Category: Property

New version of popular commercial deed of lease

The Auckland District Law Society released its revised 6th edition 2012 deed of lease form in November 2012.

Key changes include:

• CPI rent review option – this allows for a set formula to calculate rent adjustments in line with changes in the Consumers Price Index;
• Bank guarantee – on an assignment (transfer) by the tenant of the lease to another incoming company tenant, the landlord now has the option to require the incoming tenant to provide a bank guarantee;
• A premises condition report is prepared at the commencement date of the lease to provide evidence of the condition of the premises. This assists in the reinstatement obligations of the tenant on termination of the lease;
• Costs – The new deed of lease provides that each party (landlord/tenant) meets its own costs for the negotiation and preparation of the lease and any variation or renewal. Previously the default position was that the tenant was responsible for these costs – a convention inherited from the English system;
• Proportion of outgoings (operating expenses or opex) – if the percentage of outgoings payable by the tenant is unfair, the landlord must now vary the figure;
• The improvements rent percentage has been removed. This allowed the landlord to charge to the tenant by way of an increase in rent a certain percentage of the capital spent by the landlord if the landlord was obliged to by law;
• Access for repairs – these provisions are expanded as a result of issues arising in Christchurch. Landlords now have access to their building to ensure the building is brought up to current earthquake standards;
• No access – new provisions are included to deal with circumstances where a natural disaster occurs and where the premises are undamaged but cannot be accessed. In these circumstances the tenant is entitled to a rent reduction and if the restrictions on access extend beyond a specified period the lease may be terminated;
• Where the premises are a unit title, the tenant must comply with the rules of the body corporate and the provisions of the Unit Titles Act to the extent that they apply to the tenant’s use of the property. Landlords are now obliged to keep premises weatherproof; and
• Insurance excess – the amount payable by the tenant as an opex item has increased to $2,000.

Summary

The new form is more user friendly and has more modern language. It is also more fair between landlord and the tenant. We consider the new form to be an improvement over its predecessor. However, it would be unwise to treat the standard form as a “one size fits all” document. If you are considering entering into an agreement to lease or deed of lease we strongly recommend you seek legal advice before doing so.

If you would like further information please contact Dale Thomas on 07 958 7428.

The law relating to body corporate management contracts remains in a state of flux. Two recent cases provide some clarity, but also invite further questions – and some criticism. This article outlines these cases, and points to the importance of form over substance where management rights are concerned.

ABCDE – the background

ABCDE Investments Ltd & Ors v Van Gog & Ors [2012] NZHC 1131 (24 May 2012) involved a 23-unit complex in Mt Maunganui called “The Terraces”. Units 1-22 were for holiday accommodation, with unit 23 the manager’s unit. Each holiday unit was subject to an encumbrance. The decision concerned a range of instruments: body corporate rules; a management agreement entered into by the body corporate; the encumbrance; and letting agreements.

The Court held that the body corporate rules had purported to be amended before the unit plan was deposited and the body corporate created. Therefore, following Fifer Residential Ltd v Gieseg (2005) 6 NZCPR 306 (HC), the amended rules had never been properly adopted and were invalid. The Court did not proceed to consider the validity of specific rules.

The management agreement entered into by the body corporate primarily granted the manager exclusive letting service rights. The Court determined that entering into the management agreement was beyond the powers of the body corporate (ultra vires), as the amended rules which might have authorised the agreement were invalid, and the agreement was not authorised by the default body corporate rules. Again, the Court did not consider whether specific clauses were unenforceable and should be struck out, as occurred in Russell Management Ltd v Body Corporate 341073 (2008) 10 NZCPR 136 (HC).

The Court did not explore the letting agreement very far, but noted it was an annexure to the management agreement, and was to link individual owners into the exclusive letting service arrangements. More attention was instead given to the encumbrance. This instrument was registered over units 1-22, and provided for a letting service in favour of the manager as encumbrancee.

