RUSSMORR LTD v BODY CORPORATE 345866 [2016] NZCA 418

RUSSMORR LTD v BODY CORPORATE 345866 [2016] NZCA 418 [6 September 2016]IN THE COURT OF APPEAL OF NEW ZEALANDCA53/2015[2016] NZCA 418BETWEEN RUSSMORR LIMITEDAppellantAND BODY CORPORATE 345866First RespondentPOG MO THON LIMITEDSecond RespondentHearing: 10 May 2016Court: Miller, Cooper and Kós JJCounsel: B D Gray QC and S D Williams for AppellantT J Rainey and J P Wood for RespondentsJudgment: 6 September 2016 at 11 amJUDGMENT OF THE COURTA The appeal is dismissed.B Rules 2.1(f), 2.1(g) and 2.2(k) of the amended rules of the first respondent are declared ultra vires the Unit Titles Act 1972 and invalid.C The appellant must pay the respondents' costs for a standard appeal on aband A basis, together with usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Kós J)[1] May a body corporate amend its rules to require an on-site manager (to be accommodated in a unit leased from one of its members) and empower the body corporate to guarantee the rent? This question arises in the context of the now superseded Unit Titles Act 1972 (1972 Act). The 1972 Act continues to apply to the body corporate in this appeal.[2] Aquasoleil Beach Villas is a residential unit title development in the seaside town of Whitianga. The first respondent is its body corporate. As originally conceived, Aquasoleil would have an on-site manager. To effect that purpose the owner of unit R, the appellant Russmorr Ltd, leased its unit to Aquasoleil Management Ltd (AML) for a term of 30 years. AML was a company controlled bythe body corporate. The body corporate guaranteed AML's obligations under thelease. This roundabout transaction was necessary because the 1972 Act precluded a body corporate from owning or leasing an interest in land directly.1[3] The body corporate no longer wants an on-site manager. Nor does it want to have to meet the rental costs. It obtained a declaration from the High Court that the guarantee was invalid and unenforceable.2 Russmorr appeals.Facts[4] Kenneth Kells and his sons Martin and Craig are property developers. In 2003 the Kells incorporated a company called Buffalo Beach Villas Ltd (Buffalo) for the purpose of developing the Aquasoleil complex. Buffalo built the 50-unit complex between October 2003 and February 2005. Buffalo's solicitor was aMr Howard David Morrison. He is also the principal shareholder in Russmorr, the owner of Unit R.[5] In September 2003, Mr Morrison's father, Mr Morrison Sr, entered into anagreement for purchase of unit R off the plans as a speculative investment, on the initiative of Mr Morrison. Mr Morrison Sr intended to resell the unit at a profit.1 Unit Titles Act 1972, s 37(5). The position is different under s 106 of the Unit Titles Act 2010.2 Body Corporate 345866 v Russmorr Ltd [2014] NZHC 3323, (2014) 16 NZCPR 213 at [127].[6] Aquasoleil was marketed on the basis there would be an on-site building manager to enforce the rules, operate as a point of contact for the unit owners, and because units would be rented to the public in a rental pool. However s 37(5) of the 1972 Act precludes a body corporate itself acquiring an interest in land. AML was therefore incorporated in January 2005 for the sole purpose of being the lessee of amanager's unit. The shares in AML were to be held on trust by the body corporatesecretary for the registered proprietors of the body corporate.[7] Amendments to the statutory default rules for bodies corporate were drafted by Mr Morrison.3 Most materially, new r 2.1(g) — described as a "mandatory power" — provided that the body corporate shall:Procure that the Manager is provided with accommodation and pay theProprietor of the Manager's Unit the agreed rental together with the amountsdue by the Proprietor pursuant to Rule 1.4 of the Second Schedule.It is common ground that this made it mandatory for the body corporate to procuremanager's accommodation and pay rent for it. The "Manager's Unit" was to be aunit within the Aquasoleil development. New r 2.1(f) complemented r 2.1(g) byrequiring the body corporate to procure that the manager's unit be used solely forthat purpose.[8] Additionally, the body corporate was given power by new r 2.2(f) to enter into an agreement with a management company for the carrying out of management duties. New r 2.2(k) provided a power to guarantee payment of any rental and othermoneys owing in respect of the manager's unit.[9] The body corporate came into existence on 28 April 2005 when the unit plan was deposited. Titles were issued (to Buffalo) and the amended rules were registered.