BODY CORPORATE NO. 85403 AND ORS V MAGILL AND ORS HC TAU CIV 2006 - 470 - 1065

BODY CORPORATE NO. 85403 AND ORS V MAGILL AND ORS HC TAU CIV 2006 - 470 - 1065 3 March 2008IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY CIV 2006 - 470 - 1065BETWEEN BODY CORPORATE NO. 85403 First Plaintiff AND KEITH ARNOLD RYAN, BERYL MYRENNE RYAN AND NEVILLE JOHN DODS Second Plaintiffs AND MICHAEL EDWARD SINCLAIR Third Plaintiff AND RICHARD ANTHONY PUNTER Fourth Plaintiff AND CHRISTOPHER JAMES MCFADDEN AND PETER RAYMOND HILLS Fifth Plaintiffs AND JEANETTE ANNA DEKKER AND DEANNE MARIA WILLEMSE Sixth Plaintiffs AND GREGORY CHARLES BEST, JANINE GLENDA BEST AND RODGERS & CO TRUSTEE SERVICES LIMITED Seventh Plaintiffs AND KAY ELIZABETH LLOYD AND LLOYD & ASSOCIATES LIMITED Eighth Plaintiffs AND PATRICK JAMES MAGILL First Defendant AND ERICA JANE MAGILL Second Defendant AND ANDI WILLIAM KEVIN LUSTY Third Defendant2 AND JANICE HILDA LUSTY Fourth Defendant AND JOHN WILLIAM TATTON Fifth Defendant AND TAURANGA CITY COUNCIL Sixth Defendant AND JIM FLETCHER Seventh Defendant Hearing: 12 February 2008 Appearances: Ms Watkins for plaintiffs Mr Kettelwell for defendants Judgment: 3 March 2008 at 12 noonJUDGMENT OF ASSOCIATE JUDGE DOOGUEThis judgment was delivered by me on03.03.2008 at 12 noon, pursuant to Rule 540(4) of the High Court Rules. Registrar/Deputy Registrar DateSolicitors/CounselGrimshaw & Co, P O Box 6646, Auckland Sharp Tudhope, Private Bag 12020, TAURANGA Harris Tate, P O Box 1147, Tauranga (Counsel: Mr G Brittain, P O Box 13 473, Tauranga Bell & Graham, P O Box 184, Matamata (Counsel: D J Taylor, PO Box 19366, Hamilton)Background[1] Valencia Court is a unit title development comprising 13 units at 29-33 May Street, Mount Maunganui. It was built in 1999/2000. I understand that the first to fourth defendants were the instigators of the development. They still own units at Valencia Court. [2] It has transpired that remedial work is required because the complex leaks [3] At a meeting of the body corporate, on 26 August 2006, it was resolved by 7 votes to 3 that:• The body corporate would fund the cost of the repairs required to remedy the defects;• The body corporate would issue proceedings against the builders and developers of the apartment complex ("the resolution").[4] The body corporate commenced the recovery proceedings along with six other individual plaintiffs. It levied its members for the legal fees incurred in the proceedings. The applicants now say that levying them for the legal fees is unfair because they are being required to fund legal action which is being brought against themselves, amongst others. [5] On 12 October 2007 the first to fourth defendants and Karin Ann Thorburn, the owner of Unit 10, who is neither a plaintiff nor a defendant, ("the applicants"), filed this application under s 43 of the Unit Titles Act 1972 asking the Court to order that:The resolution that the body corporate fund the litigation shall be void and of no effect; They be refunded their contribution to the legal fees paid; They not be required to contribute to any future legal fees of the plaintiffs.[6] Section 43 provides:43 Relief for minorityIn any case where this Act requires, or the rules of a body corporate require, that a resolution (other than a unanimous one) or the consent of a certain percentage of the voters is necessary before any act may be done, and any such resolution is duly passed or any such consent is obtained, any person who voted against the resolution or did not consent may apply to the Court to have the resolution or decision declared to be of no effect on the grounds that in the circumstances of the case the effect of the act would be inequitable for the minority; and if the Court so orders, the resolution shall be deemed not to have been passed or the consent shall be deemed not to have been obtained.[7] The applicants say that it is inequitable that they as members of the body corporate be required to fund litigation brought against them personally. They point out that they are being compelled to contribute to a fund which will be used to mount litigation against themselves. They regard that as being self-evidently unfair. [8] The respondents oppose the application. They say that it is not materially unfair or unjust to the applicants to require them to contribute to legal fees incurred because:(a) The legal fees are for work done in the interests of and for the benefit of the body corporate: of which the applicants are members; (b) The applicants are allegedly responsible for the leaks/repair costs; (c) It would be unfair to the unit owners as a group for the applicants to be able to avoid their liability for properly generated levies simply because they are also defendants.