REAL ESTATE AGENTS UPDATE JULY 2011
UNIT TITLES ACT 2010
There have been very considerable changes made to the legislation and regulations regarding unit titled properties. The Unit Titles Act 2010 came into force on 20 June 2011. The stated aim is to:
“ensure the diverse and complex range of unit title developments are able to be managed more effectively; and will provide a clear and flexible mechanism for simple and complex developmentto be created in the future”.
Unfortunately it is far from clear whether the Act will achieve that aim.
The Act Unit Titles Act 2010 is administered by Land Information New Zealand, Department of Building and Housing and the Ministry of Justice. Unfortunately the division between the three agencies has already caused some difficulties, with inconsistencies in the legislation and regulations, and a number of errors and anomalies.
The new Act departs from the Unit Titles Act 1972 in a number of ways. The most significant changes are stated to be those that:
(a) clarify the definition of a principal unit – a principal unit must contain or be contained in a building or be a car park;
(b) streamline the process under which a staged development is built;
(c) create a sensible and more flexible system for calculating how much a unit owner should contribute to body corporate common funds;
(d) state that the body corporate owns the common property;
(e) clarify and articulate the rights and responsibilities of unit owners and bodies corporate;
(f) create more efficient and transparent governance and management structures;
(g) lower the voting threshold for most body corporate decisions;
(h) provide a comprehensive disclosure regime for buyers and sellers, developers and bodies corporate; and
(i) provide a fully integrated and cost-effective dispute resolution service for unit title disputes, through the Tenancy Tribunal.
Replacement of current Body Corporate Rules
Existing Body Corporate are governed by the schedules in the Unit Titles Act 1972, and any amendments adopted by individual Bodies Corporate. The new legislation repeals all existing Body Corporate rules, along with the schedules in the Unit Titles Act 1972, with effect from 1 October 2012. New default Operational Rules contained in the Unit Titles Regulations 2011 will take effect from that date.
During the transition period up to 1 October 2012 all Bodies Corporate should review their old rules, and the rules contained in the new regulations, and determine whether it is necessary to carry over any provisions from the old Body Corporate rules. If these rules are still required they may be adopted by the Body Corporate as part of the Operational Rules imposed by the new regulations.
Body Corporate Manager
Amongst the many changes is the replacement of Body Corporate secretaries by Body Corporate managers, who it is anticipated will generally be owners rather than independent practitioners.
Under the 1972 Unit Titles Act, many Bodies Corporate effectively delegated much of their functions and responsibilities to professional Body Corporate secretaries. The legal effect of this delegation was always uncertain.
Under the new legislation, Bodies Corporate will remain responsible for their own management, which may not be delegated. They may however obtain the assistance of a professional Body Corporate management company to act in a purely secretarial capacity. The Body Corporate and its Manager and Committee (if any) remain ultimately responsible for the management of the Body Corporate.
The legislation omits any reference to body corporate secretaries.
Calling Annual General Meetings
There are changes to the procedures for summoning and holding Body Corporate general meetings. There is now a requirement for the Body Corporate to send owners notice of an intention to call an Annual General Meeting, with an invitation for agenda items. There is then a subsequent notice actually calling the AGM. It is intended that the AGM will only consider such agenda matters as were included in the notice calling the AGM, and that owners will not be surprised with new agenda items.
The Body Corporate is required under the new Act to hold a special general meeting for the purposes of electing a committee (if required), and for appointing a manager, within 18 months. Section 90 of the Act requires the body corporate secretary to call AGM’s. Yet the chairman will not be appointed under section 89 until that first AGM occurs. The conflict is only partly cured by Regulations 5(2) and 6(2) which purport to vary the Act to provide that notice of the first AGM is to be issued by the Body Corporate (i.e. all owners). The Body Corporate should take the opportunity of holding the first AGM to consider whether changes are required to the new Body Corporate Operational Rules.
Voting Powers
One significant change to the procedure at general meetings is that the Body Corporate may now be bound by a special resolution. Under the old legislation there was a requirement for unanimous consent by unit owners for certain fundamental decisions. Such decisions required an often unworkable unanimous decision to bind the Body Corporate. Under the new Unit Titles Act 2010, a special resolution passed by 75% of those voting may made decisions for the Body Corporate which are binding on all owners. These decisions can have significant consequences for the unit owners, such as selling part of the common property, or borrowing money.
There is now a greater need for owners to be actively involved in the operation of their Body Corporate. Those owners who do not participate in the democratic process may find their property rights seriously affected. The rules require a quorum for Annual General Meetings of only 25% of eligible owners. As a consequence major decisions, including the sale or redevelopment of the entire development, may in practice be approved by only 18.75% of owners – or less, as owners who have not paid their Body Corporate levies are not eligible to vote.
There is also an anomaly in that a Body Corporate without a committee requires a 75% majority by voting rights to decide certain matters. However if the Body Corporate elects a committee at an AGM (by majority vote only), the elected committee may decide the same matters with a bare 50% majority.