[10] Initially the manager was to be in unit AB. Eventually, it was decided the manager should go into unit R, held by Mr Morrison Sr. It appears the change to3 Section 37(2) provides the default rules of a body corporate are those in schs 2 and 3 of the 1972 Act. The rules of the 1972 Act in sch 2 may be varied by unanimous resolution, and those in sch 3 by ordinary resolution.unit R was initiated by the Kells, rather than Mr Morrison. Mr Morrison incorporated Russmorr on 29 April 2005 for the purpose of purchasing unit R. He was the sole director and had a 75 per cent shareholding in that company. A friend of his, a Mr Russell, held the remaining shares. Mr Morrison's father then nominatedRussmorr as purchaser of unit R.[11] On 12 May 2005 AML resolved to enter into a 30-year lease of unit R with Buffalo, which at that point was still the registered proprietor of unit R. The resolution was approved by Mr Martin Kells as director of AML and Mr Morrison asdirector of AML's shareholder, GDP Trustee Ltd.[12] The body corporate held its first annual general meeting the following day, 13 May 2005. Buffalo was of course still the registered proprietor of all the units. So the only person present was its representative, Mr Craig Kells. The body corporate resolved that:(a) it would adopt the rules amended;(b) it would guarantee the obligations of AML pursuant to the attached memorandum of lease between AML as lessee and Buffalo as registered proprietor of unit R;(c) Direct Body Corporate Ltd would be appointed as body corporate secretary; and(d) a Mr Ross Laverick would be appointed manager and occupy unit R.[13] On 17 May 2005 AML, Buffalo and the body corporate executed a lease agreement for unit R (the Buffalo lease). It included a guarantee of AML'sobligations by the body corporate (the Buffalo guarantee). The Buffalo lease and guarantee were executed by Mr Craig Kells for Buffalo, Mr Martin Kells for AML and a Ms Woodhouse for the body corporate secretary.[14] The following day the body corporate executed a management agreement with Mr Laverick. A licence for Mr Laverick to occupy unit R was entered by AML at the same time. It was to last for so long as the management agreement continued.[15] From 24 May 2005 units in the body corporate started to be transferred from Buffalo to purchasers. Unit R was transferred from Buffalo to Russmorr on 27 May 2005.[16] When Mr Morrison then sought to register the Buffalo lease, Buffalo was no longer the registered proprietor of unit R. On 11 July 2005 the land registrar rejected that dealing.[17] A second lease in identical terms to the Buffalo lease, except with Russmorr as the lessor (the Russmorr lease) was then executed on 14 July 2005. The Russmorrlease again provided that the body corporate would guarantee AML's obligations inconsideration for Russmorr having entered into the lease with AML at the bodycorporate's request (the Russmorr guarantee). Mr Morrison signed as director of Russmorr. Ms Woodhouse signed in two capacities: for the lessee in her capacity as a director of AML, and for the body corporate in her capacity as director of the body corporate secretary.[18] The Russmorr lease was registered on 21 July 2005.[19] The terms of the Russmorr lease and guarantee are favourable to Russmorr. Unit R is leased to AML for 30 years, although Russmorr may terminate the leaseany time after five years from the commencement date by giving nine months'notice. Rent is to increase on annual rent review dates by at least five per cent on aratchet basis. AML must replace all of the lessor's fittings and fixtures every10 years. Unit R may only be used as the manager's residence, restricting AML'sflexibility of usage. The body corporate guarantees these obligations.[20] On 12 September 2005 the body corporate held a general meeting. At that point about 34 of the 50 units had been transferred to purchasers. A number present were concerned about the terms of the lease of the manager's unit, including the termof 30 years and the "excessive" level of rent. Some considered that Mr Morrison had taken advantage of his position as Buffalo's solicitor. The body corporateobtained legal advice about the enforceability of the lease. The minutes of the bodycorporate's annual general meeting in April 2006 recorded further dissatisfactionwith the Russmorr lease. But no issue was raised about the Russmorr lease, in the minutes at least, from 2006 until 2011, when the body corporate again sought legal advice.