TREMONT HOLDINGS LIMITED v BODY CORPORATE 401803 (TREMONT RESIDENCES) [2014] NZHC 988

TREMONT HOLDINGS LIMITED v BODY CORPORATE 401803 (TREMONT RESIDENCES) [2014] NZHC 988 [14 May 2014]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2014-404-330[2014] NZHC 988BETWEEN TREMONT HOLDINGS LIMITEDApplicantAND BODY CORPORATE 401803(TREMONT RESIDENCES)RespondentHearing: 5 May 2014Counsel: BM Stainton for ApplicantS Price and I Rosic for RespondentJudgment: 14 May 2014JUDGMENT OF FOGARTY JThis judgment was delivered by me on 14 May 2014 at 4.30 p.m.,pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDate: .Solicitors: Stainton Chellew, AucklandMinter Ellison Rudd Watts, AucklandIntroduction[1] In May 2008 a complex of apartments was registered as a unit titles plan under the then Unit Titles Act 1972 (1972 Act). The complex was built and is known as Tremont Apartments. It contains 106 apartments, two amenities titles and the Common Area. The amenities consist of a swimming pool, tennis court, gymnasium, spa/sauna and recreation room.[2] The applicant owns the two amenities titles, and other residential units. The amenities titles are leased to TMT Amenities Limited (TMT). The two amenitiesunits contain the complex's tennis courts, swimming pool and residents' lounge andaccessory units to those principal units which house the gymnasium, spa and sauna.[3] TMT has no assets. The amenities leases are extraordinary as the lessee hasno ability to pay the rent. TMT's liabilities are guaranteed by the Body Corporate.Effectively, the Body Corporate pays the rent and, in so doing, levies the unit holders for the cost. There is doubt as to the power of the Body Corporate to be the guarantor of the liabilities of TMT, and effectively thereby a tenant.[4] A majority of the owners of the units consider the management agreement to be onerous. The Tremont also owns a unit occupied by the manager. This unit is leased to a Mr Sage, an associate of the major shareholder and a director of Tremont, Mr Hodgkinson. The management contract provides inter alia on-site accommodation for the building manager. They are suggesting no building manager is required on site.[5] Under the 1972 Act, there were some doubts as to the scope of the powers of a body corporate. If such a guarantee is lawful, it has to be within implied powers of the Body Corporate, as necessary or incidental to the express functions conferred by statute.[6] The enactment of the Unit Titles Act 2010 (2010 Act) moved the powers of the body corporate into the statute,1 limiting the scope of implication as to additional1 See Unit Titles Act 2010, s 84.powers as necessary and incidental to express powers. Mr Hodgkinson, the director of Tremont, wants an opportunity to renegotiate the arrangements.[7] The annual cost of the Body Corporate of these arrangements is of the order of $270,000. This cost has to be met by the owners of the units. Mr Hodgkinson, who controls Tremont, was the director and majority shareholder of the developer.[8] Of the 106 units occupied by residents, approximately two-thirds want to end the amenity arrangements and 40 units by vote, including 20 owned by Tremont, are either opposed to this or are in the camp of wanting to renegotiate them.[9] At an Extraordinary General Meeting (EGM) of the Body Corporate on 7 August 2013, ordinary resolutions were passed: to terminate the management contract, to terminate each lease of the amenities, and to instruct a legal firm to act in relation to such termination.[10] On 26 November, another EGM was held which passed ordinary resolutions removing Mr Hodgkinson and Mr Nolan (the site manager) from the Body Corporate Committee, reducing the Committee to seven and the quorum to four members, voting seven members onto the new Committee, ratifying the Body CorporateCommittee's decision to terminate the management contract and raising a speciallevy of $165,000 plus GST to fund legal action.[11] The consequence of these resolutions is that Tremont faces two sets of legal costs. The first is its direct legal costs for defence of the validity of the management agreement and the amenities leases. The second is to contribute to the costs of legal proceedings of the Body Corporate against Tremont.[12] These proceedings were commenced between the August resolutions and the November resolutions. They were commenced in the District Court within 28 days of the August resolutions and removed into the High Court. These proceedings anticipated the resolutions in November to instruct a legal firm, and that there would be steps made to levy the members for the costs of the ensuing legal proceedings.