April 2009

This issue:

• Body Corporate Management v The Rights of the Individual Unit Owners
  With the down turn in the property market, owners/landlords of passive investments in such properties as serviced apartments are looking to take more control over their investments and to breaking existing arrangements in respect of their properties.  more
• Rent Arrears – Who gets them?
  Patel v Digital Printing Group Limited (2008) Court of Appeal
  When a property is sold and there is rent owing at the settlement date, is the vendor or purchaser entitled to collect the rent arrears? more
• Access to your land – Is it a given?
  Murray & Another v B C Group (2003) Limited & Others
  Buyers who purchase a property with a view to adding value by improving the access to the property should seek legal advice before an agreement for sale and purchase is signed. more
• Review Planned for Overseas Investment Regime
  The Government has recently announced a review of the Overseas Investment Act 2005 and the Overseas Investment Regulations 2005, in line with its commitment to ensure the flow of overseas investment into New Zealand is not hindered unnecessarily. more
• Legislation Updates
  Read more on the following legislation currently under review or in progress:
  -  Unit Titles Bill
  -  Resource Management (Simplifying and Streamlining) Amendment Bill
  -  Building Amendment Bill (No. 2)

How far can a body corporate manager go in controlling the rights of the individual unit owners?

With the down turn in the property market there are increasing pressures on landlords who may have passive investments in such properties as serviced apartments.  With those pressures property owners look to take more control over their investments and to breaking existing arrangements in respect of their properties.  This has resulted in reviews of body corporate management arrangements testing the enforceability of management contracts.

Russell Management ("RM") entered into a management agreement with the Body Corporate of a unit title development. The management agreement gave RM the exclusive right to provide letting services for 16 unit title properties in the development. Russell Management entered into leases for each of the units with the original owner - the property development company responsible for the development. The units were sold to individual owners subject to the leases. RM sub-leased the units to members of the public. RM paid the owners the net amount of each sub-lease rent less a commission.

RM sought the Body Corporate’s consent to assign its interest under the management agreement to an associated company, Tourism Flair Limited ("Tourism Flair").  The Body Corporate refused to accept Tourism Flair as a suitable, respectable and solvent assignee and purported to terminate the management agreement.  RM obtained an interim injunction preventing the Body Corporate from taking any further steps to enforce the termination of the management agreement pending determination of its claim against the Body Corporate.  The Body Corporate subsequently made an application for summary judgment against RM and also an order rescinding the interim injunction. 

The Body Corporate’s fundamental argument was that the rules of the Body Corporate which purported to allow it to enter into the management agreement were ultra vires (ie. beyond the powers or authority of the Body Corporate) because they breached provisions of the Unit Titles Act 1972 ("Act").  When a unit title development is lodged and a Body Corporate created, the rules set out in the second and third schedules of the Act apply to the Body Corporate.  These rules can be amended by the Body Corporate but its ability to do so is limited by the Act. 

Section 37(5) of the Act 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 identifiable to the performance of the duties or powers imposed on it by this Act or which would enable the Body Corporate to acquire or hold any interest in the land or any chattel real or to carry on business for profit.”

Section 37(6) provides: 

“No rule or addition to or amendment or repeal of any rule shall prohibit or restrict the devolution of units, or any transfer, lease, mortgage, or other dealing therewith, or destroy or modify any right implied or created by this Act.”

In respect of section 37(5) the Court referred to two previous cases.  In Velich v Body Corporate 164980  the Body Corporate rules purported to prohibit the proprietors of the units from adding to or altering the units in any way without first obtaining the written consent of the Body Corporate.  In Body Corporate 188529 v North Shore City Council the rules required the Body Corporate to be responsible for the maintenance or repair of property other than the common property.  In both these cases the essential question was whether the amended rule created powers or duties which were incidental to (meaning naturally attached to or arising from) the powers or duties in existence prior to the amendment.  A rule which appreciably expands the existing powers and duties can not be regarded as merely incidental.