[21] The body corporate has continued to meet its obligations as guarantor of the Russmorr lease since AML was struck off the Companies Register on 10 July 2007. Its position is summarised by its chairperson in these terms:If we had a free hand it is likely that we could not engage an on site manager at all and instead contract the services needed to upkeep the complex directly from local providers (for example to have the lawns mowed and the gardens tended to). There is no need to have an on-site manager in this complex, each unit is run independently by its owners who have the freedom to engage any property manager they see fit. The common facilities do not require intensive day to day management.Due to the term of the lease we are locked into an arrangement we would not freely choose and does not meet our needs. It is an unnecessary and unjustifiable expense.[22] In 2013 the body corporate (together with a representative unit holder) issued proceedings against Russmorr. The first cause of action alleged that the Russmorr guarantee was ultra vires the body corporate. There were two parts to that allegation. First, that the body corporate did not have the power to guarantee the obligations of AML under the Russmorr lease. Secondly, that the body corporate had not authorised its secretary to enter the guarantee. The second cause of action also alleged the Russmorr guarantee was ultra vires, this time because it would bind the body corporate to ensure performance of a lease not required to fulfil a duty or power under the 1972 Act. The third cause of action was that the Russmorr lease and guarantee were transactions entered for the purpose of evading the restriction on acquisition of interests in land under s 37(5) of the 1972 Act, and were therefore also ultra vires the body corporate. This plea included an allegation that AML was a sham. The fourth cause of action (unconscionability) was abandoned, as was the sixth cause of action (accessory liability to breach of trust). The fifth cause of action alleged that Russmorr enjoyed accessory liability for breach of a fiduciary duty byBuffalo to the body corporate. The final (seventh) cause of action alleged the Russmorr lease and guarantee were harsh or unconscionable for purposes of s 140 of the Unit Titles Act 2010.[23] Relief sought under the first, second and third causes of action was declaratory. By the first a declaration was sought that the body corporate lacked power to enter the Russmorr guarantee and that it was not bound by the Russmorr lease. The second sought a declaration that the Russmorr guarantee was ultra vires and void. The third, that the Russmorr lease was void. The fifth sought rescission of the lease and the guarantee. The seventh sought a declaration under s 140.High Court decision[24] Duffy J first considered whether the Russmorr guarantee was validly executed by the body corporate. This depended on whether:(a) the body corporate had the power to give the guarantee;(b) the body corporate authorised the giving of the guarantee; and(c) whether the guarantee was properly executed by the body corporate.[25] The Judge did not however address the first of these issues. Rather, she found the body corporate had not authorised the body corporate secretary to execute the Russmorr guarantee. The body corporate annual general meeting of 13 May 2005 resolved to enter into the Buffalo guarantee, which was annexed to the minutes. But not the Russmorr guarantee. The Russmorr guarantee was a separate legal arrangement from the Buffalo guarantee. It required separate authority.4[26] The Judge then considered whether the body corporate was estopped fromdenying the validity of the Russmorr guarantee on the basis it had met AML'sobligations for over seven years. She did not consider the body corporate was estopped. First, estoppel could not operate to make lawful that which was unlawful, namely the unauthorised execution of the guarantee. Secondly, Mr Morrison would4 Body Corporate 345866 v Russmorr Ltd, above n 2, at [80]–[81].have known that the body corporate secretary was required to have some authority to execute the Russmorr guarantee and that the body corporate secretary was not in fact authorised.5[27] The Judge next considered whether Russmorr could rely on its reversionary interest in the Buffalo lease/guarantee. Russmorr had submitted that if the Russmorr lease fell away, the earlier Buffalo lease remained extant and binding. The Judge concluded that, although the Russmorr guarantee was invalid, it did not follow that the Russmorr lease also was invalid. The Russmorr lease was severable from the Russmorr guarantee and remained live. This meant Russmorr and AML had mutually chosen the Russmorr lease and surrendered the