ABCDE – the encumbrance

The encumbrance was treated as a mortgage, and interpreted following the general contractual principles set out in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) and Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 (SC), including attention to context. In this respect, the Court held that the amended rules, though invalid, were an important part of the context, and could be used as a guide to interpretation of the encumbrance. The Court also looked to Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZLR 277 (SC), and held that subsequent conduct was a useful guide to interpretation. I have criticised this approach in a forthcoming article in the Conveyancing Bulletin.

However, the Court’s finding was that the encumbrance was to be read in light of the other documents, and bound the 22 holiday-unit owners to exclusive letting rights through the manager. So while a contract for the sale of exclusive letting rights may not be enforceable (see Atrium Management Ltd v Quayside Trustee Ltd [2012] NZCA 26, discussed in “What’s Wrong with Management Rights”, NZLawyer, issue 182, 20 April 2012), following ABCDE, an encumbrance providing for exclusive letting rights will be.

And this finding seems correct. A unit owner can encumber a unit title as he or she wishes, and the encumbrance will bind future owners. A body corporate, on the other hand, has quite limited powers, and cannot enter into arrangements that encumber or restrict unit owners’ rights in the same way. In this sense, form is clearly more important than substance. So exclusive letting rights set out in an encumbrance will be enforceable, while those set out in a body corporate management agreement will not be. But while I can agree with the finding, I do not agree with all the reasoning, as the Conveyancing Bulletin article sets out in more detail.

Sentinel Management – the background

Body Corporate 396711 & Anor v Sentinel Management Ltd [2012] NZHC 1957 (8 August 2012) goes a step further, considering broader issues relating to management agreements, their enforceability, and section 140 of the Unit Titles Act 2010. In Sentinel Management, a 30-storey complex in Takapuna comprised 117 apartments and a number of retail shops. The body corporate and Ansley – one of the unit owners – claimed that a management agreement between the body corporate and Sentinel (as manager) was unenforceable. Ansley had signed an agreement to purchase his unit in December 2003, though titles did not issue until February 2008. Shortly after the titles issued, amended body corporate rules were registered, and later that year, the shares in Sentinel were sold to Freestone, which had been involved in arranging management services for Sentinel.

The claim against the enforceability of the management agreement was brought on a number of grounds, each of which will be discussed in turn. By way of background, the agreement was for a 10-year term, with two rights of renewal of 10 years each, and the management fee itself was not under challenge.

Sentinel Management – the usual claims

The body corporate rules were challenged, but held to be enforceable on the basis of the “unanimous assent” rule set out in Bobbie Pins Ltd v Robertson [1950] NZLR 301 (SC), with the Court noting that no particular formalities were required for unanimity.

The Court held that some provisions of the management agreement were ultra vires, and should be severed from the remainder of the agreement, essentially on the basis set out in Russell Management. In this sense, it is important to note that ‘building management services’ (an acceptable arrangement for a body corporate) were treated differently from ‘letting services’ (not an acceptable arrangement for a body corporate).

Sentinel Management – the novel claims

The Court then considered several more complex – and previously largely unconsidered – issues.

The first of these was that a constructive trust arrangement was created by the agreements for sale and purchase, and that Sentinel had dishonestly assisted a breach of that trust. While the Court accepted that an equitable interest passed from a vendor to a purchaser when an agreement was entered into (see Bevin v Smith [1994] 3 NZLR 648), this was not the same as a trustee-beneficiary relationship, nor did it impose full trustee-type duties. There was no breach of duty, and there was also no dishonest assistance.

The second was for breach of a duty by a promoter, drawing on the analogy of the equitable duties owed by a promoter of a company to that company. The Court agreed that a promoter had fiduciary duties. Further, the New South Wales Supreme Court in Community Association DP No 270180 v Arrow Asset Management Pty Ltd & Ors [2007] NSWSC 527 had held a developer owed fiduciary duties to a body corporate; the Court noted that this decision had not been applied in New Zealand, and found the comparison of a developer to a promoter “novel”. Because of its other findings, the Court held it did not need to consider this issue, but it commented that it believed a developer was in a fiduciary position in relation to the body corporate.

