HAYES AS TRUSTEE OF THE BURR/HAYES FAMILY TRUST v BODY CORPORATE 162225 [2016] NZHC 487

HAYES AS TRUSTEE OF THE BURR/HAYES FAMILY TRUST v BODY CORPORATE 162225 [2016] NZHC 487 [22 March 2016]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2015-404-1368[2016] NZHC 487UNDER Unit Titles Act 2010IN THE MATTER of a scheme for remedial work under s 74of the Unit Titles Act 2010BETWEEN RICHARD STEWART HAYES ASTRUSTEE OF THE BURR/HAYESFAMILY TRUSTApplicantAND BODY CORPORATE 162225First RespondentKEITH JAMES MCCONNELL ANDSUSAN JANE GLOVERSecond RespondentsHearing: 1 March 2016Appearances: Applicant in personT J Rainey for First RespondentSecond Respondent, Mr McConnell, in personJudgment: 22 March 2016JUDGMENT OF BREWER JThis judgment was delivered by me on 22 March 2016 at 12 noonpursuant to Rule 11.5 High Court Rules.Registrar/Deputy RegistrarSolicitors: Rainey Law (Auckland) for First RespondentCopies to: Applicant and Second Respondents in personIntroduction[1] There is a seven unit body corporate on Balfour Road, Parnell. The units leak. They must be fixed. The body corporate engaged architects to design the remedial works, obtained a building consent from the Auckland Council and conducted a tender process. A contractor has been chosen. The tender price is $2,654,508 plus GST. Work could begin in August 2016, if not before.[2] All seven of the unit owners either agree with the steps taken by the body corporate or do not oppose them. They know that the units must be fixed. Disagreement exists principally on how the cost of the work should be apportioned between the owners.[3] Six of the unit owners are agreed that individual unit owners should bear the actual cost of repairs to their units plus a share of the repairs to common property, calculated on what is known as their utility interest.1 The owners of the remaining unit, Mr McConnell and Ms Glover, argue that this would be unfair to them. Their position is that the total cost of the remedial work should be apportioned between the owners on the utility interest basis. They calculate that this would reduce the cost to them from $662,566 to $546,735, a saving of $115,831.2[4] Mr McConnell's and Ms Glover's point of unfairness goes to the layout of the units. They own Unit A. It is an end unit and so it has three walls which they would be responsible for paying to fix under the actual costs formula. Units B, C and F have only two walls for which the owners would be responsible. Further, the owners of Unit D, also an end unit with three walls, would be required to pay foronly two walls because the unit's southern wall adjoins the driveway to the complex,and is therefore treated as common property. The cost of repairs to this wall will be shared by all the unit owners on the utility interest basis.1 Utility interest means the interest assigned to a unit under ss 39 and 40 of the Unit Titles Act 2010.2 I note that the body corporate has qualified for financial assistance under the Weathertight Homes Resolution Services Act 2006 and will receive a 25 per cent contribution to the costs of the work under a Financial Assistance Package.[5] I pause to note that Unit A's northern wall adjoins land which is not commonproperty, being reserved for the exclusive use of Unit A. Further, Units E and G are end units with third wall liability, and their owners support the actual costs proposal.Issues[6] The body corporate was created under the Unit Titles Act 1972 by the deposit of a unit plan which, of course, shows the seven units, the areas assigned exclusively to each unit, and the common property. The governing statute is now the Unit Titles Act 2010. Section 74 of the 2010 Act empowers the Court to settle a scheme for doing the sort of work which needs to be done to the seven units. All of the unit owners think that a s 74 scheme is necessary in this case, and the applicant puts before me for approval a form of scheme in which the owners of six of the units concur.[7] Mr McConnell and Ms Glover oppose the content of the proposed scheme in that they want the cost apportionment method changed, as well as some other changes going to matters of process and protection of unit owners.[8] Accordingly, the issues I have to decide are:(a) Is this a proper case for a s 74 scheme?(b) If so, how should the costs of the work done under the scheme be apportioned?(c) If so, should the scheme as proposed be amended to take account of Mr McConnell's and Ms Glover's objections?Is this a proper case for a s 74 scheme?[9] First, there is no doubt that there is damage to the units to which s 74 can apply.[10] I am satisfied also that a scheme is necessary and should be granted in order to effect the necessary repairs. I conclude this for two reasons:(a) The relationship between Mr McConnell and Ms Glover, on the one hand, and the owners of the other six units, on the other hand, is not good. It is clear from the affidavits that there is a significant degree of mistrust. A s 74 scheme would provide a clear framework for the repairs. The 2010 Act imposes on a body corporate an obligation to repair and maintain the assets of the body corporate. This obligationincludes "any building elements and infrastructure that relate to orserve more than 1 unit".3(b) I accept the submission of Mr Rainey for the body corporate that not all of the work required to be done fits easily within thedefinition of "building elements and infrastructure". Without as 74 scheme, and with the mistrust between unit owners to which I have referred, there is obvious room for dissent and delay.How should the costs of the work be apportioned?[11] Generally, the terms of a scheme imposed by the Court must balance fairlythe interests of the unit owners. Mr McConnell's and Ms Glover's objection to the proposed scheme's cost apportionment method is that it is unfair to them, and so thescheme does not fairly balance the interests of the unit owners.