WESTTHORN PROPERTIES LTD v BODY CORPORATE 177519 [2020] NZHC 593

WESTTHORN PROPERTIES LTD v BODY CORPORATE 177519 [2020] NZHC 593 [20 March 2020]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2019-404-000401[2020] NZHC 593UNDER the Unit Titles Act 2010IN THE MATTER OF an order settling scheme under section 74BETWEEN WESTTHORN PROPERTIES LIMITED,PAK HONG LEUNG and209 GROUP LIMITEDApplicantsAND BODY CORPORATE 177519RespondentHearing: 4 March 2020Counsel: J Heatlie and J Wood for the ApplicantsC Baker for the RespondentJudgment: 20 March 2020JUDGMENT OF EDWARDS JThis judgment was delivered by me on 20 March 2020 at 4.00 pmpursuant to r 11.5 of the High Court Rules.Deputy RegistrarSolicitors: Rainey Law, AucklandPrice Baker Berridge, Auckland[1] The applicants are the owners of the four commercial units in theHobson Gardens complex in Auckland. They apply for an order under s 74 of theUnit Titles Act 2010 (Act) settling a scheme of repair.[2] There is no dispute that the commercial block of the complex is in need ofrepair, and that the appropriate means of raising the funds to meet the cost of repair isby utility interest. Nevertheless, the applicants complain about delay on the part ofthe Body Corporate in effecting those repairs. There is also a concern that theBody Corporate may trigger s 126 of the Act to recover the cost of the repairs fromthe commercial owners.[3] In response, the respondent Body Corporate says that it is taking steps to effectthe repairs and that it will not utilise s 126 of the Act to recover the costs ofremediation. The Corporate says that the scheme of repair is not appropriate and thatit simply replicates provisions of the Act obliging the Body Corporate to take the stepsthat it is, in any event, taking to repair the commercial block.The Hobson Gardens complex[4] The Hobson Gardens complex is an apartment building in central Auckland. Ithas 101 principal units and accessory units. The complex was created with the depositof a unit plan on 29 January 1997.[5] The complex has two floors of below-ground car parking which extends thelength of the site. There are two main blocks above the ground. The commercial blockis on the street front at the eastern boundary of the complex. It is a single-storeybuilding of four commercial units. Those are the four units owned by the applicantsin this case. Each run a retail business from their units.[6] The residential block sits behind the commercial block. It comprises twoseparate towers, each 12 storeys high and containing a total of 97 residential units.[7] A canopy made of glass and steel extends the length of the elevation on thestreet side of the commercial block. It is outside the base footprint of the complex andoverhangs the public footpath. The canopy is common property, as is the land lyingbelow the commercial block.[8] The walls of the commercial block are also, predominantly, common property.The only exception is the parts of the back walls of the commercial units that frontonto the accessory units. Those walls are unit property rather than common property.[9] There is a history of defects with the complex. Proceedings were issued inrelation to defects within the residential towers. Those proceedings include anapplication by the Body Corporate and the majority of residential owners for a schemeunder s 74 of the Act. In a judgment dated 19 December 2014, Duffy J declined thatapplication.1[10] The defects within the residential towers have now been repaired. Initially thecommercial unit owners objected to contributing to the cost of repairs to the residentialunits when the commercial units had defects of their own. Ultimately, however, thecommercial owners relented and contributed to the payment of the repairs calculatedon a utility interest basis.[11] Defects in the commercial block were first noticed in 2008 or 2009. Anengineering report dated 7 September 2011 identified the main defects in thecommercial block to be panel cracking, inter-panel movements, canopy sagging, andlack of bearing in support of the pre-cast concrete ribs. There was also evidence ofwater leaks though the roof. The main cause of these defects appears to be differentialsettlement between different foundation types as a result of sub-soil conditions. Thathas been confirmed in subsequent engineering reports obtained by both the applicantsand the Body Corporate.[12] In 2019, the Body Corporate engaged engineering firm Tonkin & Taylor tocarry out geotechnical and structural surveys. Tonkin & Taylor recommended amonitoring schedule and a detailed structural assessment including the drilling of boreholes. Initially it was envisaged that monitoring would only need to take place over afew months, however, the most recent recommendation is that a two-year period is1 Body Corporate 177519 v Lai [2014] NZHC 3381.required. The monitoring is intended to allow a proper identification of the underlyingground conditions to be made, which will allow Tonkin & Taylor to advise on aremedial solution.[13] The further structural assessment will take place during the two-yearmonitoring period, and some minor repair works will also be made to stop wateringress. Mr Baker gave assurances from the bar that progress is being made to attendto those minor repairs expeditiously.