IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV [2015] NZHC 285. BETWEEN BODY CORPORATE Applicant

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1 IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV [2015] NZHC 285 UNDER IN THE MATTER OF the Unit Titles Act 2010 and Part 12 of the High Court Rules the Tremont Apartments BETWEEN BODY CORPORATE Applicant AND VERMILLION WAGENER LIMITED First Respondent TREMONT HOLDINGS LIMITED Second Respondent SAGE PROPERTY MANAGEMENT LIMITED Third Respondent TMT AMENITIES LIMITED Fourth Respondent Hearing: 15 and 16 December 2014 Counsel: S C Price and I Rosic for the Applicant T J Rainey and J P Wood for Respondents Judgment: 26 February 2015 JUDGMENT OF MUIR J This judgment was delivered by me on 26 February 2015 at 3 pm, pursuant to r 11.5 of the High Court Rules Registrar/Deputy Registrar Solicitors: Minter Ellison Rudd Watts, Auckland 1140 Rainey Law, Auckland 1140 BODY CORPORATE v VERMILLION WAGENER LTD [2014] NZHC 285 [26 February 2015]

2 Introduction [1] Tremont is a 106 unit residential development located in St Lukes, Auckland. Its body corporate is party to three agreements (the Developer Agreements) entered into at a time when it was controlled by Tremont s developer. The body corporate now claims that those agreements materially disadvantage it to the benefit of the respondents. It seeks summary judgment on claims that the agreements are ultra vires in whole or in part or alternatively that they are harsh and unconscionable and should be terminated under s 140 of the Unit Titles Act 2010 (UTA 2010). Background [2] Tremont was developed by the first respondent (Vermillion) on land owned by it. The relevant unit plan was deposited in May 2008 and on its incorporation the development s body corporate was governed by the default rules provided in Schedules 2 and 3 of the Unit Titles Act 1972 (UTA 1972). [3] However on 3 June 2008, while Vermillion was still the sole registered proprietor and comprised the entire body corporate, the body corporate resolved to adopt amended rules (the 2008 Rules) and simultaneously to enter into the Developer Agreements. The relevant minutes and notice of change of rules were signed by Mr Geoffrey Hodgkinson as director of Vermillion. [4] The following day the body corporate entered into the Developer Agreements comprising: (a) A Management and Letting Services Agreement pursuant to which the third respondent (Sage) was appointed to perform certain duties and provide certain services for the management and maintenance of the building (the Management Agreement); (b) A lease of apartment no 123 between Vermillion and Sage (guaranteed by the body corporate) for the purposes of accommodating the manager (the Apartment Lease and Guarantee); and

3 (c) A registered lease of the swimming pool, tennis court, spa/sauna, gym and recreation room (comprised in principal units 130 and 227 and accessory units 159 and 160) between Vermillion and the fourth respondent, TMT Amenities Ltd (TMT), guaranteed by the body corporate (the Amenities Lease and Guarantee). [5] The arrangements in respect of the amenities are unusual, if not unique. Mr Rainey for the respondents conceded as much. Typically such facilities will comprise common property within a development. [6] In November 2008 Vermillion sold and the second respondent, Tremont Holdings Limited (THL), purchased apartment 123 and the amenities. THL is now therefore the relevant lessor. [7] The companies which are parties to the Developer Agreements are interconnected. Mr Hodgkinson is the sole director of and a shareholder in Vermillion and THL. He is also a director of TMT. Ms Lilly Zhang holds shares in TMT. Ms Smith on behalf of the applicant deposes to her belief that Ms Zhang is the partner of Mr Hodgkinson. No issue is taken in that respect. Sage s director is one Darrell Nolan who also holds 50 per cent of the ultimate shareholding in Sage with the remaining 50 per cent held by Ms Zhang. [8] By ordinary resolution dated 7 August 2013 (53 votes recorded in favour and 40 against) the body corporate resolved to take whatever steps were necessary to terminate the Developer Agreements. [9] This resulted in an originating application by THL for orders declaring that only those unit holders who voted in favour of the resolutions be levied for the costs associated with the intended challenges and that any contingency funds held by the body corporate likewise be unavailable to finance any action. [10] In a judgment dated 14 May 2014 Fogarty J declined that application. 1 He described the Amenities Lease and Guarantee as extraordinary as the lessee has no 1 Tremont Holdings Ltd v Body Corporate (Tremont Residences) [2014] NZHC 988.

