WHEN CONTRACTING with a body corporate to carry out a leaky building remediation, contractors may not be aware of what is going on behind the scenes with their client. Bodies corporate are a complicated entity, with many different stakeholders – these stakeholders may not all have the same interests.
The recent judgment of Manchester Securities Limited v Body Corporate 172108 [2018] NZSC 19 is a useful reminder of the difficulties faced, particularly in remediation and the resolution of disputes.
When do disputes arise?
A leaky building can be complicated, especially where a unit title development is involved, as unit owners (as members of the body corporate) are liable to contribute to the cost of repairing common property, as well as building elements and infrastructure that relate to one or more units.
Assessing when building elements or infrastructure (e.g. cladding) relate to one or more units is not always easy or clear-cut. Disputes can arise in relation to determining who is responsible (or to what extent) to meet the costs of repairs of such building elements or infrastructure.
Some types of repair can potentially be seen as offering greater benefits to certain owners. As an example, some may see repairs to the roof as giving greater benefit to penthouse owners. Under the Unit Titles Act 2010 (‘UTA 2010’), it may be possible to recover some or all of the costs of those repairs, above and beyond an owner’s ownership interest, from that owner.
What happens when disputes arise?
The UTA 2010 replaced its predecessor, the Unit Titles Act 1972 (‘UTA 1972’).
The UTA 2010 provides a clear dispute resolution process. It also provides (in section 74) for a scheme following destruction or damage. This entails a process for the High Court to make an order to settle a scheme for the repair of a unit title development. A similar process was provided under the earlier legislation (section 48 of the UTA 1972).
What happened in Manchester Securities?
The recent Supreme Court decision affirmed the approach of the Court of Appeal and dismissed Manchester’s leave to appeal of the Court of Appeal decision. The dispute concerned a high rise apartment complex known as Hobson Apartments in Auckland. Essentially, the building was a 12-storey apartment block with 39 apartments. Manchester owned the 12th floor of the building. The exterior of the building on levels 1 to 11 was common property and is owned by the body corporate. However, the exterior of level 12 was owned by Manchester.
The dispute concerned the Body Corporate for the development applying to the High Court for the approval of a scheme under section 48 of the UTA 1972 (as this was the legislation that was then in effect). A scheme is often used to arrange and manage the carrying out of repairs to a unit title development, including as to costs allocation usually (but not always) in the case where parties cannot agree how to carry out the repairs.
A leaky building can be complicated, especially where a unit title development is involved, as unit owners (as members of the body corporate) are liable to contribute to the cost of repairing common property, as well as building elements and infrastructure that relate to one or more units.
The scheme was approved by the High Court. It declared a scheme that would require Manchester to contribute to the repairs of the common property (i.e. building exterior for levels 1 to 11) as well as paying for the level 12 work. However, Manchester’s liability would be capped at 11.88 percent of the total costs of repairs to the whole building.
This was a “departure from the default scheme” under the UTA 1972, but it was considered justified in the circumstances.
When it came to actually carrying out the scheme, things did not go according to plan. This was due to lengthy delays, cost escalations and a notable absence of full co-operation between the different unit owners. The repairs to the common property had a cost increase of 41 percent above the original estimate.
The repairs to level 12 at August 2011 had a cost increase of 150 percent from the original estimate. This further increased to 430 percent in August 2016.
Ultimately, this meant that the repairs to level 12 well exceeded 11.88 percent of the total cost to repair the common property. The outcome, if one were to follow the approved scheme, would mean that not only would owners (other than Manchester) therefore have to contribute more to the common property repairs on levels 1-11, they would also be required to make a payment to Manchester in relation to the repair of the exterior on level 12.
The Body Corporate subsequently applied for a variation of the scheme under section 48(6) of the UTA 1972, ostensibly to avoid an unjust outcome. The variation was approved by the Court which made an order requiring Manchester to pay additional money for the benefit of the other unit owners.
Court of Appeal case
The case came to the Court of Appeal because Manchester appealed the High Court judgment. Manchester argued that the High Court’s decision was based on a misunderstanding of the original scheme and the evidence.
The Court of Appeal concluded that the High Court’s decision, which created the original scheme, essentially ‘collapsed’ as a result of subsequent events (and, in part, the excessive cost escalation).
The Court of Appeal rejected Manchester’s appeal as they concluded there was nothing wrong with the High Court’s decision i.e. it was fair and reasonable that the scheme be varied requiring Manchester to pay more than its 11.88 percent share of the total costs.
What does this mean for contractors?
This is an unusual case because the body corporate was required to find a new contractor in the aftermath of the Mainzeal insolvency (which contributed to the cost escalation).
However, it is illustrative of the issues that can come up when contracting with bodies corporate.
So what does the Manchester decision mean for contractors if their client is fighting internally about how they will pay?
Contractors undertaking remedial works shouldn’t have to wait for bodies corporate to resolve messy and lengthy legal battles before they are paid.
However, they will need to be proactive to ensure they are in the best place possible in the event of an internal body corporate conflict.
That means doing the basics right – like getting legal advice before signing up to the contract, ensuring Construction Contract Act 2002 compliant payment claims are being served, taking out relevant security if necessary, and finally making sure that the body corporate understands the contract they are entering into.
• The authors thank Georgina Garrett, a solicitor in Kensington Swan’s Property team, for her assistance.
Kensington Swan offers 15 minutes of free advice on construction issues to CCNZ members. The company also provides comment on topical construction issues, visit www.nzconstructionblog.com to keep up to date.
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