[13] Tremont's originating application seeks two orders:(a) Declaring that only those unit holders who voted for the resolutions passed on 7 August 2013 can be levied by the Body Corporate for the costs of the legal and other work outlined to challenge the resolutions dated 7 August and those unit holders who voted against such resolutions are to be exempt from any such levy of cost; and(b) Any contingency funds or other funds contributed by all unit holders held by the Body Corporate are not to be used to fund the cost of legal and other related work to challenge the contracts and agreements referred to in the August resolution.Tremont's argument[14] Tremont argues that being obliged to contribute to the legal costs of the law suits to be conducted by the Body Corporate against Tremont is "unjust and inequitable" and the Court can provide relief under s 210(1) of the 2010 Act:210 General relief for minority where resolution required(1) In any case where this Act requires a resolution and the resolution is passed, any person who voted against the resolution may apply to the appropriate decision-maker for relief on the grounds that the effect of the resolution would be unjust or inequitable for the minority. (Emphasis added.)[15] Tremont accepts that the 2010 Act has clarified the extent of the powers of body corporates, but argues this dispute can be resolved by agreement, there being no need for legal preparation in the first instance for Court proceedings. It argues that the Body Corporate has had sufficient legal advice and there are willing parties ready to renegotiate the contract. However, instead the Body Corporate Committee has funded a crusade regardless of other cost-effective options involving substantially less cost to the owners. Mr Stainton thus contends that it is unjust and inequitable for the majority to act contrary to the best interests of all its members. Rather, the Committee and unit owners should take a balanced approach as the BodyCorporate must act in the interests of members generally. Mr Stainton cited Harrison J in Brooker v Body Corporate 154558.2[16] Mr Stainton submitted that when the owners purchased their units, they did so with their eyes wide open to these arrangements, that had been put in place by the developer. In addition to acquiring a unit, and sharing ownership of the Common Area, the purchasing owners acquired the rights to use all the amenities. The capital cost of those amenities was not included as part of the cost of purchase of the unit as they are not in the Common Area owned by the Body Corporate. The minority owners, particularly Tremont, are entitled to maintain their property rights, and it is unjust that they have to contribute to the legal costs of the majority of the owners litigating to remove such rights, without negotiation.[17] Mr Stainton argues that the faction of the Body Corporate Committee members who promoted these resolutions focused on the Body Corporate levy cost payable by each owner without having regard to the benefits of on-site management and use of the amenities.Internal management irregularities?[18] In addition, Mr Stainton argues that the Body Corporate Committee achieved their position by ordinary resolutions when special resolutions were required, and by invalid proxy votes.First issueShould the minority be obliged to pay for the legal costs of the Body Corporate as mandated by the majority, when some of the minority owners are going to effectively have to meet the costs of defending the legal action?[19] As explained in the introduction, Tremont as the lessor of the amenity leases and enjoys significant revenue paid by the Body Corporate as guarantor and so, effectively, by the owners of units. Tremont's principal shareholder and director,Mr Hodgkinson, also has a related interest in the benefits of the management2 Brooker v Body Corporate 154558 (2005) 6 NZCPR 953 (HC) at [62] – [64].agreement, as the manager's unit is owned by Sage Property Management, half ofwhich is owned by Mr Hodgkinson's partner.[20] Tremont is also a unit owner in respect of a number of units. In this regard, Tremont itself bears a significant share of the cost of the Body Corporate, as guarantor, and the cost of any legal proceedings by the Body Corporate.[21] Of the authorities cited before the Court in this case, the most helpful one is the decision of Associate Judge Doogue of this Court in Body Corporate 85403 v Magill.3 The Body Corporate plaintiff was known as Valencia Court. This was a unit title development of 13 units. Remedial work was required because of leaks. The Body Corporate held a meeting and it was resolved by 7 votes to 3 that the Body Corporate would fund the cost of the repairs required to remedy the defects and would issue proceedings against the builders and developers of the apartment complex.[22] The Valencia Body Corporate commenced proceedings along with six other individual plaintiffs and levied its members for the legal fees incurred. Four of the unit holders were defendants to these legal proceedings and came to the Court saying it is inequitable that they, as members of the Body Corporate, be required to fund litigation brought against them personally.