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Last Updated: 8 December 2019
Ben France-Hudson*
Introduction
The Unit Titles Act 2010 (the Act) did not have a happy gestation.1 Since its enactment there have been many calls for reform. Now, only six years after it came into force, it is subject to a review by the Ministry of Business, Innovation and Employment (the Ministry). Although still at an early stage, this review has identified several areas in which reforms could be made. In December 2016 as part of a consultation process, these suggestions were published in a discussion document.2 Ostensibly guiding the Ministry’s proposals in this document is a philosophical view suggesting that the regulatory framework set up by the Act should be as minimal as possible. In essence, the theory is that owners know their needs best, and consequently, government ought to have a very limited role in the supervision of unit title developments and the decisions they make.
This article builds on a recent report which attempted to find ways to create better housing in New Zealand by identifying the barriers that currently exist for the repair or rebuild of multi-unit complexes on a single title to land, when those buildings are destroyed or damaged either by a natural disaster, or as a result of the leaky home syndrome.3 Among other types of multi-unit land, the report considered unit titles and the current review being conducted by the Ministry, with the focus being on the experiences and concerns of a range of participants interviewed as part of the research. Although the policy intent of the Act was mentioned by a number of interviewees, space did not allow for a full examination of the application of the philosophy underpinning the Act to either the existing regime or to the proposed review.
I aim to remedy this omission by arguing that although the Ministry is superficially espousing adherence to a hands-off, minimalist philosophy, it is not doing so in a rational or coherent way. Moreover, there is no recognition of the fact that the philosophy itself is contributing to many
* Lecturer, Faculty of Law, University of Otago.
1 John
Greenwood “Unit Titles Act: Lame Duck and How to Fix It” (paper
presented to New Zealand Law Society Property Law Conference, June 2016) 3 at 3; and John Greenwood “Unit Titles Reform – What is Wrong?” (2013) 3 Property Quarterly 13.
of the problems that require reform.4 The philosophical theory is driven, in part, by an understanding of private property that is commonly associated with individual freehold land ownership. However, in my view, ownership of a unit title is different from other forms of land holding and, in order to successfully address the many problems afflicting this sector, unit titles holders should be seen as members of a community of owners, rather than as individuals who happen to live in a collective setting. Consequently, I argue that the ramifications of the policy adopted by the Ministry in relation to the Act have not been clearly thought through and are unlikely to solve the very problems which have led to the need for a review in the first instance.
I begin by providing a brief overview of the unit titles regime and the important roles and responsibilities held by the bodies established by the Act. The next section focuses on the philosophy said to be driving the Act. Considering this in detail indicates that there is an inherent tension between it and the reality that the people who choose to own a unit title are unavoidably becoming part of a community of owners. This is often ignored or overlooked by those involved in creating and overseeing the unit title regime. Focusing on three different areas of the unit titles regime and suggested areas of reform: the disclosure regime; the suggestion that a unit title Ombudsman be created; and the funding of long term maintenance, I then discuss the essentially ad hoc nature of many of the Ministry’s suggestions for reform and the failure to recognise the extent to which the policy intent of the Act influences many of the problems in the sector and hinders cohesive reform.
Overall, I suggest that ignoring the fact that unit title owners are living in a community of owners will not result in consistent, or positive, outcomes. Adherence to a very traditional and individualistic approach to ownership in this area has not resulted in good outcomes so far, and there is no reason to think that it will do so in the future. This is reflected in the fact a review is necessary so soon after the primary legalisation was passed. There is a need for a fundamental rethink regarding the framework of the Act.
II The Unit Titles Act 2010, the Philosophy Underpinning its Approach and the Current Review
The Act provides for the establishment and operation of “unit title” developments, an increasingly common and important method of owning residential, commercial, and mixed commercial and residential property in New Zealand.5
In essence, the Act is aimed at providing a framework for a “community
Ben France-Hudson “Unit Titles” in Elizabeth Toomey and others, above n 3, at 188.
Ministry of Business, Innovation and Employment, above n 2, at 1. This
Act replaced the Unit Titles Act 1972 and came into force in 2011.
of owners”6 to share both individual and collective responsibility for the complex in which they live or from which they derive a livelihood. This is reflected in the Act’s purpose, which is to “provide a regulatory framework for the ownership and management of land, associated buildings and facilities by communities of individual owners”.7 The Act is a deliberately minimalist piece of legislation, which has been described as “... light touch regulation, ... market-based legislation”.8 As a result, in most instances, the Act avoids prescription, preferring to let owners decide how they want to run the complex into which they have bought.9 This reflects long standing and traditional views regarding the ownership of property. In particular, it can be seen as a hangover from times when fee simple, or freehold, ownership was the dominant form of land ownership. Although not articulated as such in the legislation, the Ministry has indicated that the philosophy underpinning the Act is:10
... to give bodies corporate the flexibility and autonomy to govern their own units and unit complexes, based on a minimal regulatory framework. This is based on the recognition that owners know their immediate areas best and government does not necessarily have sufficient knowledge, or a role other than to provide a framework and a dispute resolution process.
The classic example of a unit title development is an apartment building, but other common examples include central city developments with retail space in the bottom of a building, and office, car parking and residential space on upper levels. In New Zealand, the model can also be used to provide for stand-alone buildings on a single title to land (for example an industrial park or a collection of townhouses). There is no
At 2.3.
At 2.1. This is reflected in the purpose section of the Act which notes: 3 Purpose
The purpose of this Act is to provide a legal framework for the ownership and management of land and associated buildings and facilities on a socially and economically sustainable basis by communities of individual owners and, in particular, ‑
(a) to allow for the subdivision of land and buildings into unit title developments comprising units that are owned in stratum estate in freehold or stratum estate in leasehold or licence by unit owners, and common property that is owned by the body corporate on behalf of the unit owners; and
(a) to create bodies corporate, which comprise all unit owners in a development, to operate and manage unit title developments; and
(b) to establish a flexible and responsive regime for the governance of unit title developments; and
(c) to protect the integrity of the development as a whole. Interview with anonymous, September 2016 cited in France-Hudson, above n 4, at 188.