Buffalo lease and guarantee. So Russmorr could not enforce a reversionary interest in the Buffalo guarantee against the body corporate. Instead it still had a lease, the Russmorr lease, albeit with a penniless struck-off company.6[28] Finally, the Judge rejected an argument for the body corporate that the Russmorr lease was a sham created to avoid the prohibition on bodies corporate leasing units. The form of arrangement reflected the intention of the proprietors whowanted to put in place a legal form allowing for provision of manager'saccommodation. It was not a façade concealing the true facts.7[29] The Judge did not determine the second and seventh pleaded causes of action, which sought respectively:(a) a declaration that the specific terms of the Russmorr guarantee were ultra vires the powers of the body corporate; and(b) relief under s 140 of the 2010 Act on the basis the Russmorr guarantee was a harsh or unconscionable service contract.[30] Instead, Duffy J made the following declarations:85 Body Corporate 345866 v Russmorr Ltd, above n 2, at [83]–[84] and [91]–[96].6 At [106]–[118].7 At [121]–[124], citing Chen v Butterfield (1996) 7 NZCLC 261,086 (HC) at 261,090.8 Body Corporate 345866 v Russmorr Ltd, above n 2, at [127].(a) The secretary had no authority to agree to, and to execute the guarantee by the body corporate of the obligations of AML pursuant to the Russmorr lease/guarantee;(b) The body corporate is not bound by the terms of the Russmorr lease/guarantee;(c) As regards the body corporate, the Russmorr lease/guarantee is invalid and unenforceable;(d) As between Russmorr and AML, the Russmorr lease is valid and enforceable.Issues on appeal[31] Seven issues were raised on appeal:(a) Are rr 2.1(f), 2.1(g) and 2.2(k) of the amended rules ultra vires?(b) Is the body corporate estopped from denying the validity of the Russmorr guarantee?(c) Was the entry by the body corporate into the Russmorr guarantee and Russmorr lease ultra vires? Were the amended rules validly adopted?(d) Was the body corporate secretary authorised by the body corporate resolution of 13 May 2005 to enter into the Russmorr guarantee on its behalf?(e) Can Russmorr enforce a reversionary interest in the Buffalo lease?(f) Was the Russmorr lease and guarantee a sham?[32] In the event, however, the outcome in this appeal turns on the first and second issues alone.Issue one: Are rr 2.1(f), 2.1(g) and 2.2(k) of the amended rules ultra vires?[33] This issues arises primarily under the first cause of action.[34] Mr Gray QC for Russmorr submitted the duties to procure a manager's unitto be used solely for the purposes of providing the manager with accommodation,and to pay for the manager's accommodation, were incidental to:(a) the duty in s 15(1)(h) of the 1972 Act to control, manage and administer the common property; and(b) the power to employ agents and servants in connection with the control, management and administration of common property in r 11(b) of the default rules.[35] Secondly, Mr Gray said, the autonomy of the proprietors was not overridden, because they had the ability to amend rr 2.1(f) and 2.1(g) by unanimous resolution and to get out of the lease by negotiating and agreeing to pay compensation for any loss suffered by Russmorr.[36] Thirdly, this was not a case where the duties in the amended rules were wholly outside of the interests of the proprietors. Mr Gray emphasised that the proprietors had had the ability to challenge the amended rules (on the basis they materially altered the market values of the properties), pursuant to a term of the agreements for sale and purchase. But none had done so. The purchasers had accepted any economic impediment to investment performance that might arise from an obligation to pay ratcheted rent to a lessor.Discussion[37] The issue whether a body corporate's amended rules are ultra vires dependson s 37(5) of the 1972 Act. It provides:Any amendment of or addition to any rule shall relate to the control, management, administration, use, or enjoyment of the units or the common property, or to the regulation of the body corporate, or to the powers and duties of the body corporate (other than those conferred or imposed by this Act):provided that no powers or duties may be conferred or imposed by the rules on the body corporate which are not incidental to the performance of the duties or powers imposed on it by this Act or which would enable the bodycorporate to acquire or hold any interest in land or any chattel real or to carry on business for profit.