[14] The preliminary estimate of the cost of repairs is between $250,000 and$500,000 plus GST, depending on what option is taken. The Body Corporate initiallytook the position that the repairs to the commercial block must be paid for by theowners of the commercial units. The Body Corporate has since retreated from thatposition and accepts that all owners are responsible for the cost of repairs to this block.Mr Till, the Chairperson of the Body Corporate, has sworn an affidavit on behalf ofthe Body Corporate confirming that it does not intend to engage s 126 of the Act torecoup any costs.[15] Levies will be raised from all of the unit owners on the basis of their utilityinterest. The Body Corporate's assessment is that by the time it is in a position tostrike a levy, it will have approximately $600,000 in a contingency fund. It will notbe in a position to know whether a further levy will be required until completion ofthe monitoring period.The law[16] Under s 138 of the Act, the body corporate has duties of repair and maintenancefor the common property, any assets designed for use in connection with the commonproperty, and any other assets owned by the body corporate. The repair obligationsalso extend to any building elements and infrastructure that relate to or serve morethan one unit.[17] Section 74 of the Unit Titles Act permits the body corporate , owners of units,mortgagees or administrators, to apply for an order settling a scheme of repairs wherea building is damaged or destroyed but the unit plan is not cancelled. A scheme mayinclude provisions for the reinstatement in whole or in part of the building or otherimprovement or for the transfer of units to the body corporate so as to form part of thecommon property.2[18] In Tisch v Body Corporate 318596, the Court of Appeal set out the approachto applications under s 74 of the Act.3 Although that decision related to a schemeunder s 48 of the Act's predecessor, the principles continue to apply to applicationsunder s 74. The Court of Appeal set out a three-step approach:(a) Step 1: the Court must be satisfied that the building has been damagedor destroyed;(b) Step 2: if so satisfied, the Court must decide whether to settle a scheme.That is, the Court must decide whether a scheme is appropriate in thecircumstances;(c) Step 3: if the Court decides the scheme is appropriate, it must thendecide what the terms of the scheme should be.[19] The Court of Appeal also considered five guiding principles emerged fromrelevant case law, namely:(a) A scheme with broad support is to be preferred;4(b) The scheme should be appropriately detailed;5(c) The order can have retrospective effect, as long as the body corporatehas acted in accordance with the scheme prior to the Court's approval;62 Unit Titles Act 2010, s 74(3)(A).3 Tisch v Body Corporate 318596 [2011] NZCA 420.4 At [45].5 At [46].6 At [47].(d) Normally work is to be done to the same standard and at the same time;7and(e) The terms of the scheme are not to depart from the Act and the BodyCorporate Rules any more than reasonably necessary to achievefairness between unit holders in the circumstances.8The proposed scheme[20] Ms Heatlie submits that the proposed scheme is in similar terms to previousschemes approved by this Court.[21] Under the terms of the scheme, the Body Corporate is obliged to carry out theremedial work irrespective of whether it is to common property or principal units. Allremedial work is to be completed in accordance with plans and specifications. TheBody Corporate is empowered to do all things necessary to carry out the work.[22] The Body Corporate is vested with a specific power to raise levies once anestimate or a tendered price for the remedial work has been obtained. Owners arerequired to pay the levies on dates to be set by the Body Corporate.[23] The costs of repairs are to be funded by way of a levy calculated and raisedfrom the owners based on the utility interests of the respective units. The levies raisedare to include costs incurred by the applicants in undertaking any interim repairs,investigating the defects and taking advice on and bringing the application for thescheme.[24] The Body Corporate also has a reporting obligation under the scheme to keepowners fully appraised of progress on the remedial work by reporting every threemonths. The scheme spells out what those three-monthly reports shall contain.7 At [48].8 At [49].Is a scheme appropriate in the circumstances?[25] There is no dispute in this case that the first stage of the three-stage approachoutlined in Tisch is established in this case. That is, all agree that the building isdamaged and in need of repair. The key issue in this case arises at the second stage ofthat approach – that is whether a scheme is appropriate in the circumstances.[26] The application for a scheme appears to have been triggered by two mainconcerns on the part of the applicants. First, the concern that the Body Corporate maychange its mind and seek to recover the cost of repairs from the commercial unitowners alone pursuant to s 126 of the Act. Second, the delays in investigating andrepairing the defects.