[23] Section 43 of the 1972 Act provided:In 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. (Emphasis added.)In SM Young v Body Corporate 1200664 Harrison J linked this power to the3 Body Corporate 85403 v Magill (2008) 9 NZCPR 399.4 SM Young v Body Corporate 120066 (2007) 8 NZCPR 932 (HC).Companies Act 1993 powers designed to prevent oppression of the minority.5[24] The relevant reasoning of Associate Judge Doogue in Magill is contained at [23] – [29]:[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 from Brooker 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, qua director. 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 rules5 At [43], citing World Vision of New Zealand Trust Board v Seal (2003) 5 NZCPR 618 (HC) at [45].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 ownis sufficient to justify the Court's intervention under s 43, because theresolution to the extent that it allows such an outcome is inequitable.[25] For the respondent, Mr Price relied principally upon [27] and [28] ofAssociate Judge Doogue's reasoning. When one focuses on the annual cost,particularly of accessing the amenities, these revenues payable by reason of the controversial guarantee of the Body Corporate, benefit Tremont and its shareholders not as owners of property as such. Indeed, as owners they are contributing to the cashflow. Rather, they benefit from it as lessors of the two units.[26] I am satisfied that there is a duality of role here between Tremont as a unit owner and Tremont as a lessor of a lease, the effective part of which may be ultra vires the Body Corporate. I agree, accordingly, that the reasoning of Associate Judge Doogue at [27] and [28] is directly referable to this present case. Section 210 of the 2010 Act is not materially different in effect from s 43 of the 1972 Act. Both use the standard of inequity(able).[27] If it can be shown that the manager's agreement, including the right to occupy a unit, cannot be commercially benchmarked against similar arrangements with similar types of apartments, there may be a basis for setting aside the agreement as not being in the interests of all the owners.[28] There are a large number of unit holders. The current Act, like its predecessor, provides for a body corporate as a manageable mechanism by which unit owners can jointly pursue and secure their interests. It was not and could not be argued that the decision of the majority of the owners to use the body corporate toendeavour to challenge the actions of the body corporate as guarantor of the amenities leases and to test the validity of the burden on the body corporate of the management agreement was an abuse of the powers given under the Unit Titles Act.[29] Mr Stainton also relied on the decision of Magill.[30] There was a qualification in Magill where the Associate Judge saw no basis for the Body Corporate being required to pay the legal costs for claims brought by individual owners arising out of damage to their units as separate from the need to remediate or repair the common area.[31] The reader will appreciate that in the context of leaky apartment buildings most of the repair costs will be to the common area, being the exterior of the building. Internal damage to individual units can also occur by reason of defects in the common area. Associate Judge Doogue criticised the particular resolution inMagill because it was too broad.6 It will be recalled that the resolution material simply said the Body Corporate would fund the cost of repairs required to remedy the defects.[32] The Judge went on to say:7[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.[33] It will be recalled that at the outset I mentioned that the preference of theapplicant and the applicant's associates is to negotiate, not litigate. This is laudable.There is nothing to stop this happening. Indeed, this usually occurs alongside6 At [29].7 At [30] and [31].litigation. The levy to raise $165,000 is not a decision to spend all of that on litigation. Settlement of disputes is usually against a credible threat of litigation and a credible threat of litigation requires the Body Corporate to have the means to do so.[34] It is, of course, possible for the disputes between the parties to be litigated by one set of unit holders against another set of unit holders. But it would be difficult. The whole purpose of the Unit Titles Act, in creating a body corporate, is to facilitate the management of such apartment buildings.[35] Where there is a duality of role, as I have found here, then it is legitimate and not unfair for defendants to proceedings against a body corporate, be it under the Unit Titles Act or under the Companies Act 1993 or under any other Act, to indirectly have to contribute to the costs of the action being brought against them where, by reason of a different status or role, are in the same class whose interests are being advanced in the claim against themselves exercising a different role. It is the identification of the duality of roles of Tremont which, in my mind, is the critical reason why this application must fail.