UNIT TITLES
Playing by the rules
Alan Henwood takes a look at the transition from the Unit Titles Act 1972 to the Unit Titles Act 2010

It seems that many body corporates – including some professionally managed – have taken the line of least resistance when dealing with the transition from the Unit Titles Act 1972 (1972 Act) to the Unit Titles Act 2010 (2010 Act).

• Most, but not all, have had their first Annual General Meeting;
• Many have delegated all possible responsibilities to a committee and/or manager;
• It appears that most have elected not to opt into the 2010 Act regime early – unless there have been major maintenance or weather-proofing issues to resolve, where the 2010 Act does, arguably, provide a greater degree of clarity.

In terms of the transitional provisions of the 2010 Act, however, another key date is fast approaching. The transition date is “15 months from the first day of the month following the date of commencement of [this] Act”. This seems to be variously interpreted as 1 October 2012 (my view) or 20 September 2012 (the anniversary of the commencement of the Act). Not a major point, but another example of the confusion engendered by the new Act. Whichever, from the transition date:

• Developments will no longer be able to rely on Body Corporate rules in force under the 1972 Act, and the question arises as to what rules do apply.
• A body corporate becomes responsible for maintaining not only common property, but also building elements and infrastructure – and there are critical differences from the old regime.
• The body corporate will have to put in place a long-term maintenance plan, which must cover a period of at least 10 years.
• A body corporate must decide whether to establish a long-term maintenance fund to support the plan.

New rules
Transitioning to new rules is not simply a matter of passing a resolution to readopt the existing rules. Rules under the 1972 Act traditionally covered governance and housekeeping (“parties, pets and parking”). Over time, some very sophisticated sets of rules have evolved. Under the 2010 regime, the situation is quite different.

• ‘Governance’ rules are now part of the statute or Regulations, and the 2010 Act does not contemplate that these provisions can be altered, nor does the Act appear to envisage that they be included in a registered set of rules.
• This also extends to some rules which bridge the divide between governance and housekeeping, such as the power to impose and collect levies, and powers in respect of maintenance.
• The only registered ‘rules’ that the 2010 Act appears to envisage are ‘operational’ rules (parties, pets and parking). The default rules in the Regulations are minimalist, so it is more than probable that most body corporates will want to adopt new rules.

How does a body corporate navigate its way through this transition?

Operational rules
Unavoidably, what this means is that the body corporate is going to have to do the exercise of reviewing its existing rules and deciding what is important to it. It then needs to check that these matters are not covered by the 2010 Act provisions or the Regulations, as any amendment or addition that is inconsistent with the provisions of the Act or any other enactment or rule of law is invalid. At this point, a body corporate will probably need legal advice.

Helpfully, the Auckland District Law Society Inc has produced standard sets of operational rules for residential, commercial, and mixed-use developments. These are capable of amendment: the Law Society describes them as “a starting point” and as not being designed to be a “one-size fits all” set of rules. They may not contain all the possible operational rules that are contained in existing rules – or they may cover more. In addition, they may not be written exactly as a body corporate would like to see them.

The end result may well be a decision to write new rules.

It does not end here. Rules must be adopted by ordinary resolution of the body corporate and do not take effect until registered. But even this is not simple. Although there is a form prescribed by the Regulations which must accompany the rules submitted for registration, Land Information New Zealand (LINZ), in its wisdom, has decided that the form must be signed and witnessed differently to the way set out in the form! I believe LINZ is wrong, but the matter rests there.

In addition, LINZ is requiring that if the new rules are adapted before 1 October, Form 15 should be further modified to recite that the adoption and modification are pursuant to a special resolution of the body corporate, seemingly on the basis that it is necessary to opt into the new regime if new rules are adopted before 1 October 2012, and that requires a special resolution under section 221. I suggest that LINZ is exceeding its mandate.

Governance rules
Body corporates appear to be finding it difficult to navigate through the governance rules, which are spread throughout the Act and the Regulations and not necessarily in a logical order.

Can you include ‘governance’ rules in a registered set of rules? Seemingly, but the process is fraught.