An approach which can be contrasted with other unit title schemes, such as that used in Queensland, which is significantly more prescriptive. See the Body Corporate and Community Management Act 1997 (Qld). Ministry of Business, Innovation and Employment, above n 2, at 4.2.
limit to the number of units that can comprise a unit title development, with the smallest number of units being two.
Functionally, the Act provides for the individual ownership of part of the building or complex (for example the inside of an apartment or shop) as a ‘unit’, with the rest of the property (usually the land and common areas (such as driveways, lobbies and shared facilities)) being co-owned by all members of the development.11
Mechanisms for governance are central to the Act. Of these, the most important is the “body corporate”,12 which is responsible for operating and managing the development and is comprised of all of the individual owners in the development.13 In order to facilitate this, the Act confers a range of duties and decision making powers on the body corporate.14 It also dictates that the body corporate owns the common property, which the Act defines as being all the land that is part of the development but is not contained in a principal unit.15 In order to enable the smooth operation of the body corporate’s functions, it is a requirement that a body corporate elect a chairperson, who has the responsibilities and duties outlined in the accompanying regulations.16 Moreover, bodies corporate for developments with greater than nine units must also establish a body corporate committee (although the Act does allow for the body corporate to opt out of this requirement).17 A committee is essentially a subset of the body corporate, and its members are elected from the full body corporate. It may exercise a range of powers delegated from the body corporate, although some decisions (such as the application of insurance monies, or the assessment of ownership interests) cannot be delegated.18
The current review makes no fundamental changes to this structure, or to the relationship between the various parties and actors involved in its administration. Indeed, in many respects the review simply tinkers with a number of problems identified by others and it misses the opportunity to seriously consider why so many problems have been identified in relation to unit titles and whether a broad change in approach may resolve many of them.
The review itself was prompted by a “thoughtful report”19 prepared by a Unit Title Working Group (comprised of a range of lawyers and other
11 Hazel Easthope and Bill Randolph “Principal-agent Problems in Multi‑
unit Developments: The impact of developer actions on the on-going management of strata titled properties” (2016) 48 Environment and Planning 1829 at 1830.
13 Unit Titles Act, s
3.
14 Unit Titles Act, s 84, 88–114.
15 Unit
Titles Act, s 5.
16 Unit Titles Act, s 89 and Unit Titles
Regulations 2011, reg 11.
17 Unit Titles Act, s 112 and Unit
Titles Regulations, reg 22.
18 Unit Titles Act, s
108.
19 Ministry of Business, Innovation and Employment, above n
2, at 1.0.
property professionals) (the working group) raising a range of concerns about the existing unit titles regime,20 although this report should be seen as the culmination of a trend, rather than a precipitating event. The discussion document released as part of the consultation process accepts that at least some of the concerns held by these professionals (and other stakeholders) are valid. It also recognises that these issues may impact on the “sector’s long term ability to support the increase in high density housing”21 required to meet anticipated needs for housing in places like Auckland. The discussion document covers a number of areas including disclosure requirements, body corporate governance and management, and dispute resolution.22 Overall, the document appears to reinforce the idea that the guiding theme in adopting particular recommendations is the somewhat laissez-faire philosophy outlined above. This is evident in the Ministry’s overall conclusion that “[t]he unit title sector is maturing, with issues resolving through pro-active sector self-regulation and improvement”.23 However, the Ministry certainly seems cognisant of the crucial tension underlying this area of the law adding:24
... further steps are needed to ensure a regulatory regime that functions well and is fit for purpose for a growing market. With this in mind, the proposals for reform in this targeted review aim to strike a balance between the benefits of additional compliance requirements and the costs these might impose. The proposals we have provided seek to keep this balance in mind ...
Indeed, a detailed reading of the discussion document discloses that there is, in reality, no coherent approach to the suggestions made, and certainly no strict adhesion to the stated policy intent. In my view, this is indicative of a broader problem in the unit titles sphere; the fact that the type of ownership conferred by the Act contains an inherent tension between the individual and community aspects of ownership, which has been overlooked in historic and contemporary discussions about the way the legislation should work. This review has been a missed opportunity to consider the extent to which the stated policy intent is actually reflected in the current regime and to consider whether the proposed reforms conform with it. Overall, it is disappointing that the chance of developing a philosophy which would cogently underpin a successful unit titles regime has been overlooked.
III The Inherent Tension in Unit Title Ownership
There is an inherent tension between the desire for individuals to be able to make fully autonomous decisions about their property and the fact that any owner in a unit title development is actually part of a community of
20 Auckland District Law Society Property Law Committee and others Unit
Title Working Group Report (May 2016).
21 Ministry of
Business, Innovation and Employment, above n 2, at 2.2.
22 At
2.2.
23 At 5.
24 At 5.
owners. It follows that there will always be a pull between the desires of the community and those of the individuals of which it is comprised. However, this tension is often overlooked; sometimes quite deliberately, as is evident from this Australian discussion:25
Strata title [equivalent to New Zealand’s unit title] allowed people to buy property with a certificate of title to land. The message from the government, private developers, and real estate agents to individual owners was that they were buying private property in horizontal subdivisions. However, when people buy a strata-titled property, as well as buying their own strata lot ... they are also buying a joint share in everything else (the common property, including the building and land) and the legal responsibility for managing that co-owned property. Herein lies the tension that pervades all aspects of strata title living – the tension between individual property rights (for the lot) and collective property rights and responsibilities (for the common property).
The reality is that within any unit title development different owners will have competing priorities and different views on aspects of the development’s operation. For example, an owner who is a resident of a complex may have very different priorities from an owner who is an investor.26 For an owner whose motivations are purely economic there may be little interest in prosaic issues regarding the day-to-day running or maintenance of the development, especially if they do not intend to keep the property for long. It follows that although the Act may be aiming to be democratic and to allow for individuals to make decisions based upon what is in their own self-interest:27
... it may be a democratic system but that only works if you have got a group of people who are going to be fair and responsible in how they act ... and often it’s the little guy who doesn’t have much money that actually is right and gets steamrolled by the investor owners who couldn’t care less about the condition of the property and they just want to get their rent for it.