[27] The first of these concerns is readily understood. The commercial unit ownershave contributed to the cost of repairs to the residential units on a utility interest basis.It seems only fair that the cost of repairs to the commercial units be paid for on thesame basis. Given the Body Corporate's changing stance on this issue, the desire tolock in the Body Corporate's most recent decision to levy all owners on a utility basisand not to trigger s 126, is understandable.[28] But I am not persuaded that a scheme should be used to set that decision instone – at least not yet. The other 97 unit owners have not had a chance to considerand vote on the scheme. The management structures for unit title developments underthe Act are based on democratic principles with each unit owner having an opportunityto vote on matters that affect their property rights. The purpose of a scheme of repairis not to circumvent those democratic rights in circumstances where there has not beenan opportunity to exercise them.[29] Those democratic rights inform the need for a scheme to have broad support.In discussing this requirement, the Court of Appeal in Tisch noted that the greater thelevel of support from owners for the proposed scheme, the more likely it is that thescheme does justice between the owners. The Court went on to say that this will notbe invariably so because a majority of owners may support a scheme that is unfair tothe minority.9[30] This is not a case of the majority favouring a scheme that is unfair to theminority. In this case, there are no majorities or minorities as the scheme has not yetbeen put to a vote. It may be that all, or the majority, of the owners agree that the cost-sharing proposal put forward in the scheme is the most equitable in all thecircumstances. I consider they should be given an opportunity to express that viewbefore the Court is asked to sanction a scheme that will bind all owners to that cost-sharing mechanism.[31] The applicants' second concern involves the delay in investigating andundertaking repairs. I am not convinced that the proposed scheme is an appropriateresponse to this concern either. It is acknowledged on behalf of the Body Corporatethat there has been historical delay, but more recently the Body Corporate has beentaking steps to progress the investigations and the repairs. The proposed scheme ofrepair will not result in these various steps being undertaken any faster.[32] Furthermore, the Act provides other routes by which disgruntled owners mayseek to enforce the Body Corporate's repair obligations. For example, depending onthe value of the work, a Tenancy Tribunal, District Court or High Court may order aparty to remedy a breach of the Act, operational rules or agreement or refrain fromdoing anything that would constitute a breach.10 I agree with Mr Baker's submissionthat the role of a scheme is not to trump other provisions in the Act more appropriatelydesigned to enforce the statutory obligations of repair. It is neither necessary, norappropriate, to have a scheme to enforce the body corporate's obligations in this case.[33] That lack of necessity is also reflected in the fact that the scheme does littlemore than replicate provisions of the Act. For example, clauses 1 and 2 of theproposed scheme oblige the Body Corporate to carry out remedial work whether tocommon property or principal units. The parties are already agreed in this case thatthe repair work falls within s 138(1) of the Act, and the Body Corporate is obliged to9 Tisch v Body Corporate 318596, above n 3, at [45].10 Unit Titles Act 2010, ss 171(3A), 172 and 173.repair. Similarly, clauses 3 to 5 of the scheme sets out the general powers of theBody Corporate in undertaking the remedial works. Those are already provided for inss 77 to 78 of the Act.[34] Ms Heatlie quite rightly points out that the Court of Appeal in Tisch said thatthe terms of a scheme should not depart from the Act and Body Corporate rules anymore than reasonably necessary to achieve fairness between unit holders. But thosecomments must be seen in the context of the earlier observations made by the Courtto the effect that the scope of s 48 (now s 74) is "limited to a situation where the bestinterests of unit owners as a whole dictate a departure from the scheme of the Act andfrom the Body Corporate Rules."11 In this case there is no pressing need to depart fromthe Act and the Rules at all, and no need to endorse a scheme that simply replicatesstatutory obligations.[35] In Fraser v Body Corporate S63621, the Court noted that a scheme should bea remedy of last resort.12 The current circumstances do not demand a remedy of lastresort, and I am not satisfied that the scheme is appropriate in all the circumstances.The application must be declined.Result[36] The application under s 74 of the Act is declined.[37] If costs are not agreed, then the parties may file memoranda within 10 workingdays of receipt of this judgment, with memoranda in reply five working daysthereafter. Memoranda should be no longer than five pages in length. Costs shall bedetermined on the papers.___________________Edwards J11 Tisch v Body Corporate 318596, above n 3, at [31].12 Fraser v Body Corporate S63621 (2009) 10 NZCPR 674 (HC) at [97].