4 ability to pay the rent. 2 That particular problem has been effectively sidestepped by arrangements which have seen the body corporate invoiced directly by THL as if the body corporate was the lessee. The same direct billing arrangement occurs under the Apartment Lease and Guarantee. [11] On 3 June 2014 the body corporate filed a statement of claim pleading seven causes of action against the defendants. [12] On 24 July 2014, prior to service of that proceeding, it filed a substitute notice of proceeding, an application for summary judgment and supporting affidavits. That application was in relation to the first two causes of action which are those identified in the Introduction. It seeks, inter alia, declarations that the Developer Agreements are in whole or in part void (first cause of action) or that they be terminated under s 140 (second cause of action). [13] Between June 2008 and June 2013 the body corporate has paid approximately $1.32m to Sage/TML under the Developer Agreements. Payments have now been suspended under each of the guarantees. Ms Smith deposes in her affidavit in reply that this is because Mr Hodgkinson has said on a number of occasions that, as a result of the various structures in place and the financial position of the companies which are parties to the Developer Agreements, the body corporate will not be able to recover any payments which it has made if ultimately successful in these proceedings. The Developer Agreements in detail The Management Agreement [14] This is for a term of 30 years (including two rights of renewal at the Manager s election (cl 14.1)) with a final expiry date of 3 June [15] Clause 3.1(1) provides that the Manager is to use reasonable endeavours to be available between the hours 9 am and 5.30 pm Monday to Friday other than public holidays. The applicant says that the fact that there is no requirement for the 2 At [3].

5 Manager to be available on a 24 hour, seven day a week ( 24/7 ) basis is relevant to the issue of whether he or she needs to be accommodated on the site. [16] Clause 3.4 is in terms which complement the Apartment Lease and Guarantee and provides: As part of the Resource Consent issued for the Tremont Apartments, which requires compliance on a continuing basis, the Building Manager is required via an authorised representative to occupy the Manager s Unit in the Building. This will be a residential Unit leased to the Building Manager for that purpose. The Body Corporate shall unconditionally and irrevocably guarantee the lessee s obligations under that lease. Any breach by the Building Manager of the lessee s obligations in that lease shall not be a breach of this agreement. The Unit will have special facilities inbuilt allowing the monitoring of fire detection and security systems which will be necessary for the safe operation and supervision of the building. The Building Manager s authorised representative must be able to conduct the day to day administration duties of the Building Manager in terms of this agreement. The Body Corporate shall pay for local and regional council rates and the Body Corporate levy for the Manager s Unit and shall pay the Building Manager an appropriate allowance for mobile telephone and office phone lines, gas, electricity and water utility services. [17] The applicant challenges the vires of this clause on the basis that the body corporate has no power to guarantee the lease. If it is correct in that position then it would seem to me to follow that cl 3.4 is itself ultra vires. I would exempt from that however the stated provision for mobile phone costs which is unrelated to the lease arrangements. [18] Clause 5.3 provides: The Body Corporate must pay the Management Fee without deduction, reservation or set off on any account whatsoever to the Building Manager in equal monthly instalments in advance on the Commencement Date and the first day of each month until the Expiry Date. [19] Clause 5.4 provides for an annual review of the management fee (initially set at $53,000 per annum plus GST). The review is to market rate or the existing rate plus CPI, whichever is the greater, and is subject to a hard ratchet. The applicants do not question the vires of this provision but say that it is relevant to the Court s s 140 UTA 2010 jurisdiction.

6 [20] On 31 August 2014 Sage wrote to the body corporate waiving a number of provisions in the Management Agreement, being cl 3.1(o), portions of cls 4.1(c), 4.4, 10.1, 10.2, 10.3, 10.6, 10.7 and 11. [21] In the result, the only vires challenge that remains is to cl 3.4. [22] Mr Price originally suggested an additional challenge being to the fifth sentence of cl 10.1 on the basis that the ability of the Building Manager to charge a unit holder for all costs of repair or replacement of items in the unit to keep it in a good and tenantable state of repair was not, on its face, limited to tenanted properties. At that point in the argument Mr Rainey advised, and invited me to record in my judgment, the fact that the Manager s power there recorded is limited to those circumstances where a unit holder has chosen voluntarily to enter into an agreement with the Manager for the provision of letting services. I record that concession accordingly. [23] While the vires challenge to the agreement has therefore been largely cauterised by the extent of the waiver which has occurred, the applicant argues that the prior existence of these additional, arguably ultra vires, clauses is relevant to the Court s discretion to terminate the entire agreement under s 140 of the UTA I have difficulty with that proposition to the extent that the agreement on which the Court is asked to give its judgment in terms of harshness or unconscionability must, it seems to me, be the agreement extant at the relevant date, allowing for any provisions which have been waived. I do not regard Body Corporate v Sentinel Management Ltd 3 as inconsistent in this respect. In that case there had been no waiver of ultra vires provisions and a finding had been made as to their unenforceability. 4 Although counsel for the defendant had suggested that the ultra vires terms could be severed, Woolford J found that the potential length of the term and difference in termination rights were equally objectionable. 5 In the s 140 context I consider the case of voluntary waiver to differ from that where a manager clings to ultra vires provisions and then, faced with the prospect of an adverse finding, invokes a potential power of severance Body Corporate v Sentinel Management Ltd [2012] NZHC At [261]. At [268].