Slavish adherence to a self-interested view of property aimed at facilitating autonomy in this context is not going to result in optimal outcomes for a unit title complex, nor for the community more generally. A particular problem that arises is that this approach reinforces an idea of property that does not allow for easy collective decision making. This is evident in some of the problems that have given rise to the current review, many of which arise as a result of communities of unit title owners having difficulty coordinating their desires in order to achieve outcomes that are beneficial for everyone.
Hazel Easthope, Sarah Hudson and Bill Randolph “Urban Renewal and Strata Scheme Termination: Balancing Communal Management and Individual Property Rights (2013) 45 Environment and Planning 1421 at 1423.
At 1425.
Interview with Chief Executive, Auckland, October 2016 cited in France-Hudson, above n 4, at 188.
Although these problems may be writ large for those residents who have to bear the brunt of the problems (and are not necessarily faced by those owners who do not live in the complex, and who may absent themselves from any involvement beyond the fact of their ownership) the issues are also a problem for society more generally. As Sherry notes, the primary reason Surfer’s Paradise on the Gold Coast of Queensland looks tired and run down is that many of the unit title schemes in that area have “resident owners, investor owners, a lingering developer, a management rights owner and other contact holders” all of which combine to create “an archetypical anticommons, with ‘multiple owners ... each endowed with the right to exclude others from a scarce resource and no one [having] an effective privilege of use’”.28 Thus, what amounts to a dysfunctional form of property holding, and a massive collective action problem, has ramifications that extend beyond those who live and stay in these complexes. Likewise, in the context of damaged unit title complexes, difficulties in coordinating repair or replacement can lead to a range of negative effects, including lower capital values, depopulation, transient populations and the loss of social amenity.29
This becomes particularly problematic in light of the fact that governments, developers and agents have been pushing the idea that owners of unit title properties have bought ownership of land that is accompanied by the same rights and privileges that are conferred by ownership of a fee simple title to land and the ownership of a standalone house.30 However, in comparison with fee simple ownership, owners of units have a significantly reduced range of rights.31 A unit owner owns only a share of the land on which the development sits and a proportionate share of the common property of the development (such as lobbies or gardens). Their decision making in relation to this aspect of their ownership is constrained by the structure and procedures imposed by the Act. While they may be able to choose what they wish in relation to the interior of their unit (factors which are also constrained to some extent by the Act),32 in relation to everything else they must participate in a democratic decision-making process. As a result, their ability to control the property is very limited and they have to make decisions in concert with their co-owners. Given the rhetoric by the major players in this area, this is very rarely understood by, or explained to, purchasers.33 Certainly, anything beyond the well-understood model of a fee simple
28 Cathy Sherry “Lessons In Personal Freedom and Functional Land Markets:
What Strata and Community Title Can Learn from Traditional Doctrines of
Property” [2013] UNSWLawJl 13; (2013) 36 UNSW Law Journal 280 at 309 citing Michael A Heller
“The Tragedy of the Anticommons: Property in the Transition from Marx to
Markets” (1998) 111 Harvard Law Review 621 at
624.
29 Elizabeth Toomey, Jeremy Finn, Ben France-Hudson and
Jacinta Ruru
“Introduction” in Elizabeth Toomey and others, above n 3, at
11.
30 Easthope, Hudson and Randolph, above n 25, at
1428.
31 At 1428.
32 For example, Unit Titles Act,
ss 79–80.
33 At 1428.
title can be, to most people, “simply a mystery”.34 In particular, there is a consistent concern about the very limited general understanding about how the unit titles regime actually works.35 Indeed, a common theme of discussions in this area is that people buy into unit title developments because they perceive that they are ‘lock and leave’ and that someone else will look after the day to day running of the complex and any necessary maintenance.36 There can be a large degree of surprise at the amount of involvement and work associated with being a member of a body corporate (and how expensive it can be).
The tension between the rights of the individual to make autonomous decisions and the reality that ownership of a unit title requires coordinating desires with a number of other owners should be recognised and catered for in any unit title regime. However, the current review does not address it, although it arguably underpins many of the problems that have led to the need for a review. Indeed, even if every owner had perfect knowledge of the rights and responsibilities of property owners in a unit title complex, problems would still arise. However, there has been no acknowledgement of, or attempt to grapple with, the difficulties that have already arisen by focusing solely on a light touch regulatory model. As a consequence, there has been no reassessment of where the line must be drawn between individual ownership rights and collective responsibility, or how individual property rights are modified by the collective environment.
IV Missed Opportunities to Grapple with this Tension A The Disclosure Regime
Thus, the structure of the unit titles regime and the policy underpinning it becomes crucial. The problems that arise are not matters than can simply be improved by providing more information to potential purchasers or to unit owners. Indeed, the general sense one gets from reading the discussion document is that there is a perception that the solution to many of these problems in not greater regulation or governmental involvement, but rather, that there should be a greater effort on the part of the Ministry to ensure that better information flows to potential purchasers and improved access to other types of information. This is in line with the idea that markets work best where information asymmetries are reduced and that problems within a market can be addressed by improving access to information.37 For example, the discussion document notes that the majority of stakeholders considered that the government needs to provide greater leadership “including proactively providing more
34 Elizabeth Toomey and others, above n 29, at
13.
35 At 14.
36 At 14.
37 Joseph
Stiglitz “Information” in The Concise Encyclopedia of Economics
(2nd
ed, 2007) Library of Economics and Liberty <www.econlib.org>.
advice and education to the sector”.38 While not expressly agreeing with this sentiment the Ministry does agree “that a more informed consumer and body corporate is likely to have a significant positive impact on the sector as a whole, and that MBIE has a key role in providing trustworthy information”.39 It therefore suggests that it will clarify the disclosure rules, provide better guidance material to body corporates and committees regarding their rights, duties and responsibilities, and introduce a new IT system which will process dispute case management application more “efficiently and consistently”.
