How well do you know your body corporate rules?  [June 2009]

Whether you are buying or selling property within a unit title development or you are creating unit title development from scratch it is essential that you understand the significance of the Body Corporate rules.

Over the last 10 years there has been an increase in cases appearing before the Courts in which the entire set of rules of the Body Corporate (or in some cases parts of the rules) have been declared ‘ultra vires' (outside the scope of power) and invalid. This has resulted from amendments made to Body Corporate rules that breach the restrictions on rule amendments under the Unit Titles Act 1972 or the rule amendments have not been registered properly. Developers, unit owners, Bodies Corporate, Body Corporate Secretaries and other third parties can all suffer in one way or another when a Body Corporate rule is declared ultra vires and invalid. There can also be significant financial consequences depending on the circumstances.

Background
The demand to subdivide land into unit titles has been created by the increase in clusters of town houses in suburbs and city centres and also by apartments, (some with both residential and commercial uses), being built in low to high rise apartment blocks.

The Unit Titles Act 1972 ("The Act") was introduced to meet this demand and put in place a management structure for the units and common property. The Body Corporate rules are designed to govern the use, enjoyment and control of units and common property and also regulate the activities of the Body Corporate itself.

In the 1990s it became apparent that the default Body Corporate rules found in Schedule 2 and 3 of the Act lacked the sophistication required to manage the range of unit developments springing up across New Zealand, many with mixed uses and extra communal facilities. A more sophisticated development requires a more comprehensive set of Body Corporate rules.

Amended rules
Under the Act the default rules can be replaced by individually amending rules or adopting an entire set of new rules. The amended rules are registered on the Supplementary Record Sheet ("SRS") as an instrument on the title that can be searched in the same way an easement or land covenant can be searched, particularly by an inquiring purchaser.

However, it is becoming increasingly apparent that changes made to Body Corporate rules are not being made in accordance with the Act. Such rules may be declared ultra vires and invalid which can have significant consequences for various parties.

For developers it is essential that the Body Corporate rules be considered as early on in the process as possible. The type of development will have a significant impact on what changes (if any) are needed to the default rules already in the Act. Any rule amendment made must comply with subsections 37(5) and (6) of the Act. Also the Notice signed by the Body Corporate changing the rules must be signed and lodged with Land Information New Zealand ("LINZ") after the unit title plan has deposited with LINZ. If the Notice changing the rules is signed and lodged before the plan has actually deposited (as can often happen) the rule amendments will not apply

Disclosure
Vendors must be aware that they have an obligation to disclose any proposed rule changes or unregistered rule changes under the REINZ/ADLS Agreement for Sale and Purchase. By not disclosing a vendor may be held to be in breach of warranty. If the rules are ultra vires this may also have an impact on a purchaser's rights under the Agreement and on settlement.

A Real Estate Agent selling a property with ultra vires rules may also need to carefully consider their duty to disclose if they have knowledge of rules being ultra vires.

And finally a purchaser should ensure they obtain a copy of the rules and if amendments have been made they should ask their solicitor to check the amendments have been registered properly. A rule registration check is very fast and can save a lot of delays, stress and cost further down the line. We also recommend the inclusion of a due diligence condition in the Agreement for Sale and Purchase to allow for an investigation into the actual amendments made to the Body Corporate rules if necessary. If a purchaser decides to purchase a property with ultra vires rules they need to be aware of the risks involved and the likelihood of further costs in the future to fix the rules. If the purchaser on sells they will also need to be ready for the same enquires being made by a future inquisitive purchaser.

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