The third issue was that the management agreement was an unconscionable bargain. On this issue, the Court held that the body corporate did not suffer any disability or disadvantage. Rather, the Court determined that there was an equality of bargaining power that meant this cause of action must fail.

Sentinel Management – section 140

We then turn to the nuclear option – a claim under section 140(5) of the Unit Titles Act 2010, which allows a “service contract” between a body corporate and another party for a term of more than one year to be terminated if it is “harsh or unconscionable”. This was the first case to consider this provision.

First, the Court held that the provision applied to all relevant management agreements, whether entered into before or after the commencement of the Unit Titles Act 2010 on 20 June 2011. Looking to the words “harsh or unconscionable”, the Court noted that neither Select Committee comments nor the use of the phrase in other statutes provided much guidance.

The Court considered “oppression”, “unconscionability”, and “unfairness”, and held that something more than unfairness was involved for section 140 to apply: rather, there must be something close to “outrageousness”, involving an intrusion upon unit owners’ rights or the functioning of the development. The words “harsh or unconscionable” could also be read separately.

The Court then drew on three points to find that the management agreement in this case was “harsh or unconscionable”: the combination of ultra vires clauses; the potential length of its term; and the different termination rights applying to the body corporate and manager. Having been found to be harsh or unconscionable, the agreement was terminated. While this caused disadvantage to Freestone, the Court noted that Freestone was involved in setting up the management agreements, and was an author of the management-rights scheme.

Lessons

Sentinel Management provides useful guidance on section 140(5), and on challenges to management agreements generally. However, the Court came close to inviting an appeal (at [271]), and I understand ABCDE is to be appealed as well.

Looking to the two cases, the reasoning in Sentinel Management appears sounder. However, it is significant that the Court drew on a combination of points, rather than any single point, in finding the contract harsh or unconscionable. The term of the agreement, the ultra vires provisions, and the difference in termination rights were all relevant, as was the knowledge of the manager’s shareholder. Things might be different in other cases involving (say) an innocent purchaser of the management rights, congruent termination rights, and a shorter term. In this sense, while Sentinel Management provides some general guidance, it could also be seen as quite fact specific. But for now, it is the best statement of law we have, and these cases reinforce some simple lessons:

• ‘Building management services’ are different from ‘exclusive letting services’.
• Exclusive letting rights set out in a body corporate management agreement will be unenforceable.
• Exclusive letting rights secured against individual titles by an encumbrance will be enforceable.
• A management agreement with a long term, ultra vires provisions, and incongruent termination rights will be harsh and unconscionable, and subject to a termination order under section 140 of the Unit Titles Act 2010.
• But these same provisions in an encumbrance will not be subject to section 140, and will stand.

A simple conclusion can be stated: “don’t mess with unit owners’ rights through the body corporate”. Rather, “mess with their titles instead”. Because, where the enforceability of management rights is at issue, form matters more than substance.

If you would like further information please contact Dale Thomas on 07 958 7428.

Introduction

Difficult economic times have led to an increase in the number of properties being sold by mortgagee sale.

The most common instance of a mortgagee sale is where a Bank exercises its power of sale where the owners of a mortgaged property have failed to pay their bank loan. For simplicity, in this article the mortgagee is referred to as “the Bank.”

It is important to note that even where the Bank sells a property as mortgagee, the Bank never becomes the owner of the property. This leads to an unusual situation where the Bank is selling property that it does not own or control. Because of this, there is additional risk placed on the purchaser. If you are interested in buying, bidding or submitting a tender on a property being sold by a Bank as mortgagee, it is important you are aware of the risks set out in this article.

This information is provided as a general guide, not an exhaustive list and circumstances will vary depending on the particular property and agreement involved. If you require further information on your particular situation, please seek specific legal advice.