In line with this, amendments to the current disclosure regime appear to be one of the few suggestions from the working group which the Ministry appears to whole-heartedly support. As it stands the seller of a unit must provide two disclosure statements; one before a contract is entered into, the other before settlement.40 A prospective purchaser may also require an additional disclosure statement.41 However, the general consensus is that this system is “broken”42 and that much of the information that is currently only provided as part of the additional disclosure regime should really be provided from the beginning (as part of the pre-contractual disclosure), as it is the sort of information a purchaser needs right at the beginning.43 As the Ministry agrees “the disclosure regime is underperforming as prospective buyers are not adequately informed and protected in the process of buying a unit title, and there is limited buyer recourse for incomplete or false disclosure”.44 As a result, the Ministry proposes to amalgamate all current disclosure requirements into one, pre-contractual step.
Interestingly, although one might expect the ethos underpinning the disclosure regime to be in line with the policy intent of the Act and driven by ideas of personal responsibility and a desire to ensure information asymmetries are reduced in order to facilitate a functioning market, the Ministry appears to conceptualise the current disclosure regime (and the proposed amendments) as being for the purpose of consumer protection. The Ministry stresses that:45
The disclosure regime aims to protect consumers by ensuring that at the various stages in the decision making process, the best information about the unit, the development and the activities of the body corporate is made available to them. The regime is an important consumer protection mechanism and influences how the UTA system works as a whole.
38 Ministry of Business, Innovation and Employment, above n 2, at
2.3.
39 At 2.3.
40 Unit Titles Act 2010, ss 146 and
147.
41 Unit Titles Act 2010, s 148.
42 Auckland
District Law Society Property Law Committee and others,
above n 20, at Summary of Proposals.
44 Ministry of Business,
Innovation and Employment, above n 2, at 4.1.
45 At 4.1.
Two comments can be made about this statement. The first is that it seems very difficult to say, on the one hand, that putative purchasers are deserving of protection through the provision of comprehensive information, and then insist that “owners know their immediate areas best and government does not necessarily have sufficient knowledge,
or a role other than to provide a framework and a dispute resolution process”.46
The second is that, even if the true reason for attempting to ensure comprehensive and quality information is given to potential purchasers is to encourage those individuals to make well-informed autonomous decisions about what they are buying into, as noted above, all of the evidence suggests that unit title owners remain largely ignorant of what they are actually buying. Indeed, governments and developers have tended to perpetuate the myth that unit title ownership is as good as fee simple ownership. Moreover, many practitioners working in this area suggest that you can have the best disclosure regime in the world, but it will not work if people do not read, and understand, it (which they tend not to).47 More information will not solve all problems. Although the current regime is not very good, it does provide a degree of information about the unit title development in question. It is mandatory and must be seen as, at the very least, putting the putative purchaser on notice that they are not buying a half-acre, half-pint, pavlova paradise. Nonetheless, it is clear that general ignorance pervades the sector and that this is having real ramifications for how unit owners deal with issues as “property owners” living within a community.48 For example, it appears that while unit owners may be distantly aware that their complex has a body corporate, they often do not know its purpose, or the fact that
they are a member of it. Indeed, often the body corporate is seen as a “foreign, and oppressive, entity”49 and:50
They might vaguely be aware that they are a unit owner or there is some legislation but it is all complicated and it is interfering with my social life, and besides that, I bought an apartment to get away from the responsibilities of having to look after my house. I live in a complex with a manager you know, it’s someone else’s problem.
Such a lack of awareness makes it very difficult for unit owners to realise that they have embarked on a collective endeavour to which their engagement and participation is required. This is compounded by the fact that the stated policy intent underpinning the Act is to give “bodies corporate the flexibility and autonomy to govern their own units based
46 At 4.2.
47 Personal communications with the author during the International
Research Forum on Multi-owned Properties, Deakin University, Melbourne, February 2017.
49 At 15.
50 At 15.
on a minimal regulatory framework”.51 The effect of this is to import into the unit titles space the continuation of a range of deep seated cultural ideas about property, well summarised by the observation that “... the NZ society ... way of thinking is very much [that] a person’s home is their castle and they should be able to do what they like with their home”.52 The problem is, of course, that this idea does not work at all well in relation to unit titles which are undeniably a form of community living that calls for a very different approach to decision making:53
... at the end of the day it’s a community, whether it goes up or it goes sideways, and you have the same problems pets, parking, rubbish, [and] noise but it is just about the semantics and customising and conceptualising it for New Zealand.
Undeniably, people should have much greater knowledge about what they are buying into and the details regarding the particular complex they are interested in. However, simply providing more information is not going to solve all of the problems in this area. These will only be addressed by reviewing the nature of the policy intent underpinning the Act, recognising the inherent tension that arises and making changes accordingly.
Crucially, although the Ministry accepts that it needs to play a greater role in providing and coordinating the provision of information to unit title holders, it does not consider (and therefore can be taken as rejecting) the stakeholder suggestion that it should take a more proactive role in educating unit title owners about their rights or responsibilities.54 However, the fact that the Ministry advocates improved disclosure on the basis of consumer protection suggests a recognition that people buying into unit titles are in a vulnerable position, and that this type of ownership is different from standard fee simple title. Clearly, there is a degree of acceptance that this type of ownership is different. Given the nature of this type of property ownership and the fact it is both relatively new and quite unlike other types of property holding, it is disappointing that the Ministry does not consider whether there may appropriately be a larger role for the government in helping these communities to function effectively. Certainly, better information is better than poor, or no information, but this ought not simply be limited to a pre-contractual exercise. Ideally, a focus of the current review would have been on constant opportunities for education aimed at the different sorts of problems that can arise during unit title living. However, this would need the involvement of the Ministry in running and promoting such opportunities. As discussed below, the summary dismissal of the suggestion to establish a Body Corporate Ombudsman is disappointing.
51 Ministry of Business, Innovation and Employment, above n 2, at
4.2.
52 Interview with lawyer, Wellington, November 2016 cited in
Toomey and
others, above n 29, at 15.
54 Ministry of Business, Innovation and Employment, above n 2, at 2.3.
In addition to dispute resolution capacities, an Ombudsman could play an important role in promoting public education about unit titles, a model that can be found in Queensland.55 Other jurisdictions take a different approach, such as the City of Sydney which offers a number of workshops on apartment living, including the aptly named session “Strata Skill 101: Strata Paws”.56 Presumably, both the Ombudsman approach, or a face-to-face education option have been dismissed by the Ministry on the basis of a conflict with the hands-off policy of the Act. This is an opportunity missed, which might have provided a mechanism to resolve a range of problems before they escalate.