[38] An amended rule must (1) fall within the ambit of the first paragraph of s 37(5) and (2) not fall foul of the proviso in the second paragraph. The word"incidental" in the proviso means "naturally attached to, or arising from, or naturallyappertaining to any of the duties and powers set out in the Act."9 An amended rule which appreciably expands powers and duties (ie beyond those set out in the 1972 Act and its default rules) will not be incidental to the performance of the bodycorporate's (existing) powers and duties.10 Common sense in construing the degree of incidentalism has been encouraged by this Court in previous decisions.11[39] Three High Court decisions are helpful. In Wu v Body Corporate 366611 one of the amended rules challenged required the body corporate to appoint a building manager pursuant to a specific contract annexed to the rules.12 The annexed contract had onerous clauses: the building manger had power to assign its interest without prior approval and would be absolved from further liability if it did so; appointment was for 10 years with a 10-year renewal at the option of the manager; and the manager could only be removed by special resolution and not within the first three years of its appointment. These terms were "most favourable" to the manager and had "no tangible benefit to the proprietors".13 Asher J held:[100] [The amended rule] goes much further than covering theengagements referred to in [default r 11(b)]. It imposes [a particular] form of management agreement on the Body Corporate. As such it inhibits the ability of the committee to negotiate and enter into the management contracts. It binds the Body Corporate to a certain form of agreement and precludes it from entering into any other form of agreement, even if commercially that might be better for the Body Corporate. The management contract can only be changed by a resolution of at least 75 per cent of members. Such a restrictive provision cannot be regarded as "incidental" tothe performance of the duties or powers imposed on the Body Corporate by the Act.9 Chambers v Strata Title Administration Ltd (2004) 5 NZCPR 299 (HC) at [44].10 Velich v Body Corporate 164980 (2005) 5 NZ ConvC 194,138 (CA) at [31].11 At [30].12 Wu v Body Corporate 366611 [2011] 2 NZLR 837 (HC). The vires issue was not taken on appeal to the Court of Appeal or Supreme Court: Body Corporate 366611 v Wu [2012] NZCA 614, [2013] 3 NZLR 522 at [22]; Wu v Body Corporate 366611 [2014] NZSC 137, [2015] 1 NZLR 215.13 At [98] and [105].[40] Chambers v Strata Title Administration Ltd was a similar case. The impugned rule empowered the body corporate to appoint a secretary who could not be removed except by unanimous resolution.14 Paterson J held this was ultra vires. The appointment of a professional manager on these terms was not incidental — that is, reasonably necessary — to the performance of any of the duties or powers imposed on the body corporate by the 1972 Act.15[41] There are similarities, too, with Low v Body Corporate 384911.16 A challenged body corporate rule provided that the body corporate secretary could not be removed at a general meeting. Heath J held this removed an important aspect of the owners' oversight of financial matters of concern to them in a manner ultra viresthe 1972 Act.17[42] Turning to the present case, we consider r 2.1(g), which requires the bodycorporate to procure accommodation and pay rental for a manager's unit, is ultravires for similar reasons.[43] First, the starting point is that the 1972 Act and default rules would permit engagement of an on-site manager. That was common ground. An amendment conferring powers to that effect would generally be incidental to the performance of the duties or powers imposed on the body corporate by the 1972 Act. Specifically, such a rule would be incidental to the duties and powers on which Mr Gray relied, those in s 15(1)(h) to manage common property and enforce the rules, and the power under r 11(b) of the default rules to employ agents to control and manage the common property and exercise the powers and duties of the body corporate.[44] Secondly, however, r 2.1(g) creates a situation quite different to that provided by the default rules. It effectively commits the body corporate to retaining a manager on a permanent basis. It can only be changed by unanimous resolution.18Thereby, it effectively gives the owner and lessor of the manager's unit a power of14 Chambers v Strata Title Administration Ltd, above n 9.15 At [44].16 Low v Body Corporate 384911 [2011] 2 NZLR 263 (HC).17 At [80] and [85].18 Unit Titles Act 1972, s 37(3).veto. It removes the committee's discretionary power in the default rules to employ an external manager or not as it thinks fit from time to time.19[45] Thirdly, it must follow that the mandatory nature of r 2.1(g) offends the incidentalism of amended rules required by s 37(5). An obligation to retain an on-site manager does not arise naturally from a discretionary power to employ an on-site manager. It appreciably expands the burdens of the body corporate from those contained in the default rules.