In this case the Court held that the exclusive management agreement, which allowed a third party (RM) the exclusive right to contract with other parties, expanded the powers or duties of the Body Corporate and so could not be considered as incidental to the statutory powers.  The Court further noted that the previous test had been expanding the powers appreciably but held in this case that they expanded the powers considerably. 

In respect of section 37(6) the rules clearly placed a restriction, in fact a prohibition, on the proprietors of the individual units to lease their unit as they wished.

The Court noted that the management agreement in addition to providing the exclusive leasing right allowed RM to provide other management services in respect of the unit title development.  The question was asked whether these other services were severable from the exclusive leasing rights.  The test to be met in answering this question is whether the nature of the balance of the agreement would be altered by removing the exclusive leasing rights.  This question was left open for determination at a substantive hearing.  The Court noted that RM would need to prove that Tourism Flair would remain a solvent assignee in the absence of the exclusive leasing rights. 

The Body Corporate noted its ability to terminate the leases in the event that the management agreement was terminated.  Naturally, until the question of severability is answered this power can not be exercised. 

The Court also noted the complications associated with the leases in that they were in place when each of the individual proprietors purchased their respective units.  The individual owners were therefore faced with the problem that they were arguably bound to honour the lease arrangements that their predecessors in title (the unit title developer) entered into with RM. A counter argument to this proposition is that because the basis on which RM entered into the leases has been found ultra vires, the leases themselves are unenforceable.

This case has yet to have a final judgment issued to determine:

• whether or not the balance of the management agreement remains valid;
• whether Tourism Flair is a solvent assignee;
• whether RM has any cause of action for damages or loss of profits;
• whether the leases are enforceable. 

The outcomes, when and if determined, will be of significant relevance to body corporate managers, especially where they take a pro-active role in managing/leasing units for or from individual owners.

For more information please contact: Deborah Miller, Ian McCombe or Howard Johnston (Partners, Commercial Property)

Rent Arrears – Who gets them?

Patel v Digital Printing Group Limited (2008) Court of Appeal

When a property is sold and there is rent owing at the settlement date, is the vendor or purchaser entitled to collect the rent arrears?

The Churchills were the registered proprietors of a commercial property which was subject to a lease to Digital Printing Factory Group Limited. The Churchills entered into an agreement for sale and purchase of the property to the Patels.  After settlement of the sale to the Patels, Digital Printing Factory Group Limited assigned its interest in the lease to Digital Printing Group Limited (“Digital Printing”).  The Churchills were shareholders of Digital Printing and guarantors of the lease under the assignment. 

Some two years later the Patels signed an agreement for sale and purchase to sell the premises.  The agreement did not refer to the lease but the settlement statement included apportionments for rent as at the settlement date. In the three months leading up to settlement the rent for the premises was not paid.  Settlement of the sale was completed and the property was transferred to the purchaser. 

Prior to settlement the Patels had issued proceedings in the District Court against Digital Printing and the Churchills for the outstanding rent.  Digital Printing and the Churchills argued that the Patels could not sue for the rent because they were no longer the registered proprietors of the land.  The Court referred to sections 232 and 233 of the Property Law Act 2007 which state that the person from time to time entitled to the income of the land may exercise the right to receive rent payable for the premises unless a contrary intention appears from the lease or surrounding circumstances.

The Court found:

• Proceedings against Digital Print and Churchill had been filed before settlement.
• The settlement statement included apportionments prepared on the basis that the rent had been or would be collected by the Patels.
• The agreement for sale and purchase implied a right for the Patels to sue for rental arrears up to the date of settlement.
• The purchaser’s equitable interest as lessor (under the purchase agreement) does not extend to recovering rent arrears prior to settlement.
• A contrary intention existed in the surrounding circumstances.

The Court found in favour of the Patels based on the lease, when read with the Property Law Act 2007, and on the right to sue implied in the agreement for sale and purchase.

For more information please contact: Deborah Miller, Ian McCombe or Howard Johnston (Partners, Commercial Property)

Access to your land – Is it a given?