[36] For these reasons, I do not think the applicant Tremont has made out a case for injustice or inequity under s 210 by reason of having to contribute to the BodyCorporate's costs.Internal management irregularities[37] As a result, for this application to succeed the applicant has to persuade the Court that there were procedural defects sufficient to invalidate the resolutions.AGM July 2013 Special Resolution[38] A special resolution was passed on 8 July 2013 delegating the chairperson'sduties and the Body Corporate's duties and powers to the Body Corporate Committee. It was a general delegation of: all the powers and duties that may be delegated. [39] Mr Stainton argued that this general delegation was in breach of reg 22 of the Unit Title Rules 2011 which provides:22 Delegation to body corporate committee(1) A written notice of delegation of a duty or power by a body corporate to a body corporate committee under section 108(1) of the Act must—(a) contain the following information about each duty or power that is being delegated:(i) a description of the duty or power; and(ii) the restrictions (if any) on the body corporatecommittee's power to perform the duty or exercisethe power; and(b) specify the duration of the delegation; and(c) contain a statement that the notice of delegation is evidenceof the body corporate committee's authority to perform each duty or exercise each power that is being delegated; and(d) specify the frequency of the body corporate committee'sreports on the delegation to the body corporate.(2) A written notice of delegation must be served on each member of the body corporate committee.[40] Following that resolution in July, the Body Corporate Committee members received advice from Crockers Body Corporate Management Limited (a firm that at the time provided management support to the Committee), on various sections of the Unit Titles Act and the Regulations that the Committee are required to abide by and be aware of, including particularly the notice of delegation following on from the resolution. This is a one-page detailed notice of 13 paragraphs. It records, inter alia, as notice of the delegation:That in accordance with the provisions of section 108 of the Unit Titles Act 2010, all the powers and duties that may be delegated, together with the full authority of the Body Corporate is delegated to the Body Corporate Committee provided that in accordance with section 110 in the Unit Titles Act 2010, nothing in this resolution affects the ability of the Body Corporate to form a power or duty it has delegated to the Committee or to revoke any power or duty that has been delegated as provided in section 111 of the Unit Titles Act 2010.That notice does not expressly describe the power of the Body Corporate to exercisea discretion to terminate existing contractual obligations which affect all owners.[41] Mr Stainton argues that because of the broad manner of the delegation, and in the absence of a specific delegation to exercise a discretion to terminate existing contractual obligations, the delegation in July 2013 was ineffective. Mr Stainton argued that because the delegation was ineffective, the subsequent AGM could not decide by ordinary resolution those matters which, had the delegation been effective, could have been decided by the Body Corporate Committee. As a result, under s 101(1), the subsequent resolutions in general meeting to challenge the leases had to be made by special resolution.[42] Section 101, in its entirety, provides:101 How matters at general meeting of body corporate decided(1) Any matters at a general meeting of a body corporate relating to an exercise of a duty or power that may not be delegated under section 108(2), or that have not been delegated to the body corporate committee, must be decided by special resolution.(2) Except as otherwise provided in this Act, all other matters to be decided by the body corporate at a general meeting must be decided by ordinary resolution.(3) Any matter that is not on the agenda for a general meeting may be discussed at the meeting but, unless all the eligible voters are present at the meeting, no resolution may be voted on and made in respect of that matter except to include that matter on the agenda for a subsequent general meeting.(4) Every resolution must be recorded in writing.[43] The main purpose of s 101(1) is to provide that the powers that cannot be delegated, which are set out in s 108(2), have to be decided by special resolution. There are only four such powers. For s 108 provides:108 Delegation of duties and powers(1) Except as provided in subsection (2), a body corporate may delegate any of its duties or powers, either generally or specifically, to the body corporate committee by special resolution and written notice.