Do your research and preparation

Mortgagee sale properties are most commonly sold by auction or tender. If you intend to bid/tender on a property, you need to do your planning and research about the property before the auction or tender closing date.

We recommend that you look at:

• Arranging finance for the purchase. If you are successful at auction, you will be required to pay a deposit (usually 10% of the sale price) on the fall of the hammer on the auction day. With a tender, you are usually required to submit a deposit with the tender;
• Get a certificate of title search for the property. This will show you any interests relating to the property, which may include caveats, charging orders or other encumbrances registered on the title for the property;
• Get a LIM Report from the relevant local Council, particularly to ensure that any buildings on the property are permitted and have code compliance certificates; and
• Depending on the type of property being purchased, it may also be prudent to get a valuation, builders report, geotechnical report or other relevant information.

We recommend you talk to your lawyer before making an offer on a mortgagee sale property. Often the agreement is prepared as being “unconditional” which means that after you sign or win the auction/tender, you are bound to complete the purchase and have no rights to cancel.

No warranties

As mentioned above, there is additional risk placed on you as the purchaser because the Bank is not the owner or occupier of the property being sold.

With a mortgagee sale, the standard vendor warranties in a “normal” sale and purchase agreement are deleted. The Bank cannot and will not promise that the property, house and chattels will be in good condition because the Bank is not in a position to control this.

Chattels on the property

Chattels are “movable property” – i.e.: items which are not attached to land and are owned by the owners of the property (for example stove, dishwasher, carpet, curtains, light fittings etc). In a standard sale and purchase deal, chattels are included as part of the sale for practicality purposes.

A mortgagee sale agreement will not include any chattels on the property, because the Bank has no right to sell these. Often the chattels are left on the property, but there is the risk that the property owner could remove the chattels before you take ownership of the property.

The Bank is not required to provide you with keys for the property on settlement. We recommend that you change the locks after you take ownership of the property to ensure that the property is secure.

Risk of damage after agreement signed

The period between when you sign the unconditional agreement or are successful at auction or tender up to the settlement date (the day you complete the purchaser and take ownership of the property) is the “danger period”.

The risk of damage to the property passes to you on the agreement becoming unconditional, the fall of the hammer at auction or the tender is accepted. In some cases, the owners of the property or tenants might still be living at the property at the date the agreement is signed, which they are entitled to do until the settlement date.

The owners of the property can become upset by the sale of the property by the Bank. In some cases, the owners have stripped or caused intentional damage to the property. As the Bank does not warrant that the property will be in a good state of repair on settlement, any damage caused in this interim period is at your risk.

You should arrange insurance for the property from the date the agreement is signed. You will need to disclose to your insurer that the property is being purchased by mortgagee sale.

No vacant possession

A similar risk applies to possession of the property. Although you may purchase the property on a specific date, the Bank will not promise you that the property will be vacant on that date.

If the owner or tenant is living at the property on the settlement date, you will still be required to complete the purchase in accordance with the agreement. In some cases, a disgruntled former owner or tenant may refuse to leave the property or cause damage in the interim. If this occurs, it will be your responsibility to remove the owner or tenant from the property, at your cost.

Talk to your lawyer

As outlined above, buying a property by way of mortgagee sale can be a time-consuming and risky process. We recommend you speak to your lawyer about the risks and any particular issues relating to the specific property before you sign an agreement. Doing the relevant investigations before auction/tender can be costly if the purchase does not proceed, but the benefits of being informed far outweigh the cost of being “trapped” in an agreement to buy an unsuitable property.

If you would like further information please contact Kerri Schofield on 07 958 7423.