[9] Finally, I need to note that all of the applicants with the exception of Ms Thorburn are defendants to the recovery proceedings.Body corporates generally[10] The applicants' entitlements arising from their unit titles are described in theLaws of New Zealand Land Law Part II Estates and Interests in Land at paragraph 30 as follows (I have omitted footnotes):Statutory stratum estates arise, when a unit plan is deposited in the Land Transfer Office and has the effect of creating a stratum estate in freehold. That estate comprises: • the fee simple estate in the unit;• an undivided share in the fee simple estate in the common property to which the unit holder is entitled; and • an undivided share in the fee simple estate in all the units to which the unitholder is contingently entitled, upon cancellation of the unit plan. Dealings in the estate are effected in a broadly similar fashion to other land under the land transfer system. The estate may be brought to an end in certain specified circumstances.[11] Body corporates in general have a responsibility for maintaining common areas. As it is put in Brookers Land Law (paragraph 3.2.04)The body corporate is charged with the maintenance and upkeep of common property: s 15(1)(f) and (h) and (2)(a) UTA72. If the outward face of an external wall, or ceiling, of a unit is in need of maintenance or remedial work, prima facie the responsibility may be that of the body corporate.[12] Section 13 of the Unit Titles Act ("UTA") provides:13 Actions by and against body corporate(1) The body corporate shall be capable of suing and being sued in its corporate name and of doing and suffering all that bodies corporate may do and suffer. (2) Without restricting the generality of subsection (1) of this section, the body corporate may sue for and in respect of damage or injury to the common property caused by any person, whether that person is a unit proprietor or not.[13] In some circumstances, as here, the body corporate will not be able to discharge its functions unless it can recover damages to pay for the work.Section 43 of the act[14] In his judgment in S M Young v Body Corporate No. 120066 HC AK CIV2007-404-2375 6 November 2007 Harrison J described the effect of the section in the following terms:[57] It is common ground that this power is designed to prevent oppression of the minority: World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673, Heath J at [45]. The test for determining whether the effect of the resolution 'would be inequitable for the minority' is objective and, of course, requires all relevant circumstances to be taken into account including the position of the majority. The expression 'inequitable' implies material unfairness or injustice to the minority unit holder: Spencer-Inight v Johnston[1999] 3 NZLR 103 at 106; Hart v Body Corporate No.180455 (2005) 5 NZConvC 194,147. The Court retains a discretion to grant relief even if satisfied that the effect of the resolution would be inequitable for the minority: Spencer-Inight at 106.[15] The reference to the discretion to grant relief in the last sentence obviously means that the Court has a discretion to withhold relief even if the effect of a given resolution would be inequitable for the minority. [16] In another judgment, Brooker v Body Corporate No 154558 (2005) 6 NZCPR 953, Harrison J had before him a case where a proprietor sued the body corporate after water entered her unit which was used as a restaurant. The plaintiff had refused to pay levies imposed by the body corporate. [17] The facts of the case were different from those now under consideration but what Harrison J said in his judgment throws light on the relationship between the various parties to this litigation:The body corporate is a statutory entity created for the proprietors' mutual benefit. There is no commercial element in its functions. While empowered to engage a manager and secretary, the body corporate's affairs are in the hands of an owners committee. It is a voluntary entity which must act in the best interests of members generally. The body corporate will inevitably depend upon expert advice on issues like repair and maintenance of common property. Moreover, the body corporate will not normally have sufficient funds to pay for more than routine repair work. The body corporate can only resort to the expensive, protracted and problematic process of litigation to recover levies from a recalcitrant proprietor. And it cannot commission works without the means to pay.SubmissionsApplicants[18] Mr Kettelwell's submission was that the resolution of 26 August 2006 was unfair on several levels. He submitted to me that the evidence establishes that the plaintiffs generally are intending to fund the litigation against the defendants by means of levies exacted by the body corporate. The effect of this is that the body corporate will be paying the legal costs of individual unit holders who are seeking damages relating to their units. He said that this was unjust.