Murray & Another v B C Group (2003) Limited & Others

Buyers who purchase a property with a view to adding value by improving the access to the property should seek legal advice before an agreement for sale and purchase is signed.

Under Part 6 Subpart 3 of the Property Law Act 2007, an owner or occupier of  landlocked land may apply to the Court for an order granting reasonable access to such land.  Before such an application can be considered, a Court must be satisfied that other relevant statutory provisions have been satisfied.  This is a complex exercise whereby the Court is required to consider many factors which are relevant to such an application.

In this High Court case the property was a residential dwelling that did not have vehicular access but had pedestrian access along a public walkway. The land was purchased in 1989 without vehicular access by owners applying for improved access.  The owners argued that their land was landlocked and that access via the public walkway was dangerous, poor and inconvenient. 

When their lot was created in 1963 it was clearly not intended to have vehicular access.  The lot was designed to provide foot access only.  The contour of the neighbourhood made it very difficult to provide vehicular access to every lot.  At the time they purchased the land in 1989, the owners were happy with the access which they considered reasonable.  However access by foot was becoming burdensome for health reasons.

The Court refused to grant relief to the applicants in this case.  The Court held that circumstances had not changed since the lot was created in 1963 to make foot access unreasonable.  In addition that Court held that a 1-3 minutes walk of 70m in length and 15m elevation up or down a poorly lit path remained reasonable in the context of the neighbourhood and the topography.  However, the Court held that if distances or elevations were twice that amount, the Court would not hesitate to say that in 2009, foot access was insufficient. 

For more information please contact: Deborah Miller, Ian McCombe or Howard Johnston (Partners, Commercial Property)

Review Planned for Overseas Investment Regime

Given the current economic climate, the Government is anxious to ensure the flow of overseas investment into New Zealand is not hindered unnecessarily.  Following through on that intent the Government recently announced there will be a review of the Overseas Investment Act 2005 ("Act") and the Overseas Investment Regulations 2005. 

Anyone who has endeavoured to sell or consult as advisor to a proposed purchaser of certain lands will know that rules are presently unnecessarily complex. Certain lands are tagged as "sensitive land" requiring consent of the Overseas Investment Office in circumstances that catch trivial or minor transactions in the web of the overseas investment regime complexities.  This results in significant costs being incurred by a vendor and/or purchaser and often the collapse of a reasonably negotiated contractual arrangement.

While always addressing valid concerns about foreign investment in New Zealand, the stated objective of the review is to create an overseas investment screening regime that promotes and encourages the flow of investment into New Zealand.  The review will consider the following issues:

• How the purpose of the Act can be restated to better reflect the importance of foreign investment to New Zealand's economic growth.

• How the screening thresholds for investments and significant business assets and sensitive land can be adjusted to ensure they promote the initial and ongoing flow of investment into New Zealand.

• How the type and scope of sensitive land can be refined to ensure that only land of particular significance or importance to New Zealand is screened.

• The tests that are to be applied to foreign investments so those foreign investments meet the necessary criteria for consent to be granted under the Act.  Such tests would include factors for determining the benefit to New Zealand, minimising compliance costs and avoiding deterring valuable investment opportunities.

It is anticipated that Cabinet agreement to any recommendations arising from the review will be sought by the end of June 2009 and at this stage there is no clear timetable for the tabling of the necessary legislation.

For more information please contact: Deborah Miller, Ian McCombe or Howard Johnston (Partners, Commercial Property)

Unit Titles Bill – An Update

In our October 2008 Property Law Update we advised that the Unit Titles Bill was introduced in May last year to reform the current rules relating to unit titles by replacing legislation that was originally enacted in 1972.  Submissions on the Bill close on 24 April 2009.  We will update you further once the Select Committee has released its recommendations.

For more information please contact: Deborah Miller, Ian McCombe or Howard Johnston (Partners, Commercial Property)

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Last updated: 17 April 2009

The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.