[46] Fourthly, it is not in our view relevant that the owners may have accepted the economic impediment presented by the requirement to have an onsite manager. Nor that they have not sought to challenge the amended rules on the basis of breach of the agreements for sale and purchase of the units. That goes only to whether an estoppel can operate, which we consider later.[47] Fifthly, it is no answer that a unit title development the size of Aquasoleil needs to have a full time on-site manager. The policy of the 1972 Act is to create by rules a democratic framework within which all proprietors can make decisions about the management of their homes and/or economic investments.20 The question whether to have an on-site manager is for the body corporate to decide through that democratic framework. It is not to be predetermined by amendments to the rules at the time of formation of the body corporate.[48] It follows also that r 2.1(f), which requires the body corporate to procure themanager's unit is used solely for the purposes of providing the manager withaccommodation, is ultra vires. That obligation imposed on the body corporate is interdependent with the duty in r 2.1(g) which we have found to be ultra vires. It limits what the body corporate may do in a manner going far beyond what is incidental to the discretionary power to employ a manager.[49] Rule 2.2(k), which gives the body corporate a discretionary power to guarantee rental obligations, is subsidiary to rr 2.1(g) and 2.1(g), and must also be19 Schedule 2, r 11(b).20 Low v Body Corporate 384911, above n 16, at [24] and [80]; World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673 (HC) at [51(a)].ultra vires. Without rr 2.1(f) and 2.1(g), there is no duty to which r 2.2(k) can be said to be incidental. We put to one side the question whether a discretionary power to give such a guarantee might be incidental if it supported a discretionary power toprocure manager's accommodation. That question does not arise here.Conclusion[50] It follows that rr 2.1(f), 2.1(g) and 2.2(k) are ultra vires. We will make a formal declaration to that effect.[51] It also follows that the body corporate did not have the power to enter into the Russmorr guarantee and that that guarantee is invalid. Duffy J has already made that declaration, which is undisturbed by this judgment.Issue two: Is the body corporate estopped from denying the validity of the Russmorr guarantee?[52] Mr Gray submitted this is a classic case of estoppel because the body corporate is attempting to renege on an arrangement it once viewed as to its advantage. The body corporate represented that the lease was valid and enforceable by continuing to pay rental and outgoings for more than seven years. Russmorrreasonably relied to its detriment on the body corporate's representations by agreeingto a variation to the agreement for sale and purchase of unit R so that the purchasewas subject to the manager's unit. That variation reduced the capital value of unit R.[53] Mr Gray submitted Duffy J erred in finding there could be no estoppel because the body corporate was not empowered to execute the Russmorr guarantee. This was not a case where the guarantee was void because the body corporate lacked power; but rather because of a failure to obtain requisite authority. He also submitted that Duffy J erred in finding Russmorr (through Mr Morrison) knew the guarantee was invalid.Discussion[54] We consider that estoppel does not operate in this situation, for two reasons.