[19] He also submitted that it was, in any event, inequitable for the defendants to be compelled to contribute to the claims brought by the body corporate for damages arising out of the effects of the leakage's on the common areas of the property. He said, in effect, that the defendants were being compelled to contribute to litigation that was hostile to their interests. This was self-evidently unfair, in his submission. [20] Mr Kettelwell said that his 'fallback' position was that the applicants represent approximately 50 % of the unit entitlements. They should therefore only be required to pay a proportionate share of the body corporate's legal costs relating to the action brought in respect of the common areas of the development. He said that there are eight plaintiffs of which one is the body corporate. Therefore 1/8 th of the legal costs are referable to the body corporate's action. The defendants as holders of approximately 50% of the unit entitlements should therefore only be required to meet 50% of the 1/8 th share, namely 1/16th of the entire costs. In that way they would be paying for only ½ of the body corporate's legal expenses. [21] Mr Kettelwell also said that it appeared that the authority contained in the resolution had been exceeded. That was because the resolution was limited to mandating Grimshaw & Co to issue the proceedings on behalf of the body corporate, to thereafter have the proceedings stayed, for all of which work the estimated cost would be $5,000. He said that the body corporate had gone beyond the limits of that resolution both that in the work that had been undertaken by Grimshaws and the expense which thus far was in the region of $7,000 rather than the $5,000 contemplated by the resolution.Respondents[22] Ms Watkins for the respondents submitted:Valencia Court is a leaky building which contains defects requiring repairs. Where the body corporate authorises repairs to be carried out, it can issue proceedings against the parties responsible for the defects and claim for the cost of the repairs. It is fair for the Body Corporate to fund litigation to recover the loss incurred by the unit owners for the defects and the resultant repairs. It is also legally entitled to levy its members for costs incurred in performing its duties based on unit entitlement.The body corporate and its owners are separate legal entities. That some of the owners happen to be defendants in respect of the proceedings does not matter. They are defendants because of their role in the development and not because they are owners. It is in their capacity as owners that they contribute to the funding of the litigation, and this is entirely appropriate. Furthermore, the applicants will no doubt wish ultimately to benefit from any recovery of any made losses by the body corporate by virtue of being members of the body corporate. In fact, the first to fourth defendants have already benefited from the body corporate paying for certain repairs which were for the sole benefit of their units. So in the final analysis, it is just and equitable that the applicants should pay for their share of the litigation costs in relation to recovering the monies expended to pay for the repairs.Discussion[23] There was no dispute that the Court has jurisdiction in this case to make orders under s 43. The issues are, first, whether the resolution 26 August 2006 is inequitable and, second, whether the Court in its discretion ought to grant relief. [24] The following matters seem to me to be relevant to the issue of whether the effect of the resolution is inequitable. [25] The body corporate could, of course, have sued the Magills and others even had they not been unit proprietors. By taking action to maintain the common property, the body corporate is in a sense acting as the representative of the owners of the common property, who include the applicants. The body corporate can only act in a representative capacity for all the owners, or none. The passage fromBrooker which I have cited in paragraph [16] above underlines that the proceedings that have been brought in this case, were brought by the body corporate, as distinct from the owners who are entitled to vote at meetings of the body corporate. [26] The starting point is that it would seem fair that, given that the applicants, together with other owners, will indirectly benefit from a successful action to recover compensation, they should meet their rateable share of the costs in recovering that compensation. To excuse the applicants from the levy for legal costs would throw an unfair burden on the majority of the unit-owners to fund the body corporate's proceedings.