(2) The body corporate must not delegate any of the powers or duties set out in—(a) subsection (1) (which is the general power of delegation):(b) section 41 (which provides for the reassessment of ownership interests and utility interests):(c) section 105(3) (which requires the body corporate to comply with the body corporate operational rules):(d) section 136(4) (which relates to the application of insurance monies in or towards reinstatement of the development).[44] None of the subsequent decisions which Tremont seeks to attack fall within those four non-delegable categories. The function of the second clause in s 101(1)"or that have not been delegated to the body corporate committee" is not clear. It is not necessary to interpret this, however, if the special resolution at the July AGM to delegate to the Body Corporate Committee all powers and duties that may be delegated is valid.[45] The critical decisions which Tremont complains about were made in the July 2013 AGM, the EGM of August 2013 and at the EGM in November 2013. None of the critical decisions were made by the Body Corporate Committee. But if the Body Corporate Committee has all those delegable powers, it follows that the members in general meeting have at the least all the powers of their sub-committee.[46] Section 108 does not list all the powers of the Body Corporate. It functions by listing the non-delegable powers. It allows the delegation of all other powers and duties. It does not prescribe that to be delegated they have to be separately listed. Arguably, if only some are delegated, it follows the rest can only be exercised by special resolution. Section 108 is designed to enable delegation of all powers and duties to the body Corporate Committee, save a few exceptions. The powers to litigate, pursue ultra vires issues, try to renegotiate or set aside obligations seen as unreasonable are delegable. Mr Stainton did not argue otherwise.[47] I conclude that the special resolution was effective in delegating all powers except those excluded from delegation in s 108(2).November AGM[48] The remaining issue of procedural irregularity depends on the contention that the proxy forms were so irregular as to be ineffective for the November general meeting.[49] This was a meeting where the agenda was for the removal of Mr Hodgkinson and Mr Nolan and the election of a new Body Corporate Committee. At the July AGM the Body Corporate had resolved to appoint Crockers to perform management and administrative functions. Since that time, the Committee became dissatisfied with Crockers and sought to replace them with Auckland Property Management Limited (APM). At this EGM the Committee was requesting the Body Corporate members to confirm the termination of contract with Crockers and the appointment of APM. Also by November the Committee had worked out a budget and was recommending the Body Corporate raise a special levy of $165,000 plus GST for legal fees. This recommendation of the Committee was adopted by the members in the November EGM.[50] Mr Stainton argued that these proxies used in the November AGM were irregular because the forms used for proxies did not follow the prescribed form in reg 3. The prescribed form has a box, to be completed setting out the agenda items. However, the prescribed form, which is form 11, also has as a note 2:The full text of motions is contained in the notice of general meeting, a copy of which should be provided to the proxy.[51] There is no doubt that, in this case, the full text of the motions was provided with the proxy form to the members. This fact is recorded in the proxy form actually used, which is a variant of form 11. The issue becomes whether it was essential to the validity of the proxy forms to include on the form the agenda issues.[52] I am satisfied there was substantial compliance with the intent of the regulations as to the proxy forms. The proxy forms have to be read in combination with the full agenda items accompanying them. Mr Stainton was unable to cite any authority showing that the failure to comply precisely with the proxy forms created a material irregularity to defeat the voting at the November general meeting. It wouldbe very easy, based on the material a member received, to confine proxy authorities to particular resolutions as to agenda items at the meeting if the member wanted to give a limited proxy a general proxy.Result[53] The application is dismissed.[54] The respondent is entitled to costs on a 2B basis. If the parties cannot agree on costs, I will receive submissions limited to five pages each which must be exchanged in draft before being files.[55] Because of this reasoning, it is not necessary to engage with the two memoranda filed by counsel on 7 and 13 May.