[55] First, we have found the Russmorr guarantee was void for stronger reasons than Duffy J did — an absence of power as a matter of law, rather than an absence of authority as a matter of fact. For reasons of public policy, Parliament has prohibited a body corporate from assuming an obligation in its amended rules to have amanager's unit by leasing one of the members' units. Estoppel cannot be invoked tocircumvent this statutory proscription.21[56] Second, the equities here do not favour giving effect to the transaction. It would have been unconscionable for Russmorr to take advantage of an estoppel when its director and principal shareholder, Mr Morrison, knew the registered proprietors would have been unaware the body corporate had recently entered an onerous guarantee when they took title. That involves taking advantage of their lack of control over the body corporate in the period between signing up and settling their purchases. The proprietors took legal advice whether the guarantee was binding after the September 2005 general meeting. We do not view the time taken in then commencing proceedings as disentitling.Remaining issues[57] Our conclusions on the first and second issues determine the appeal. We comment briefly only on the remaining issues.Issue three: Was the entry by the body corporate into the Russmorr guarantee and Russmorr lease ultra vires?[58] This now hypothetical issue was pleaded squarely in the second cause of action. It particularises what is said to be objectionable about the Russmorr lease. It was not determined by the Judge. Nor was it focussed on in the evidence sufficiently for this Court to form a clear view of its own.[59] But for our conclusion that the amended rules were ultra vires, we would have remitted the second cause of action back to Duffy J, under s 62 of the Judicature Act 1908.21 Todd v Parker [1953] NZLR 39 (SC) at 47. See also Mansion House Kawau Ltd v Stapleton[1948] NZLR 1015 (SC) at 1019; Laws of New Zealand Estoppel (online ed) at [58]; and J W Carter Contract Law in Australia (6th ed, LexisNexis, Chatswood (NSW), 2013) at [27-09].Issue four: Were the amended rules validly adopted?[60] Paragraph 42(b)(i) of the statement of claim alleged (as part of the first cause of action) that the amended rules were adopted prior to the formation of the body corporate and therefore were invalid. Given our primary finding that the relevant amended rules are ultra vires, we do not propose to address this issue further.Issue five: Was the body corporate secretary authorised by the body corporate resolution of 13 May 2005 to enter into the Russmorr guarantee?[61] A majority of this Court (Miller and Cooper JJ) would have held that the decision to execute the Russmorr lease could only have been made by the proprietors, and therefore the substitution of Russmorr as lessor was invalid because the proprietors were different at 14 July when the Russmorr lease was executed to 13 May when the authority was given.22 It cannot be presumed that the registered proprietors on 14 July would be indifferent to the identity of the lessor with whom they were entering into a 30-year commitment.[62] A minority of the Court (Kós J) would have taken a different view on this issue. The Buffalo lease concerned unit R, which was beneficially owned on 13 May by Russmorr pursuant to an unconditional agreement for sale and purchase. In entering the lease, Buffalo was acting as bare trustee for Russmorr, and the lease would have passed fully to Russmorr when it took legal title. There was no relevant change in lessor identity. The body corporate proprietors could not have prevented Buffalo selling the reversion. In any event, lessor identity is always prone to change on transfer of land. Therefore, on this approach, the 13 May resolution authorised substitution of the lessor because there was no difference of substance.[63] It being unnecessary to resolve this issue, nothing turns on the difference of opinion.Issue six: Can Russmorr enforce a reversionary interest in the Buffalo lease?[64] Duffy J found Russmorr could not enforce a reversionary interest in the Buffalo lease because the Russmorr lease as between AML and Russmorr remained22 Thirty-three units were transferred from Buffalo between 13 May and 14 July 2005.intact. We would have found that the body corporate's entry into the guarantee ineach lease was equally invalid.Issue seven: Was the Russmorr lease and guarantee a sham?[65] While we would have found AML was created to avoid the statutory disability on bodies corporate leasing property, that did not render the lease and guarantee a sham. The arrangement was not a pretence or deception. It operated in exactly the way the parties who created it (ie the Kells family and Mr Morrison) intended it to operate.23Result[66] The appeal is dismissed.[67] Rules 2.1(g), 2.1(f) and 2.2(k) of the amended rules of the first respondent are declared ultra vires the Unit Titles Act 1972 and invalid.[68] The appellant must pay the respondents' costs for a standard appeal on aband A basis, together with usual disbursements.Solicitors:Carson Fox Legal Ltd, Auckland for AppellantRainey Law, Auckland for Respondents23 Clayton v Clayton [2016] NZSC 29, [2016] 1 NZLR 551 at [128].