[27] To be placed in the balance against those considerations is that the position of the applicants is ambiguous: actions designed to obtain compensation for damage to the common property, benefit them qua owners, but disadvantage them in their capacity as defendants to the legal action brought for that purpose. But it is not uncommon that people find themselves in such a situation. An example is the case where a shareholder and director of a company is sued qua director. It is not difficult to imagine cases where the resources of the company, which he had an indirect interest in qua shareholder, are used to fund an action against himself, quadirector. It may be because of the way that they have arranged their affairs – as in this case – even although they might not reasonably have foreseen that their interests and their responsibilities might one day clash. [28] While it may seem repugnant to the applicants to be required to contribute to the cost of litigation brought against them, any perceived difficulty arises from the duality of their interests as developers, on the one hand, and then owners once the development of Valencia Court had been completed. There was always the potential that at some future point a divergence might occur between their interests as developer/vendors of the property, on the one hand, and part-owners of it on the other. The rules which are part of the legal structures that they promoted as part of the property development, may have turned out to have some unexpected consequences. But none of this constitutes a reason why they should now expect to resile from the requirements of the rules that they promoted and then subscribed to. [29] However the position is otherwise so far as the claims of individual unit owners are concerned. I can see no justification in principle for the body corporate being required to pay the legal costs for claims brought by individual owners arising out of damage to their units. To permit such an outcome would result in the body corporate as a separate and distinct legal entity is being asked to meet liabilities which are not its own, but which are liabilities of other quite different persons. That cannot, in my view, be a legitimate use of body corporate resources. The resolution as expressed, contemplates that this is exactly what should occur. This ground on its own is sufficient to justify the Court's intervention under s 43, because the resolution to the extent that it allows such an outcome is inequitable.[30] It may be legitimate for the body corporate to expend funds on legal action designed to compensate it for damage to the common areas of the development, which are its responsibility. But the resolution in its current form authorises a course of action which extends beyond that objective into areas where, in my judgment, it ought not to go. This results in the resolution as a whole being properly characterised as inequitable. [31] There are no discretionary reasons that were suggested to me which would justify the Court in exercising its discretion against the applicants. If an order was made striking down the resolution, it would be a relatively straightforward matter for a further meeting to be convened and a resolution in modified form to be passed in its place. That is to say, no appreciable prejudice would result to the respondents from the making of the order. [32] I intend to exercise my discretion in favour of the applicants.Other Matters[33] Other matters were raised which are simply outside the scope of the present application. These include the question of whether the applicants, having contributed to the plaintiff's costs incurred in obtaining legal advice from Grimshaw & Co, ought to be entitled to receive copies of the advice so received. The present application is not a proper vehicle for determining that issue. I therefore do not propose to say anything further about it. [34] Mr Kettelwell invited me to make orders that the applicants be refunded their contribution to the legal fees paid. That lead to an enquiry from me as to how the funding had been provided to date. Had their been levies imposed on the shareholders? Mr Kettelwell told me that thus far the body corporate has funded the expense without levies, presumably from funds in hand. Given that circumstance, I comment that it seems unlikely that even if the Court had jurisdiction to do so, any order for reimbursement of money paid would be appropriate at this point. Rather, there may have to be some adjustment to the accounts of the body corporate to compensate the applicants for the expenditure of body corporate funds for purposes which, I have included in this judgment, went beyond what was permissible.Order[35] Counsel for the respondents did not make detailed submissions on the form of any order that I should make. I consider that the Court is able to make the order applied for under para 1 of the Notice of Interlocutory Application dated 12 October 2007. The last sentence of paragraph 1 (that is the sentence beginning with the words 'those individuals ') should not appropriately be included in any order. Apart from that I am content to make an order in terms of para 1. [36] For the reasons earlier in this judgment I decline to make the order sought in para 2 of the application. [37] I decline to make the order applied for in para 3 of the application. I am not satisfied that such an order is required given that the terms of this judgment set aside the resolution of 26 August 2006 which is the basis for the majority seeking to impose a levy which binds the applicants. [38] The parties should be able to agree on the matter of costs. If they cannot, counsel should file memoranda not exceeding three pages each within 10 working days. _____________ J.P. Doogue Associate Judge