B The Creation of a Body Corporate Ombudsman
Education, however, would not be the only role an Ombudsman would play and one of the suggestions made by the working group was that a Body Corporate Ombudsman should be introduced to consider unit title disputes and either make recommendations, or impose binding solutions.57 This suggestion was made to remedy perceived flaws in the current dispute resolution system, where the only available forums require an adversarial approach by the participants, do not possess specialist expertise or knowledge and are expensive.58 Drawing analogies with Queensland, where applications for dispute resolution can be made to the Commissioner of the Commission for Body Corporate and Community Management, an Ombudsman would, among other things, have the primary responsibility to “assess disputes and complaints with investigation officers appointed to determine the substance of complaints or disputes and with the power to dismiss frivolous or vexatious matters”.59 While the Ombudsman would not have jurisdiction in some areas, it would be funded by a levy on body corporate trust accounts and, as noted above, would serve an educative function in addition to its role in dispute resolution.
Interestingly, the Ministry rejected this suggestion outright. In part, this is because it claimed there was no consensus on the actual functions or
55 The Body Corporate and Community Management Act 1997 (Qld)
provides for a dispute resolution process run by a Commission for Body Corporate and Community Management presided over by a Commissioner. The Commission also has an educative role, for example, through providing online training courses.
59 John Greenwood and Charles Levin, above n 57.
form of such a body.60 However, the primary concern seems to be
that such a body would be a disproportionate response to the identified issues
facing the
unit tiles sector (which the discussion document accepts
are
simply unit title holders) and the “size of the
industry”.61 Importantly, it notes that:62
The establishment of a new separate entity would require significant changes to the UTA policy intent (such as the role of the state in unit title matters), and machinery of government changes. The cost of establishing any such entity, and the ongoing costs (while not quantified), would be considerable ... It is our view that the costs and legislative change required to establish a separate entity outweigh the benefits.
Clearly, this response is driven in large part by the philosophy underpinning the Act. However, it is difficult to reconcile with other aspects of the regime. For example, the ability to apply to the High Court for an order settling a scheme for repair where there has been damage or destruction63 clearly involves the close involvement of the state (in its broadest sense) in unit title matters. It is also extremely costly. Likewise, the dispute resolution scheme more broadly has mandatory components that tend to contradict the ethos expressed here. For example, one major complaint about the current system of dispute resolution is that it is not possible for parties to agree to attempt to resolve their dispute by reference to private arbitration or mediation.64 Section 174 of the Act prevents the exclusion or limitation of the Tenancy Tribunal’s jurisdiction (which is however capped at disputes of up to $50,000, with disputes over this threshold going to the District or High Court). This prohibition specifically includes agreements providing for matters to be referred to arbitration.65 Thus, any dispute must first go to the Tenancy Tribunal (which operates under the auspices of the Ministry and the Ministry of Justice). If the current Act truly adhered to the ostensible policy intent, it would already allow for private dispute resolution, with a state mechanism as an option of last resort. Clearly, the state is already prepared to interrupt the ability of individual unit title holders to engage in private dispute resolution. While an Ombudsman may take a role that is significantly more involved than the Tenancy Tribunal it should be seen as at least on the same continuum, albeit at a different end. This suggests that the Ministry’s rejection of an Ombudsman has not been carefully thought through, or is based primarily on the perceived costs of such a scheme.
60 Ministry of Business, Innovation and Employment, above n 2, at 3.2.
However, the Ministry provides no analysis or support for this claim and it
must be noted that at such an early stage of such a review
such a consensus
would be unexpected.
61 At 3.2.
62 At
3.2.
63 See Unit Titles Act, s 74.
64 Greenwood
“Unit Titles Act: Lame Duck”, above n 1, at
8–9.
65 Unit Titles Act, s 174(2).
While the costs of such a scheme may well be prohibitive, the discussion document is clear that, while cost was a factor in the decision, those costs have not been quantified.66 In the absence of such analysis such claims should be met with caution. The suggestion is that the costs of an Ombudsman would be met by a levy on body corporate trust accounts, or an annual CPI adjusted fee per unit.67 This is not dissimilar to the way the Tenancy Tribunal is currently funded to deal with residential tenancy disputes, which relies on the interest generated by the government’s holding of bond money.68 Interestingly, the cost of applying to the Tenancy Tribunal in relation to a residential tenancy dispute is currently $20.44.69 In contrast, the current cost recovery model which applies to unit title disputes in the same forum is currently $850 for minor matters, and $3,300 for all other disputes.70 In the absence of any analysis it is certainly possible that an Ombudsman system may either cost less overall (particularly if it is no longer necessary to fund the Tenancy Tribunal in this area), or cost less for those who are confronted with a dispute. It could, however, be a much better way to resolve disputes and address some of the problems with the current system.
Although the discussion document also suggests that mediation through the Tenancy Tribunal may be introduced as an option, it would still be via a state mandated mechanism. Consequently, such a proposal would still not allow the individual parties to drive their own dispute resolution processes, and would still be in conflict with the supposed policy of the Act to allow owners the maximum freedom to exercise their property rights and run their complexes as they see fit. Conversely, if the Ministry does consider that the state must play a role in all dispute resolution matters an Ombudsman would still be able to fulfil this role, but is likely to have a number of advantages over the Tenancy Tribunal (including the educative role noted above).
The key tension in unit title ownership is how to reconcile the individual rights and desires of unit owners with the rights and desires of the other individuals with whom they live in a community. As the Act currently stands, the only way in which to resolve disputes involves adversarial processes, which should be a method of last resort for a community based arrangement. While the creation of an Ombudsman was rejected by the Ministry on the basis that it would require a significant change to the policy intent, viewed in this way, it is clear that the policy intent of the Act really requires a rethink in order to provide a comprehensive, and workable dispute resolution system for unit title owners.
66 Ministry of Business, Innovation and Employment, above n 2, at
3.2.
67 Greenwood and Levin, above n 57.
68 Ministry
of Business, Innovation and Employment, above n 2, at
4.5.