[12] I have reached the view that the cost apportionment method in the proposed scheme is fair to all the unit owners. My reasons are:(a) The units are not identical. Each has its own physical characteristics and each was bought by its owners accordingly. There is no reason why unit owners should contribute to the cost of repairing otherowners' units.(b) When the body corporate was subject to the 1972 Act, individual owners were responsible for the maintenance and repair of their own units. Under the 2010 Act, the obligation on the body corporate to3 Unit Titles Act 2010, s 138(1)(d).maintain and repair is complemented by a power to require that owners of units pay for repairs to building elements and infrastructure contained within their unit:4Any costs incurred by the body corporate that relate to repairs to or maintenance of building elements and infrastructure contained in a principal unit are recoverable by the body corporate from the owner of that unit as a debt due to the body corporate (less any amount already paid) by the person who was the unit owner at the time the expense was incurred or by the person who is the unit owner at the time the proceedings are instituted.(c) The argument by Mr McConnell and Ms Glover that there is a"default position" in the 2010 Act that utility interest should form thebasis of charging is incorrect. It might be that with body corporates consisting of multilevel developments with units of near uniformity, utility interest would be the most expedient and fair way of calculating contributions to repairs. But that is not the case here. As I have pointed out, the 1972 Act put the onus of repairs and maintenance on the individual unit owners and the 2010 Act makes repair and maintenance costs attributable to individual units recoverable from the owners of those units. There is nothing unfair in that and the proposed cost apportionment is consistent with the obligations of owners under the 1972 Act and not inconsistent with the 2010 Act.Should the scheme be amended otherwise?[13] Mr McConnell and Ms Glover take issue with the proposed scheme'stimetable for payment. The scheme proposes that as the repair contract progresses, the owners of the units will be required to contribute more or less depending on the actual work done to their units. In other words, a "pay as you go" approach. Theaim is to ensure that by the end of the repair contract, the owners of each unit will have paid their utility interest share of the cost allocated to common property and also the actual cost of the repairs undertaken to their own units.4 Section 138(4).[14] Mr McConnell and Ms Glover submit that this is too difficult a method to work precisely and transparently. Mr McConnell raised the example of how scaffolding enshrouding the whole of the complex would be paid for in a month if the only work done was to a single unit. Would that unit owner be required to pay the entire cost of hiring scaffolding for that month? Mr McConnell and Ms Glover submit it would be more simple and fairer for monthly costs to be allocated on a utility interest basis. That would require a wash-up at the end when all costs were known so that various unit owners would pay money and other unit owners would receive money.[15] In my view, the proposed method is the better one. I say this because:(a) The proposed contract (which is the standard construction contract) will be under the oversight of a contract engineer. He or she will approve each payment claim by the contractor and will allocate approved costs to individual owners.(b) Individual unit owners who disagree with allocations can make their points to the engineer.(c) Since individual owners will be responsible for their individual costs, it is fair that they pay those costs as they are incurred. Otherwise, those owners who have lower costs will, at least for a period, subsidise those who have higher costs.(d) One of the main reasons for approving a scheme is to diminish the chance of argument. There is an obvious risk of argument if, at the end of the contract, some owners owe money to the body corporate and others are entitled to receive money from the body corporate. Especially where, as here, there is distrust between owners and different views as to the equities of payment.Clause 31: proof of funds[16] Mr McConnell and Ms Glover want cl 31 of the proposed scheme to itemise what proof of funds is acceptable and to provide that the chairman of the body corporate has no discretion as to what is acceptable unless all of the owners agree unanimously.[17] Proof of funds is required before the contract can proceed. This is a small body corporate. Unless all of the unit owners can provide a proper assurance that they can fund the costs to them, then the contract will not be able to proceed.[18] Clause 31 provides:The resolution to levy the funds to pay for the repairs requires unit owners to provide proof of funds which proof will enable the Body Corporate to satisfy MBIE that all unit owners will be able to pay those levies as they fall due. Whether the condition is satisfied is delegated to the Body Corporate Chair- person under this Scheme as it is not a major decision under Part IV above.[19] I appreciate that Mr McConnell and Ms Glover want to tie down the issue of proof of funds because they do not trust the other members of the body corporate. However, as Mr Rainey pointed out, cl 31 is drafted to mirror the requirements of the Ministry of Business, Innovation and Employment (MBIE) which administers the Financial Assistance Package scheme. The body corporate will have to satisfy MBIE that it has the money to do the required work in order to get the 25 per cent contribution. In my view, no change to cl 31 is required.Clause 40: audit[20] Again, out of mistrust, Mr McConnell and Ms Glover ask that cl 40 be amended to require that an independent auditor report annually on the repair contract and also at the end of the project.