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BODY CORPORATE SERIES: LEAKY BUILDINGS AND BODIES CORPORATE
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The continuing leaky building crisis is not over yet, especially for bodies corporate, as demonstrated in the recent judgment of Manchester Securities Limited v Body Corporate 172108 [2018] NZSC 19. This case is a useful reminder of the difficulties bodies corporate face, particularly in weathertightness remediation and the resolution of disputes.

When do disputes arise?

A leaky building can have severe financial implications for its owners. This matter becomes even more complicated where a unit title development is involved, as unit owners (as members of the body corporate) are liable to contribute to the cost of repairing common property, as well as building elements and infrastructure that relate to one or more units.

Assessing when building elements or infrastructure (e.g. cladding) relate to one or more units is not always easy or clear-cut. Disputes can arise in relation to determining who is responsible (or to what extent) to meet the costs of repairs of such building elements or infrastructure.

Some types of repair can potentially be seen as offering greater benefits to certain owners. As an example, some may see repairs to the roof as giving greater benefit to penthouse owners. Under the Unit Titles Act 2010 (‘UTA 2010’), it may be possible to recover some or all of the costs of those repairs, above and beyond an owner’s ownership interest, from that owner. [1]

What happens when disputes arise?

The UTA 2010 replaced its predecessor, the Unit Titles Act 1972 (‘UTA 1972’).

The UTA 2010 provides a clear dispute resolution process. It also provides (in section 74) for a scheme following destruction or damage. This entails a process for the High Court to make an order to settle a scheme for the repair of a unit title development. A similar process was provided under the earlier legislation (section 48 of the UTA 1972).

What happened in Manchester Securities?

The recent Supreme Court decision affirmed the approach of the Court of Appeal [2] and dismissed Manchester’s leave to appeal of the Court of Appeal decision. The dispute concerned a high rise apartment complex known as Hobson Apartments in Auckland. Essentially, the building was a 12-storey apartment block with 39 apartments. Manchester owned the 12th floor of the building. The exterior of the building on levels 1 to 11 was common property and is owned by the body corporate. However, the exterior of level 12 was owned by Manchester.

The dispute concerned the Body Corporate for the development applied to the High Court for the approval of a scheme under section 48 of the UTA 1972 (as this was the legislation that was then in effect). A scheme is often used to arrange and manage the carrying out of repairs to a unit title development, including as to costs allocation usually (but not always) in the case where parties cannot agree how to carry out the repairs.

The scheme was approved by the High Court. It declared a scheme that would require Manchester to contribute to the repairs of the common property (i.e. building exterior for levels 1 to 11) as well as paying for the level 12 work. However, Manchester’s liability would be capped at 11.88% of the total costs of repairs to the whole building. This was a “departure from the default scheme” under the UTA 1972, but it was considered justified in the circumstances.

When it came to actually carrying out the scheme, things did not go according to plan. This was due to lengthy delays, cost escalations and a notable absence of full-co-operation between the different unit owners. The repairs to the common property had a cost increase of 41% above the original estimate. The repairs to level 12 at August 2011 had a cost increase of 150% from the original estimate. This further increased to 430% in August 2016.

Ultimately, this meant that the repairs to level 12 well exceeded 11.88% of the total cost to repair the common property. The outcome, if one were to follow the approved scheme, would mean that not only would owners (other than Manchester) therefore have to contribute more to the common property repairs on levels 1-11, they would also be required to make a payment to Manchester in relation to the repair of the exterior on level 12.

The Body Corporate subsequently applied for a variation of the scheme under section 48(6) of the UTA 1972, ostensibly to avoid an unjust outcome. The variation was approved by the Court which made an order requiring Manchester to pay additional money for the benefit of the other unit owners.

Court of Appeal case

The case came to the Court of Appeal because Manchester appealed the High Court judgment. [3] Manchester argued that the High Court’s decision was based on a misunderstanding of the original scheme and the evidence.

The Court of Appeal concluded that the High Court’s decision, which created the original scheme, essentially ‘collapsed’ as a result of subsequent events (and, in part, the excessive cost escalation). The Court of Appeal rejected Manchester’s appeal as they concluded there was nothing wrong with the High Court’s decision i.e. it was fair and reasonable that the scheme be varied requiring Manchester to pay more than its 11.88% share of the total costs.

What does this mean for you?

Manchester Securities is an unusual case in some ways, as the intention of applying for a (now) section 74 scheme is to ensure certainty as to how repairs are carried out, and the manner in which costs are allocated between owners. In Manchester Securities, the scheme (as initially approved) did not provide for unforeseen cost blowouts. Therefore it is important that a Body Corporate gets the right advice the first time, and prepares an appropriate but flexible scheme.

It is essential to get early legal advice to avoid unnecessary expense and delays. We have substantial experience in dealing with the multitude of issues.

If you are buying a unit, becoming involved in running a body corporate, or are involved in a body corporate dispute – be sure to seek legal advice. We have years of experience in the unit titles field, and can help you get organised.

Thanks to Georgina Garrett, Solicitor, for the preparation of this Newsflash.

FOOTNOTES

[1] See sections 126 and 138 UTA 2010

[2] Manchester Securities Limited v Body Corporate 172108 [2017] NZCA 527

[3] Body Corporate 172108 v Manchester Securities Limited [2017] NZHC 329

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