69 Residential Tenancies (Fees) Regulations 1998, reg
(2)(1).
70 Unit Titles (Unit Title Disputes—Fees)
Regulations 2011, reg 5. Although
the discussion document suggests some lowering of these costs.
C Long Term Maintenance Funding
Another area in which the inherent tensions in unit title ownership are readily apparent is in relation to long term maintenance of unit title complexes, and the particularly important issues of how, and when, to pay for it. This is also an area in which the current philosophy driving the Act has been identified as problematic and the current regime has been identified as requiring reform.
By way of context, s 116 of the Act currently states that a body corporate must establish and regularly maintain a long-term maintenance plan. The plan must cover a period of at least ten years.71 The purpose of the plan is to:72
(a) identify future maintenance requirements and estimate the costs involved; and
(b) support the establishment and management of the funds; and
(b) provide a basis for the levying of owners of principal units; and
(a) provide ongoing guidance to the body corporate to assist it in making its annual maintenance decisions.
Section 117 deals with long term maintenance funds and states that “a body corporate must establish and maintain a long term maintenance fund unless the body corporate, by special resolution, decides not to”.73 Section 117 also states that the fund may only be applied to spending relating to the long term maintenance plan.74 As a result, while the creation of a fund is discretionary, once established it can only be used for matters addressed in the long term maintenance plan. Any costs of unpredicted maintenance (or damage) cannot be met out of the long term maintenance plan.75 A number of problems arise from these provisions and a central focus of the discussion document is on how to ensure “adequate long term maintenance plans”.76
71 Unit Titles Act, s 116(2).
72 Unit Titles Act, s
116(3).
73 This is a somewhat similar structure to that found in
Victoria, where
some large developments are required to have a long-term maintenance plan,
and smaller developments can develop plans if they wish.
Those developments that
have a plan must also have a fund, although there does not appear to be a
requirement to contribute to it.
See the Owners Corporation Act 2006 (Vic), ss
36–45. This can be contrasted with New South Wales, where there is a
requirement
to have a capital works fund. See the Strata Schemes Management Act
2015 (NSW), s 74. For further discussion, see Jeremy Finn and Elizabeth Toomey
“Overseas Findings” in Elizabeth Toomey and others, above
n
3.
74 Unit Titles Act, s 117(2).
75 In such a case
the body corporate would be required under s 138 to
undertake the repairs it is responsible for (that is, to building elements
and infrastructure) before seeking to recover the costs
of any work that was
solely within the boundary of a particular unit (under s 138(4)), or that
substantially benefited one unit (or
units) more than any other (s
126).
76 Ministry of Business, Innovation and Employment, above n
2, at 4.4.
Planning and funding long term maintenance of unit title developments is crucial to the successful functioning of those developments.77 However, the general consensus is that in New Zealand many of the long term maintenance plans currently created by bodies corporate are inadequate.78 At the extreme end, there is evidence that many bodies corporate have simply failed to establish a long term maintenance plan and are actually in breach of the Act.79 Where bodies corporate have established plans, these are often not prepared by an appropriately skilled professional (largely because there is no requirement for this in the Act).80 As a result, many “seemingly comprehensive maintenance plans” are generally not in conformity with the requirements of the Act.81 This is deeply problematic because, although it may impact on those already resident in such a complex, it may also be of particular concern to potential purchases, many of whom rely on long term maintenance plans in making decisions about whether or not to buy. This is compounded by the fact that any pre-contractual inspection will usually be limited to the unit itself. A putative purchaser can only proceed on the assumption that the complex’s long term maintenance plan is in accordance with the requirement of the Act and has accurately identified problems and resolved how, and when, to address them.82
Concerns regarding quality are compounded by the current optional nature of long term maintenance funding under the Act. This has a number of ramifications. For example, there tends to be a desire by developers to keep levies as low as possible. Consequently, developers are often disinclined to create unit title developments that include proper provision for undertaking the long term maintenance outlined in the associated plan.83 As a result, when setting up unit title developments, it is common for a developer controlled body corporate to pass a resolution opting out of the establishment of a long term maintenance fund. Alternatively, payments into the fund (if created) will be set at a very low level (which, for example, may factor in the benefits of warrantees for building work and building elements that will only apply over the
77 France-Hudson, above n 4, at 221.
78 At 224.
79 John Gray “The Long-term Maintenance Regime” in Auckland District
Law Society Property Law Committee and others, above n 20, at 6–7. Remarkably, there are no consequences for a body corporate that does not comply with the requirements of the Act.
81 Gray, above n 79, at 6.
82 At
5.
83 At 14. As noted by Gray, although the Home Owners and
Buyers
Association (HOBANZ) is aware that some developers would prefer to be as transparent as possible, these developers are of the view that this would make them uncompetitive.
short term).84 While this may work in the favour of current owners who have the benefit of low levies, it will have a significant impact on the owners in the complex at the time the bill becomes due.85 There is a real tension here regarding when the costs associated with maintenance should become payable, and who should have to pay. There are two obvious possibilities. The first is that the costs are payable at the time the work is done. The second is that the costs are spread evenly over time. The first has the benefit of simplicity; the second of temporal equity.86
As appears to be accepted by the discussion document, the current approach creates a clear conflict between the interests of current owners, who may wish to keep body corporate charges as low as possible, and the interests of future owners (and potentially the community at large) who may be confronted with very large maintenance bills when necessary work needs to be undertaken. Essentially, the current scheme allows for the self-interest of current owners to trump both the interests of future owners and the development itself.
In light of this, the discussion document provides an example of the Ministry attempting to grapple with the tensions in this area. It advocates a retreat from the current position, suggesting that, it no longer be possible for ‘large’87 bodies corporate to opt out of having a long term maintenance fund. Instead they will be required to develop and maintain one.88 The stated aim is to ensure that levies remain “consistent and fair through forward planning and budgeting across the life of the building”.89 This proposal is eminently sensible and, subject to the quality of the long term maintenance plan and accompanying financial estimates, is likely to go a long way towards addressing a number of the concerns surrounding the long term maintenance regime. Certainly, it would address the “odd”90 feature of the current Act that while it is a requirement to have a long term maintenance plan, it is not a requirement to have a long term maintenance fund. However, it does seem to be in direct contradiction to the stated philosophy of the Act. It appears to acknowledge that, over the life of the building, the costs need to be “consistent and fair”,91 rather
84 At 14. Developers are under no obligation to provide a long term
maintenance fund and are not required to cost out any maintenance that may be required by warranties or maintenance schedules.
