integrity to the Body Corporate, to ensure its undisclosed financial position and levy funds can be investigated by independent persons, to ensure proactive steps are taken to address significant arrears and unpaid levies and to monitor Body Corporate spending of levies to ensure compliance with the Act.
[123] However, I consider a sharper focus needs to be brought to the role of the administrators, rather than the wide and general appointment sought in the application. This focus will assist with the cost factor, which the Body Corporate was concerned about.
Orders
[124] I make an order appointing Rees Logan and Andrew McKay, chartered accountants of BDO Auckland, jointly and severally as administrators of Body Corporate 201036 (the Body Corporate) on the following terms:
(a)The administrators may exercise all the powers of the Body Corporate in relation to the ongoing raising and collection of levies, enforcement actions to recover levies, reviewing instructions to external counsel, ensuring payment of ground rental in priority under s 87(2) of the Act and approval of other levy spending to the exclusion of the Body Corporate and Body Corporate Committee and are subject all the duties of the Body Corporate;
(b)The administrators are to minimise administration overheads where practicable, including by delegating the management of the levying, enforcement and payments processes to the existing persons undertaking those processes where the administrators are satisfied it is appropriate to do so;
(c)Notwithstanding the ability to delegate, the administrators are to have overall control over levying, enforcement and decisions over payments made from Body Corporate funds;
(d)The administrators are to report back to the Court and the parties regarding the levying, enforcement and payments made from Body Corporate funds and the Body Corporate’s compliance with its obligations within six months of the date of this judgment;
(e)The administrators’ appointment is to continue until further order of the Court but with the parties and the administrators having leave to apply to vary or end the administration orders after the six month reporting date;
(f)The administrators are entitled to be remunerated by the Body Corporate for their reasonable attendances at a rate of $550.00 per hour plus GST and reasonable disbursements;
(g)The administrators may be assisted by staff and employees of their firm acting under their direction and supervision, as appropriate, whose hourly rates (excluding GST and disbursements) are:
·Associate $475
·Senior Manager $400
·Manager $325
·Senior Analyst $250
·Analyst $200
·Administrator $180
(h)In order to ensure the Body Corporate’s legal obligations in relation to levying and payment of ground rental are met, the administrators are to have access to all records relating to the Body Corporate’s levying for all purposes (including its enforcement actions against unit owners), its accounts and its payments; and
(i)Leave is granted to the administrators to seek directions from the Court relating to remuneration and any other matters arising from the administration.
Costs
[125] I reserve costs. Whai Rawa, as the successful party, is prima facie entitled to costs. If the parties are able to agree costs, a joint memorandum should be filed within 20 working days of the date of this judgment.
[126] If costs cannot be agreed, Whai Rawa may file and serve its memorandum within five working days of the date for the joint memorandum. The Body Corporate is to then file and serve its memorandum within five working days of the date of service on it of Whai Rawa’s memorandum.
[127] Memoranda should not exceed five pages excluding any attachments. I will determine costs on the papers.
Gordon J
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