Another oddity is that where owners vote by postal vote, or on a resolution in lieu of a meeting, each owner counts as one vote. This is contrary to the usual rule that voting rights are in proportion to ownership interests.
Body Corporate Committees
A Body Corporate with more than ten owners must have a committee, unless it elects by special resolution not to do so. A smaller Body Corporate may choose whether or not to operate a committee. The committee will exercise certain powers of the Body Corporate, which may not be further delegated.
There is the risk that individual committee members may be held personally liable for their action or inaction. The possibility of personal liability of committee members should be considered, particularly for larger Bodies Corporate or where there is an added risk, such as the building being leaky. We would recommend that Bodies Corporate should consider obtaining indemnity insurance cover for the committee members and manager.
Approval of Spending
The Body Corporate is now required to approve by ordinary resolution all expenditure that is not categorised as urgent. An annual budget must therefore be very detailed and comprehensive. Any foreseeable expenses must be included. Anything unforeseen, and not provided for, but which is not urgent, cannot be undertaken and expenses incurred without the approval of the Body Corporate. This may result in non-urgent works being delayed until the next annual meeting, and becoming more costly to undertake as a consequence.
Long Term Maintenance Plan and Long-Term Maintenance Fund
All Body Corporate are now required to adopt a ten-year maintenance plan. Bodies Corporate are also required to operate a long-term maintenance fund for associated maintenance costs. The term sinking fund is no longer used.
The Body Corporate may elect to opt out of the requirement for a long-term maintenance fund – they may not however opt out of the requirement for a maintenance plan.
Monies held in the maintenance fund may not be apportioned between vendor and purchaser on the sale of units. It is anticipated that the value of the fund will instead be taken into account in arriving at an appropriate purchase price.
There is some uncertainty as to whether the payments made into the maintenance fund is money spent, which can be deducted by the unit owner for tax purposes. As the monies are effectively held on trust for future work, they may not be spent for tax purposes until that work is actually undertaken and paid for by the Body Corporate.
Disclosure
The new legislation also imposes significant obligations in respect of disclosure. There is now provision for three types of disclosure: pre-contract disclosure; pre-settlement disclosure; and additional disclosure. The regulations are fairly prescriptive as to the information required in each type of disclosure pack.
A vendor of a unit titled property must prepare a pre-contractual disclosure document for prospective purchasers. This must be provided free of cost to enquirers. It must be signed by the vendor or someone authorised by the vendor. This will likely increase the costs to a vendor of selling a unit-titled property, as the statement is likely to be prepared by, or with information supplied by, the Body Corporate. It has been predicted that the costs of disclosure may exceed the legal costs of a unit title transaction.
There is also an additional pre-settlement disclosure document. This is similar to, but much more extensive than, the traditional Section 36 Certificate. Oddly, unlike the Section 36 certificate, it need not include details of the Body Corporate insurance. This must be made available to the purchaser prior to settlement. We would recommend that vendors of unit titled properties ensure that the pre-settlement disclosure document includes insurance details, although this is not a legal requirement.
Finally, there is provision for additional disclosure. This is an even more comprehensive disclosure package, which may be requested by a purchaser. The additional disclosure package includes details of the insurance, amongst many other matters. Unlike the other two disclosure packages, it is the purchaser not the vendor who must meet the cost of preparation of the additional disclosure package. A purchaser may be obliged to request and pay for this additional disclosure if the vendors pre-settlement disclosure pack does not include insurance details. It would be best practise for a purchaser to request that the pre-settlement disclosure include details of insurance. Oddly Regulation 35, which lists the additional information that can be requested, also does not include all of the details which a prudent purchaser may require.
Whilst it would be desirable for the vendor not have to prepare an additional disclosure package until one is requested, we note that this disclosure package must provided within only five working days of being requested. As it may in practice be difficult for a vendor to collate this information within five days, we would suggest that best practice would be to prepare the additional disclosure package at the time of preparing a pre-contractual disclosure pack.
Mortgagees were not required under the Unit Titles Act 1972 to provide a section 36 certificate prior to settlement of a mortgagee sale. However all vendors, including mortgagees, must provide full disclosure under the Unit Titles Act 2010. The mortgagee may not however have access to all of the information required.
Disputes
Disputes concerning Bodies Corporate are to be directed to the Tenancy Tribunal under the new legislation. Whilst this may be a convenient forum, the filing fees imposed can be significant. Application fees are as high as $3,300.00 for a category 1 application (i.e. more complex proceedings relating to the repair or maintenance of common property, the governance of a body corporate, or the decisions and procedures of a body corporate).
Consideration should be given to including comprehensive dispute resolution provisions in Operational Rules, to reduce the likelihood that disagreements will have to be referred to the Tenancy Tribunal. Unfortunately arbitration and mediation provisions in the Body Corporate Operational Rules will not override the statutory provision allowing for an application to the Tenancy Tribunal.
As the new Act and regulations are very extensive, the above is only a short summary of some of the many changes.
Please feel free to discuss any of the above matters directly with John Cox.