86 Finn and Toomey, above n 73.
87 It
is proposed that ‘large’ bodies corporate be defined as those with
greater
than 29 units. See further the text to n 93.
88 Ministry of
Business, Innovation and Employment, above n 2, at 4.4.
89 At
4.4.
90 Interview with lawyer, Wellington, November 2016 cited in France‑
Hudson, above n 4, at 227; and Greenwood “Unit Titles Act: Lame
Duck”, above n 1, at 4.
91 Ministry of Business, Innovation
and Employment, above n 2, at 4.4.
than allowing for owners to “know their immediate areas best”.92 In turn, this suggests both that the Ministry is cognisant of the tension inherent in unit title ownership and also prepared to intervene to address it when necessary. It can also be taken as an implicit acceptance of some of the defects in the current policy intent underpinning the Act.
Disturbingly, the discussion document does not recommend that mandatory funding of long term maintenance plans should apply to all unit title developments. It suggests that there should be differentiated requirements for different sizes of unit title development. Only large unit title developments (comprised of 30 or more units) would be required to develop and maintain a long term maintenance fund. Medium sized developments (ten to 29 units) are to be given the ability to opt out of these requirements and small developments (up to nine units) are to be exempt altogether. The stated rationale for these measures is to exempt small bodies corporate from “potentially onerous compliance while ensuring medium and large bodies corporate plan responsibility [sic] for financial contingencies”.93
The problem with this approach, however, is that the issues that flow from having inadequate funds to meet planned long term maintenance are not limited to large bodies corporate. It follows that, if the proposal was adopted in its current form, the exemptions would likely lead to a perpetuation of the existing problems; only they would be restricted to small and medium developments. On the current numbers it would also mean that the 51 per cent of unit title holders in New Zealand who currently own a unit in a small or medium sized development would still potentially have no long term maintenance funding at all.94
The reality is that planning for maintenance, and making provision for funding it, is “good discipline for any household planning”.95 While the owner of a standalone freehold house may be prepared, and able, to meet maintenance costs as they become due, or to allow their property to fall into a state of disrepair, the position is much more complicated when more than one owner is involved. All unit title complexes, regardless of size, will face foreseeable maintenance costs, and it seems unwise to allow some not to put aside money to pay for it. In reality, mandatory provision of funding is really the only way that bodies corporate and unit owners (of any size) can avoid being “ambushed”96 by significant cost when work can no longer be put off. Indeed, just because a unit title complex is of a medium or small size, does not mean that its residents will be able to meet the costs of maintenance any more easily than those of a larger complex. While a larger complex may cost more to maintain, economies of scale mean that the cost per unit may well be lower.
92 At 4.2.
93 At 4.4.
94 At Annex
One.
95 Greenwood “Unit Titles Act: Lame Duck”, above
n 1, at 5.
96 At 5.
Given that exemptions justified by cost are tenuous at best, it is instructive to consider whether the true justification for the differentiation between small or medium and large bodies corporate is being driven by the policy intent behind the Act. Certainly, it is possible to see the proposal as driven by the ideas of autonomy, personal responsibility and democracy that are inherent in the policy of the Act, by indicating that small and medium bodies corporate should have a say in how levies are fixed, and the level of reserve funds set aside (if any). It is a structure that allows individual unit owners to have a strong and direct voice with regards to the costs they are exposed to and to decide for themselves how prepared they wish to be to meet long term maintenance costs. However, it is notable that, if this is indeed a driving force behind the proposals it is not clearly articulated. As it stands the only driver is the rather flimsy reliance on supposed compliance costs. In any event, even if it is the philosophy of the Act driving these differentiated compliance requirements, it is not at all clear why there should be strict adherence to a philosophical view point of ‘owners know best’ for medium and small bodies corporate with much less weight given to it with regard to large bodies corporate.
In any event, a focus on ‘owners know best’ ignores the fact that the consequences of failing to provide funds for long term maintenance may have implications for the community as a whole. A real concern surrounds older buildings that suffer from defects such as (but not limited to) weather-tightness issues. There are now many unit title complexes in New Zealand that are older than ten years. It is likely that many of these are ‘leaky’.97 However, ten years after construction, a building in this position cannot make an application to the Weathertight Homes Resolution Services Act 2006 (or take advantage of the Government’s financial assistance package for leaky building repairs), nor is it possible to make a claim through the courts.98 It follows, that for buildings in this position to undertake the necessary maintenance or repairs, it will be necessary for the members of the body corporate to fund the work themselves. This will clearly be a problem for people who already own units in such a complex, but it may be a particular problem for future owners as well. A future owner is likely to be confronted with a “mountain of debt in terms of the contingent liability that is accruing in relation to the cost of future repairs and maintenance”.99 If necessary work is not noted, or at least clearly articulated in a long term maintenance plan, and if the work is not funded over time, existing and future owners may find themselves unable to contribute to the cost of repairs and at
97 Gray, above n 79, at 6.
98 See the Building Act
2004, s 393; the Limitation Act 2010; and Gray, above
n 79, at 5.
99 Gray, above n 79, at 6.
great financial risk.100 If some unit owners do default on payments the body corporate not only has to pursue these defaulters but are forced to impose more levies on others in order to obtain adequate funding. This can cause a “domino effect”101 whereby bodies corporates without a fully funded maintenance plan get deeper and deeper into the red.102 Such a result is not limited to weather-tightness issues and may extend to any sort of defect in a complex which is not remedied in a timely fashion and which leads to further degradation of a property.