[21] I am mindful that under the 2010 Act, audits are required unless unit owners by special resolution decide otherwise. Clause 40 provides:The accounts prepared under this Scheme shall be audited annually by an independent auditor appointed by the Body Corporate for that purpose. Provided that the owners may by special resolution decide not to have anannual audit pursuant to the power in section 132(8) of the Act, and, for the removal of doubt, this power applies to the accounts prepared under thisscheme and an owner's general right to minority relief under section 210 ofthe Act applies to a resolution passed pursuant to this clause.[22] The repair contract, I am told, should take a year, give or take. I do not see a need to make mandatory an annual audit. I see sense in a mandatory audit at theconclusion of the project. I acknowledge Mr McConnell's and Ms Glover's positionas a distinct minority in a small body corporate. A final audit would make it clear where funds had been allocated and on what basis. The scheme is to be amended accordingly.Clauses 41 and 42: reporting[23] There is discord over the scheme's proposed monthly reports to unit owners.The relevant clauses provide:41. The Body Corporate will keep each Owner fully appraised of details of the Repairs and progress of same over the period of the scheme by reporting every month with a summary of the levies received and/or in arrears.42. The monthly draw down report to the Owners shall include:(a) A report on the overall position both in terms of the progress of the Repairs and financial terms, including details of costs and apportionments;(b) A statement of the position of each Owner detailing the apportionment of costs between common areas and individual units under the scheme together with the certificate issued by the Registered Quantity Surveyor appointed by the Body Corporate certifying the amounts due under the Scheme from each of the owners;(c) The amounts shown as payable by each owner shall be paid by them on or before the 20th of the following month.[24] Mr McConnell and Ms Glover submit that the monthly report should specify progress against timetable, progress against budget and any issues existing or anticipated, which might affect the project.[25] In my view, the proposed reporting regime is sensible. Real problems will be apparent and a final audit will be a sufficient safeguard.Clause 19a: vacant possession[26] Mr McConnell and Ms Glover submit that unit owners should have a minimum of 30 days from the confirmed start date of the on-site construction to vacate their unit. This seems to me to be sensible, and Mr Rainey for the body corporate does not oppose. The proposed scheme will be amended accordingly.No committee[27] Mr McConnell and Ms Glover would like the scheme to include a provision that during the execution of the contract the body corporate not have a committee. Under s 112 of the 2010 Act, it is not mandatory for a body corporate of a unit title of nine or fewer principal units to form a committee. Be that as it may, the body corporate must still function during the execution of the contract. Further, under the proposed scheme, it is the body corporate rather than a committee that has the responsibility of completing the remedial work. I not satisfied, therefore, that preventing the body corporate from having a committee during the execution of the contract would achieve any meaningful purpose.Transparency[28] Mr McConnell and Ms Glover would like the scheme to include a provision that during the duration of the project there be a general obligation of transparency including but not limited to:(i) Any legal advice received by the body corporate is circulated to all owners.(ii) Minutes of all owners' meetings will be prepared and promptly circulated to all owners.(iii) All owners are invited to attend any owners' meetings where three ormore owners are invited.(iv) All owners are circulated all emails where an email is sent or copied to three or more owners.(v) Where it is intended to appoint a sub-contractor that they prove to owners that they are suitably qualified and independent.(vi) If the total project cost is allocated other than by utility interest, then any owner can ask for, at body corporate cost, a second opinion on the decisions of the quantity surveyor.[29] Having heard from Mr McConnell, I am sure that he and Ms Glover seek a professionally and transparently managed process. But I am satisfied that the scheme, complete with the amendments made in this Judgment, achieves this end. I refer specifically to cl 25 of the scheme, which requires the body corporate to make all major decisions connected with the scheme at a General Meeting called for that purpose. I also refer to s 206 of the 2010 Act which provides:206 Provision of records and documents(1) The body corporate must, on request from a unit owner, make copies of the following records and documents available for purchase by the unit owner:(a) the body corporate operational rules:(b) all current insurance policies held by the body corporate or its head body corporate in respect of the buildings and improvements on the base land:(c) the long-term maintenance plan:(d) any agendas or minutes of the body corporate:(e) the financial statements:(f) any other documents the owner of a principal unit is required to provide under subpart 14 of Part 2:(g) any other records or documents if the body corporate thinks it is reasonable in the circumstances to provide those records or documents.