The recent decision in Atrium Management Ltd v Quayside Trustee Limited (in receivership and in liquidation) [2012] NZCA 26 (21 February 2012) potentially represents a significant change in the regulation of body corporate management agreements in New Zealand. Before Atrium Management, the key principles of the case law on body corporate management agreements could have been stated as follows:

• A body corporate rule entrenching a particular form of management agreement was unenforceable (see Body Corporate 201036 v Broadway Developments Ltd (2010) 11 NZCPR 627).
• “Exclusive letting” arrangements in management agreements were unenforceable under the Unit Titles Act 1972 (see Russell Management Ltd v Body Corporate 341073 (2008) 10 NZCPR 136 (HC); Gilbert, Liquidator of Crystal Waters Management Ltd (in liquidation) and Anor v About Body Corporates Ltd and Anor (High Court, Auckland CIV-2009-404-2048, 23 June 2009, Justice Harrison).
• A long term was not necessarily an issue, as long as there was an ability to terminate for non-performance (see Russell Management, where a 10-year contract with two times 10-year rights of renewal was acceptable).
• If problematic, it was likely that particular clauses would be struck out, rather than the whole agreement being unenforceable (see Russell Management; Low v Body Corporate 384911 [2011] 2 NZLR 263 (HC)).
• Where the agreement essentially provided for the manager to replace the body corporate and its duties, the whole agreement could be void (see Rendall v Jackson Mews Management Ltd (District Court, Lower Hutt CIV-2004-032-634, 17 December 2010, Judge SE Thomas).

These principles have now been upended (or ‘clarified’) by Atrium Management – particularly in respect of the striking out of entire agreements. That is, we must now add:

• For the whole agreement to be struck out, an unenforceable matter must be fundamental to the agreement. Where exclusive letting arrangements are fundamental to the contract, the whole agreement may be unenforceable (Atrium Management).

The Atrium Management decision

Management rights are big business, particularly when sold at a significant multiplier based on the term of a management agreement. It is significant that Atrium Management did not involve an effort by a body corporate to challenge a management agreement, but rather a vendor-purchaser situation.

Quayside developed a residential and retail mixed-use complex. In 2006, Atrium agreed to purchase a manager’s unit and separately, but contemporaneously and interdependently, agreed to purchase management rights, including provision for exclusive on-site letting service rights. A clause in the agreement for the purchase of the management rights (the October agreement) stated that Quayside would deliver the signed management agreement on payment of the purchase price.

In 2009, Quayside had not yet procured the executed management agreement, and Atrium gave notice to Quayside of cancellation, relying on the decision in Russell Management, delivered in late 2008, where it was held that the grant by a body corporate of exclusive letting rights to a manager was ultra vires sections 37(5)-(6) of the Unit Titles Act 1972 (though it can be noted that these provisions relate to body corporate rules, not body corporate decisions as such).

Atrium was of the view that the body corporate would be acting ultra vires if it granted the management rights described in the October agreement, and that Quayside would not be able to perform the contract. Atrium therefore cancelled the October agreement based on anticipatory breach. Quayside considered this a repudiation, and served notice demanding settlement. When settlement did not occur, Quayside issued proceedings, stating that the offending provisions should be able to be severed, and seeking a declaration as to the enforceability of the management rights. Quayside’s claim for specific performance was subsequently altered to damages.

Atrium counterclaimed and sought summary judgment. Summary judgment was denied in the High Court on the basis that Quayside had an arguable defence, including that it could seek severance of part of the agreement. Atrium then appealed this decision not to grant summary judgment.

Court of Appeal

The Court of Appeal:

• Held that frustration was not a good reason for cancelling.
• Held that the consideration payable under the October agreement was “substantially attributable” to the exclusive letting service (at [34]). That is, the exclusivity was an essential part of the agreement to purchase the management rights, a point amplified by the express ability of Atrium to cancel if Quayside did not comply with a settlement notice. Based on the context of the October agreement, the Court of Appeal held that further evidence was not necessary to determine that the exclusive letting rights were essential.
• Looked to Humphries v The Proprietors ‘Surfers Palms North’ Group Titles Plan 1955 (1994) 179 CLR 597, a decision of the High Court of Australia in which there was no severance of an offending term – the whole agreement was struck down. This decision was referred to in Russell Management, but not followed. The Court of Appeal was of the view that the exclusivity of the arrangements was fundamental to the management agreement, and as an essential term could not be severed.