Increasing degradation (from whatever source) will have consequences for the community as a whole as the quality of complexes diminishes over time, with the corresponding question being what to do about dilapidated developments and the people who have no choice but to live there. Moreover, the security afforded to banks who lend on such developments will reduce, making it both more difficult to borrow to fix problems and more expensive to borrow for everybody. A strong, but probably valid, view is that these problems are a clear consequence of a maintenance and funding regime that prevents the identification of existing construction defects and disincentives the need to remedy defects and schedule the repairs.103
Overall, allowing bodies corporate to elect not to have a long term maintenance fund has a number of consequences. It may result in the slow degradation of unit title developments and the neighbourhoods in which they sit, it may leave unit title owners stuck with sub-standard housing and no way to remedy it or move on. It also creates a moral hazard as it allows for owners who are primarily interested in short term gains to potentially realise those gains at the expense of current owners who do not share that motivation, and those who may buy into the development in future. The analogy that the Ministry and the policy intent of the Act appear to draw with fee simple ownership is inappropriate and ignores the realities that accompany this mode of property ownership. While a fee simple owner may be permitted to
100 See Anne Gibson “Elderly dad’s home at risk over $14.5m repair bill” The
New Zealand Herald (online ed, 28 June 2017) <www.nzherald.co.nz/
business/news/article.cfm?c_id=3&objectid=11879479> which
recounts the
story of a family who own a unit in a development in Auckland, which claims it
cannot afford to contribute to a special
levy of $222,363.89 toward a body
corporate resolution to repair the roof at an estimated cost of $14,500,000, and
who are concerned
the body corporate will attempt to sell the unit to recover
the costs.
101 Gray, above n 79, at 11.
102 At 11.
103 At 5. This paper
also makes the point that some complexes now under
remediation are not only leaky but also compromised structurally, fail to conform with the building code standards for the prevention of fire and acoustic performance and “have put the lives of residents, visitors and rescue personnel at risk”.
allow their house to fall down around their ears,104 it is not clear that the same result should be available in a community of owners, even if the decision is reached ‘democratically’. Such a decision may have an impact on the community more generally that goes beyond the consequences of a single freehold owner neglecting their property.
What is needed in this space is not an ad hoc approach which applies some rules to large developments and different rules to smaller developments. The issues remain the same regardless of size. Residents and business owners of any size development can be left in an invidious position if unplanned for work needs to be undertaken and there is no way to pay for it. Many owners are simply not in a position to be able “to meet a large levy that is thrown on them ... because the roof ... needs replacing at $125,000 and there is nothing in the kitty”.105 Rather, what is needed is for policy makers to step back, reassess the nature of unit title ownership, recognise the tension inherent in this type of ownership, reconsider the policy intent underpinning the Act and identify policies that will work to address the problems across the board.
V Conclusion
While there are many positive aspects to the current review there is clearly a problem with the policy intent driving the Act. The disjointed and confused way in which it is deployed suggests that it needs fundamental reconsideration. In relation to disclosure, intervention by way of an Ombudsman, and long term maintenance funding, it is clear that practical consequences of policy decisions in this area should not be underestimated. The policy underpinning the Act does have real world consequences which drive many of the problems that have led to the need to have a review. This fact has been overlooked by the Ministry, even as it struggles to adopt suggestions that will result in meaningful reform. The failure to stand back and consider the philosophy underpinning the Act has been an opportunity missed and, as a result, the current round of reforms are unlikely to address the root causes of the problems. Instead, the review ought to have considered how unit title ownership is different from other types of ownership, and the driving objective of the review should have been to find a policy rubric that will result in excellent outcomes for the increasing numbers of people who live, and will live, in these developments.
104 A proposition which is itself questionable. See for example Liz MacDonald
“City council turning attention to residential eyesores in Christchurch” Stuff (19 July 2017) <www.stuff.co.nz/the-press/news/94895710/ city-council-turning-attention-to-residential-eyesores-in-christchurch>, which reports that the Christchurch City Council is considering taking enforcement action against the owners of residential properties who have made no progress on fixing their residential properties after the Canterbury earthquakes of 2010 and 2011 and have let them fall into a derelict state.
Of course, this article has not attempted to articulate precisely what sort of policy intent could, or should, replace the current one. Instead, it has attempted to demonstrate that the current approach is inappropriate for this type of property holding. The unavoidable conclusion of a rational assessment of the unit titles regime is that it is fundamentally about community living. Unit owners cannot equate their ownership of a unit with owning a freehold section and house. Unit ownership is very different from freehold ownership and in order to function effectively it needs different rules. It is clear that the current philosophy underpinning the Act has gone too far in one direction; promoting the rights of the individual and their knowledge of what they think may be best for them above the sorts of tempered rights that may be necessary for a well-functioning community. As the current problems facing the Act demonstrate, the policy underpinning the Act should not simply reflect historical approaches to land ownership. Successful unit titles regimes will not flow from a collection of individuals acting in their own self-interest. The driving force behind the Act, therefore, should be the question of how to best mediate the needs of each individual living within that community, with the needs of that community. Importantly, these needs do not stop at those of the current owners, but must be seen as extending to a consideration of the effect that actions will have on those who come later.
Nonetheless, this may not necessitate a complete overhaul, or even a radical rethink.106 A series of tweaks and potentially greater willingness for greater governmental involvement through regulation, education and intervention (via an Ombudsman or some other sort of mechanism) to enforce the rules before problems arise may be sufficient. However, in rethinking and redesigning the framework of the Act it will be necessary to adopt an approach to property that caters for all of the competing values and behaviours that are evident in unit titles ownership. Human nature being what it is, it is unsurprising that groups of people may need some help in coordinating their (probably incommensurate) desires. It is clear that there are problems in how the sector is currently operating. The requirement for a review so soon after the passage of primary legislation is testament to this. In developing a robust and effective unit titles regime we should look to the particular problems that have arisen, and find workable solutions to them, guided by the reality that unit title owners are part of a very close community that shares ownership of much of the property in issue. They may sometimes need external help and this is not necessarily a bad thing. The inappropriate analogy with the fee simple should be abandoned. Instead the focus should be on resolving the inherent tensions in this type of ownership.
106 Sherry, above n 28; and, more generally, the literature culminating in, and
following on from: Gregory S Alexander, Eduardo M Peñalver, Joseph William Singer and Laura S Underkuffler “A Statement of Progressive Property” (2009) 94 Cornell L Rev 743.
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