(2) The copies must be made available within a reasonable time, and the body corporate may charge any reasonable costs incurred in providing the records and documents.[30] It is clear that Mr McConnell and Ms Glover are entitled to attend meetings specifically called for the purpose of making major decisions connected with the scheme. They are also entitled under s 206(1)(d) to the minutes of those meetings.In addition, Mr McConnell and Ms Glover are entitled under cl 42 of the scheme to a monthly report detailing, among other things, the progress of the construction project.[31] I am, therefore, satisfied that Mr McConnell and Ms Glover will be kept up to date with relevant developments. The scheme should balance the interests of the individual unit owners with the general desirability of making the construction project efficient and cost-effective. In my view, the requirements sought by Mr McConnell and Ms Glover would undermine the efficacy of the scheme and are unnecessary to meet their transparency concerns.[32] For completeness, I will refer briefly to some of the particular requirements set out in [28].Legal advice[33] Mr McConnell and Ms Glover would like any legal advice obtained by the body corporate to be circulated among all the owners.[34] I do not think this would be wise. A body corporate has its own statutory responsibilities and unit owners can have differing interests. If, during the course of the scheme, an issue arises on which legal advice has been taken, then a request can be made and s 206(1)(g) of the 2010 Act can allow disclosure if that is seen to be reasonable. If there is a refusal to disclose, then the reasons for that can be tested in Court if the matter is serious enough.Owners' meetings and email correspondence[35] Mr McConnell and Ms Glover are concerned that they will be excluded from discussions relevant to the construction project. It is for this reason they have asked for clauses requiring:(a) that all owners are provided with all emails sent or copies to three of more owners;(b) that all owners are invited to attend any owners meetings where three or more owners are invited; and(c) that the minutes of all owners meetings be circulated to all owners.[36] It will be apparent from the reasons I gave at paragraphs [29]-[33] that I do not consider these clauses to be necessary. Moreover, these clauses are too broad to justify incorporation within the scheme. It is not clear, for example, whether three owners having a casual conversation about the construction project would constitutea "meeting" for the purpose of the proposed clause. Similarly, it would be anunjustifiably wide clause that required all owners to be provided with all emails sent to three or more owners. Transparency concerns do not justify the disclosure of private email correspondence, irrespective of its content, between three or more owners.Sub-contractors[37] Mr McConnell and Ms Glover seek a clause requiring proposed sub-contractors to "prove to the owners that they are suitably qualified and independent."This is inconsistent with the proposed standard form construction contract. Under the contract, it is the responsibility of the head contractor to appoint sub-contractors when necessary. On this basis, I consider the proposed clause to be an inappropriate addition to the scheme.Second opinion on actual costs incurred[38] Mr McConnell and Ms Glover propose a clause that permits owners toobtain, at the body corporate's cost, a second opinion on the decisions of the quantity surveyor. In my view, this would unnecessarily delay the process and add to the total cost of the construction project. As I said earlier, individual unit owners who disagree with allocations can make their points to the engineer.Risk of contractor failing financially[39] A final and separate area of concern for Mr McConnell and Ms Glover is the risk of the contractor failing financially without finishing the contracted work,resulting in loss to the unit owners. They want the body corporate to "appoint aprofessional to undertake a financial and legal due diligence on [the contractor], express an opinion on the degree of risk and recommend any steps that can be takento mitigate that risk".[40] Plainly, it is in the interests of all the owners that the scheme is efficient and cost-effective. The clause proposed by Mr McConnell and Ms Glover would delay the scheme and add to its expense. I do not think the extra cost and delay can be justified. The body corporate considered three tenders before resolving to appoint the head contractor. That suggests a degree of care in the contracting process. Mr McConnell has not pointed to anything suggesting that the proposed works carry a heightened risk requiring active mitigation by the body corporate. Put simply, there is always a risk of the sort identified by Mr McConnell and Ms Glover when engaging a contractor. The risk is mitigated by the tender process and by ensuring proper control over the monthly progress payments. In this case, that is all that is objectively necessary.Decision[41] The application is granted. The proposed scheme is approved subject to the amendments specified at [22] and [26] above. An amended scheme is to be produced for my final approval.Costs[42] I am inclined to let costs lie where they fall. This is a small body corporate where the owners of seven units face significant expense in order to remedy weathertightness issues. The application for a s 74 scheme was not opposed by Mr McConnell and Ms Glover. Their opposition was to aspects of the scheme. However, if any party wishes to seek costs, then memoranda are to be filed by 30 April 2016 and replies by 15 May 2016.________________________________Brewer J