Further provisions in the Unit Titles Bill [Oct 2009]

In this Newsletter we discuss further provisions in the Bill. These include ownership and utility interests and common property. We also discuss the very important issue of responsibility and payment for exterior maintenance under the 1972 Act. We will discuss the maintenance provisions in the Bill more thoroughly in a future newsletter. Currently the Bill is only ranking at No. 23 in Parliament's Schedule.

Ownership and Utility Interests

Under the 1972 Act the imposition of levies and disbursement of surplus monies are calculated by the unit entitlement of each unit. The unit entitlement is set by a registered valuer at the time that the unit plan is deposited. The use of unit entitlements has proved problematic in a number of situations because they do not account for actual usage of common property. The main example being a lift where an owner on the first floor is paying the same amount for the lift upgrade as an owner on the 10th floor.

Under the Bill unit entitlement has been replaced with two types of interest being ownership and utility interests. Both are assessed by a registered valuer although they may be reassessed in the case of layered developments or if the Body Corporate decides by special resolution to do so.

The ownership interest is set on the basis of the relative value of the unit in relation to each of the other units. The ownership interest is used to determine, for example, the beneficial interest of the owner in the common property, voting rights when a poll is requested, the owner's share in the land on the cancellation of a unit plan, the extent of the owner's levies in respect of any capital improvement fund, and the amount of ground rental payable.

The Bill provides that the utility interest may be assessed on a fair and equitable basis having regard to the relevant benefits and costs to units. This type of interest is used to establish the owner's levies in relation to the new long term maintenance fund, the optional contingency fund and the operating account and the owner's right to any surplus monies held in those funds and accounts. This type of interest and the way it is assessed will deal with the unfairness which results from the application of unit entitlement under the 1972 Act.

Common Property

Provision has been made in the Bill for access lots to be deemed common property on the deposit of the unit plan where the access lot is owned by the developer/initial registered proprietor of the base land. The Bill also provides for the Body Corporate to acquire by special resolution an interest in land outside the base land. To effect the transfer of this interest a new unit plan will need to be deposited incorporating the land as common property.

Other than these new provisions and the Body Corporate's right to now grant licences in relation to the common property there are no other major changes. The common property will not have a separate title and the Body Corporate is still unable to mortgage, charge or encumber it. Therefore unlike in Australia the New Zealand Body Corporate will still struggle to offer security to any potential financier.

Who Should Pay for Exterior Maintenance under the 1972 Act?

The responsibility for paying for exterior maintenance has been closely scrutinised given the high costs of fixing leaky complexes.

Section 15 of the 1972 Act makes it the obligation of the Body Corporate to keep the common property in a state of good repair.

When the survey plan identifies the exterior as being common property, the obligation to repair is on the Body Corporate, with it being common property. However, when the survey plan shows the exterior as being part of individual units, the obligation to repair is on the individual unit owners. To get around this, many Body Corporate Rules have been amended to provide that it is the Body Corporate's responsibility to repair the exterior.

Given the costs of external repairs, it has been argued that such rule changes are ultra vires, that is, there is no power in the Act to make such changes, so they are void. The argument has been that the Act only allows the default rules to be amended if it is "incidental" to an existing obligation under the Act, and as a Body Corporate's statutory obligation is to repair common property only, such rule changes are not "incidental" to the performance of this obligation.

There have been two recent High Court cases which have come to different results. In one, it was held that such a rule was not ultra vires, as if external repairs were not made, it might expose the common property to physical damage, so that the work was "incidental". Whereas, in the other case, it was held that the Act is clear, with the unit owners being responsible for repairs to their own units, and the Body Corporate being responsible for repairs to common property only. Our view is that the latter approach is correct, but it will need to be finally determined by the Court of Appeal.

The Bill makes it the obligation of the Body Corporate to "maintain, repair, or renew all building elements and all infrastructure that relate to or serve more than 1 unit". A "building element" includes the external part of a building, including, roofs, walls, etc.

This will result in a statutory obligation on a Body Corporate to repair the exterior of a complex, with the ultra vires argument being irrelevant. However, the Bill provides that the Body Corporate's new repair and maintenance obligations will not come into force until up to fifteen months after the Bill becomes an Act. Liability for external repairs will still be an issue for some time yet.

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