The reason it seems possible is that the 2010 Act does contemplate registration of amendments to the operational rules that relate to “the regulation of the body corporate” (section 106(1)(b)). The problem is, however, that any amendment cannot be inconsistent with any provision of the 2010 Act (section 106(4)). Largely, therefore, the exercise would appear to be a repetition – in a more logical order – of the existing provisions of the 2010 Act and the Regulations that relate to governance.

Clearly, it is possible to register “amendments” to operational rules that relate to matters not covered by the Act or the Regulations. Some suggestions are:

• Filling a casual vacancy on a committee – but only where the quorum is not affected;
• Voting priority of joint holders when voting in person at a general meeting. Voting priority when voting by proxy is covered by the Act, but not voting in person.

Unfortunately, it does not appear to be possible to amend some of the problem provisions in the Act and the Regulations, such as the plurality of definition of simple majority, the right to demand a poll, and the impact of amendments to resolutions where postal voting is involved.

Maintenance responsibilities
From 1 November 2012, the body corporate will be responsible for maintaining not only common property but also all building elements and infrastructure in the development.

The definition of “building elements” is extensive, and worth setting out because it may change the responsibility significantly. Building elements:

“includes the external and internal components of any part of a building or land on a unit plan that are necessary to the structural integrity of the building, the exterior aesthetics of the building, or the health and safety of persons who occupy or use the building and including, without limitation, the roof, balconies, decks, cladding systems, foundation systems (including all horizontal slab structures between adjoining units or underneath the lowest level of the building), retaining walls, and any other walls or other features for the support of the building”.

Previously, the responsibility typically stopped at the exterior face of external walls where they adjoined common property, and did not include internal common walls or floor/ceiling slabs; these were typically owned by adjoining owners to the mid-line. In many cases, because of the definition’s use in plans, roofs of buildings could form part of individual units notwithstanding that they form the roof of a multi-unit building.

Similarly, in the case of services and utilities which, under the 1972 Act, could be regarded as the responsibility of the body corporate or unit owners depending on purpose and location. These are now classed as “infrastructure” and are primarily the responsibility of the body corporate.

As it had under the 1972 Act, the body corporate is given the power to levy for the cost of repairs and maintenance, and there is useful clarification of the ability to levy individual unit owners where repair or maintenance is identifiable as specific to a unit or attributable to acts or omissions of a unit owner or those under its control.

Responsibility for building elements and infrastructure represents potentially a major increase in cost (albeit recoverable) for a body corporate, and the body corporate needs to be ready for this. This means it has to be thinking now about the levies it will want to impose.

Coupled with this, it will need to think about whether it wishes to establish “utility interests” as a basis of contribution. These are a new concept under the 2010 Act. Under the 1972 Act, levies were required to be based on unit entitlement (“ownership interest” under the 2010 Act) and these were assessed largely on the basis of relativity of capital values. This did not necessarily address the use of facilities. The concept of “utility interest” is designed to rectify this. A body corporate does not have to adopt utility interests. In that case, by default, utility interest is the same as the ownership interest/unit entitlement.

Adoption of ‘utility interests’ requires a special resolution at a general meeting. However, there is no reason why a body corporate or body corporate committee should not initiate the process of assessing utility interests now, with a view to bringing it into play when the transition period ends. Calculating utility interests is not necessarily a quick process.

A minor trap in the legislation is that an assessment (reassessment) can only be made if 36 months have elapsed since the last review of utility interests or ownership interests, or deposit of the unit plan. This means that any unit title development that is less than 36 months old cannot adopt utility interests until that period elapses.

Transition
Something the 2010 Act does not deal well with is transition. What, for example, is the situation where building elements or infrastructure which were formerly the responsibility of a unit owner are in a state of disrepair? It appears that the responsibility becomes that of the body corporate, although it does have the ability to recover the cost of repair or maintenance from that unit owner on a differential basis under the powers given by the 2010 Act. It is not explicit, but would appear to be implicit, that its powers to carry out repairs and recover levies would extend to a state of disrepair which arose before the body corporate became responsible for repair and maintenance.