As a result, the Court of Appeal was satisfied that Quayside could not succeed at trial, and granted summary judgment to Atrium, meaning Atrium’s cancellation was justified.

The bigger picture

If management rights are big business, then the big picture is what this decision means for other management rights.

Following Russell Management, it was already clear under existing law that exclusive letting rights granted by a body corporate would be unenforceable; though four points can be noted. First, subsections 37(5)-(6) of the Unit Titles Act 1972, which were referred to in Russell Management, relate to body corporate rules, not necessarily general decisions of a body corporate. It needs to be emphasised that ultra vires body corporate rules and ultra vires body corporate actions can too easily be confused. Second, while subsections 37(5)-(6) remain in place until the end of September 2012 under the transitional provisions, there is no equivalent of these under the Unit Titles Act 2010. Third, the decision in Russell Management might not stop those rights being linked directly to owners through an encumbrance mechanism rather than through the body corporate or body corporate rules. Russell Management also suggested that a Court would be likely to sever any offending provisions, rather than strike down the whole agreement.

After Atrium Management, this approach seems unlikely to be followed. The Court of Appeal has held that where an unenforceable term of an agreement – such as the grant of exclusive letting rights – is essential to that agreement, the whole agreement will be struck down. It can be imagined that there will be many other agreements now subject to challenge. Some of these may be challenged under Atrium Management principles, while others may be challenged under section 140 of the Unit Titles Act 2010.

But, in assessing the implications of Atrium Management, it is important to remember that this was a decision about the sale of management rights. One party was unable to deliver the management rights as agreed to the other, so the agreement to sell the management rights came to an end. This was not, in the end, a challenge to the management rights themselves, though there are some indications the Court of Appeal thought it was. This case was also an appeal from a summary judgment decision, and not a good place for new law to be made. Exclusive letting rights will also not be essential to all management agreements – many of them are about (or also about) building or common area maintenance, or other matters. All of these points suggest it may be appropriate to read it restrictively – rather than as open season on management rights.

Thomas is a Director in our Property Team and can be contacted on 07 958 7465.

The Licensed Building Practitioners (“LBP”) regime came into full effect on 1 March 2012. It will come as no surprise to many in the industry as the regime has been in the pipelines for a number of years now to give those effected time to adjust. From 1 March 2012 any building work that comes within the definition of “restricted building work” and does not satisfy the DIY exemption must be carried out or supervised by an LBP.

What is restricted building work?

Restricted building work is work related to the primary structure or external moisture management system of a house or small-to-medium apartment building and includes bricklaying/blocklaying, carpentry, external plastering, foundations, roofing and design.

In terms of design work, any fire-safety system attached to or forming part of a small-to-medium apartment building is specifically declared to be restricted building work.

Monitoring of compliance

Before restricted building work commences under a building consent, an owner must give the relevant building consent authority written notice of the name of every LBP who has been engaged to carry out or supervise the restricted building work that is the subject of the consent (where not already stated in the application for consent). Written notice must also be given of any changes regarding the LBP that is carrying out or supervising the work.

On the completion of restricted building work, LBPs must provide the owner and the relevant territorial authority with a record of work. The record of work must be in a certain form, and state what restricted building work the LBP carried out or supervised. The owner must provide a copy of the record with an application for a code compliance certificate.

Consequences of non-compliance

Code compliance certificates will not be issued for building work that includes restricted building work without satisfactory evidence of the involvement of an LBP. Both building practitioners and homeowners are potentially liable for substantial fines of up to $20,000 if they breach the LBP requirements.

Other requirements

To remain licensed, LBPs must continue to meet minimum competency standards (to be prescribed by regulation). LBP qualifications and disciplinary history are also recorded on a public register, and they are subject to a disciplinary regime administered by the Building Practitioners Board.

If you would like further information please contact Daniel Shore on 07 958 7477.