Allied to this, what if the unit is ‘a leaky home’ in respect of which a claim has been brought under the Weathertight Homes Resolution Services Act 2006 or its predecessor Act, and the claim has been brought by the owner? Does the body corporate succeed to the rights under that claim? A fundamental requirement of the Weathertight Homes Resolution Services Act (sections 3 and 15) is that the claimant own the dwellinghouse (unit). The body corporate does not – although it may now have responsibility for parts of it. The Weathertight Homes Resolution Services Act does not appear to envisage this change. At best, it may be that the owner remains the trustee for the body corporate for the purposes of the claim: Body Corporate 180379 and Donk Properties Limited v Auckland City Council [2012] NZHC 588 (30 March 2012). At worst, it is arguable that as the owner is no longer responsible for those elements, it has no longer any entitlement to a claim in respect of them.

The other possible answer is a scheme, under now section 74 of the 2010 Act, which seems an expensive solution in itself.

Long-term maintenance plan
The long-term maintenance plan is another of those innovations that seems a good idea, but may suffer in the implementation. Many of the larger developments already have them. The downside is that a competent plan may not be cheap or easy to prepare, and for a smaller development, such as a small residential development, it is another imposition which is unlikely to be complied with – or complied with badly. In the Auckland market at least, it seems that competition from Australian providers is limiting cost; whether this is happening elsewhere is unclear.

Again, one wonders how long it will be before a body corporate, or whoever prepared the plan on its behalf, is joined as a party to a weathertightness claim on the basis that the long-term maintenance plan is inadequate or negligent.

Other points that need to be noted are:

• It does not appear possible in most cases to simply readopt an existing plan: the plan must be a 10-year plan, and most existing plans will already have run part of their course;
• The maintenance responsibilities of the body corporate have changed. It is unlikely that an existing plan fully addresses those responsibilities.

Delegations
Although not strictly a ‘transitional’ issue, a comment on the question of delegations seems appropriate, as opting into the 2010 Act will also bring section 108 (delegation of duties and powers) into play.

First, there is a preliminary question, and that is whether to form a committee. If the body corporate has nine or fewer members, there is no obligation to form a committee. If there are 10 or more members, it can choose not to, but must do so by special resolution.

In general terms, a body corporate can delegate all of its powers to a committee, with limited exceptions set out in section 108(2). It appears many body corporates (and body corporate administrators) have adopted the line of least resistance, and are delegating all powers except those reserved by section 108(2).

In many cases, the delegation is of “all powers that can be delegated”, which does allow argument that it does not extend to all powers if a delegation is challenged. But that wording can be somewhat misleading. Clearly, that form of delegation excludes the powers reserved by section 108(2), but there are also a number of powers in the Act that can only be exercised by special resolution. A committee decides by simple majority (section 113), so that, by implication, no matter that must be decided by special resolution can be delegated. A committee is unlikely to realise this distinction.

There are also some powers which, by analogy with other corporate bodies such as companies, are traditionally the reserve of the body corporate in general meeting. These are such matters as the power to approve annual accounts, and the power to dispense with an audit. A delegation does not prevent the general meeting exercising these powers, but the potential for conflict is there.

A general delegation also begs the question whether there are some powers that the body corporate in general meeting would like to reserve. Chief among these would be the power to adopt levies, but there will also be other examples.

Delegation needs more thought than it appears it is being given.

The role of body corporate administrators also needs to be considered in this context. Many body corporates are adopting rules that allow administrators/secretaries to be appointed. However, their role is simply agency. Neither section 108 nor section 113 allows delegation to such an administrator.

Transition date
As these things go, 1 October 2012 is not far away.

• Operational rules take time to review and replace;
• Long-term maintenance plans need time to prepare – and for their cost implications to be thought through;
• Delegation is not necessarily the simple exercise it may appear.

If these steps are taken before 1 October, then sections 220 and 221 also need to be noted and addressed because, effectively, the body corporate will be opting into the 2010 Act regime before the transition date.

Added to this is that most of these steps require a general meeting. Ignoring for the moment the arguments as to which rules – 1972 Act or 2010 Act – apply to that meeting, organising a general meeting takes time. If the view is taken – as seems to be prevalent – that the 2010 Act applies, then the requirements are quite detailed. Compliance is an exercise in itself.

Body corporates and their advisers need to be preparing now.

Alan Henwood is a director of Stephens Lawyers Limited. He can be contacted on 04 915 9589.

NZLawyer \\ issue 186 \\ 15 June 2012