7 The Apartment Lease and Guarantee [24] This is for 30 years plus six working days, again allowing for rights of renewal which are contained in cl 5.1. Renewal is at the option of the lessee (Sage). The body corporate, as the party actually meeting the relevant costs, has no input into the process. [25] In terms of cl 3.1 the initial rental is set at $35,000 per annum plus GST. In addition cl 3.2 requires the lessee (in effect the guarantor) to pay the Tenancy Costs. These include maintenance and repair to the unit, any utility charges due and unpaid by the tenant, body corporate levies on the unit, premiums on the lessor s contents and loss of rent insurance policies, and any tax or impost payable by the lessor apart from income tax. [26] There are inconsistencies between the Tenancy Costs payable under the Apartment Lease and Guarantee and accommodation related expenses identified in cl 3.4 of the Management Agreement. For example, the Management Agreement provides for payment of rates whereas the lease does not. The lease provides for the payment of certain insurance premiums whereas the Management Agreement does not. [27] Clause 3.5 specifies the rent review process. Again the guarantor, albeit effectively lessee, has no rights in relation to the process. [28] Clause 3.11 has the same market/cpi/hard ratchet provisions which apply to the Management Agreement. [29] Having regard to the initial starting rent and the operation of the rent review clause over the succeeding period, the gross amount now payable by the body corporate for lease of the Manager s apartment is $1, per week including all outgoings. The evidence of Ms Smith is that, as at 5 March 2014, the average weekly rental for a three-bedroom unit at Tremont was $660 with rates, body corporate levies etc met by the landlord in the usual way. Indications are therefore that under its guarantee arrangements the body corporate is paying a rate which is approximately 50 per cent over market.

8 [30] Clause 12.1 of the Management Agreement relates to the position on termination of the Management Agreement for any reason (which could include termination by the body corporate on breach by the Manager or three months notice of termination by the Manager to the body corporate (cls 12 and 13 of the Management Agreement)). In the event of a termination, the body corporate s obligations under the guarantee are expressed to continue that is, the guarantee runs independently of the Management Agreement. [31] The terms of the guarantee appear in Schedule 3. In terms of cl 1, the body corporate is liable for all obligations of the lessee, not just payment of the rent. To that end, were the Manager intentionally to damage the apartment, the body corporate would be responsible for the remediation costs. [32] Clause 7 of the guarantee is in unusual terms. Mr Price went so far as to describe it as extraordinary. It provides: To the fullest extent permitted by the law, the Guarantor waives such of the rights of the Guarantor as surety or indemnifier (legal, equitable, statutory or otherwise) that may at any time be inconsistent with any of the provisions of this guarantee and indemnity. Furthermore, the Guarantor shall not take any proceedings or action against the Lessee arising in any way in relation to this lease without the prior written consent of the Lessor which the Lessor may refuse in its complete discretion. [33] Mr Price submits that the effect of the second sentence in the clause is effectively to make the guarantor the lessee by removing powers of recourse and subrogation other than in what he describes as the academic context of lessor consent to bring such a claim. He says that in combination with the no set-off provision in cl 5.3 and the provisions in cl 3.4 of the Management Agreement that any breach by the Building Manager of the lessee s obligations in that lease shall not be in breach of this agreement this means that in, for example, the intentional damage scenario postulated, the body corporate has no effective rights of recourse. The Amenities Lease and Guarantee [34] This is for a period of 999 years and six working days from 4 June 2008.

9 [35] It is at an initial rental of $100,000 per annum plus GST with the same current market rental/cpi/hard ratchet review provisions. For the period June 2013 to June 2014 annual rental was $111,500 indicating an approximately 12.5 per cent net return on the current QV value of the amenities. 6 [36] In terms of the definition of Premises Outgoings (cl ) the lessee (and guarantor) are liable for all rates, body corporate levies, insurance premiums, maintenance reserves and utility supply costs associated with the amenities. [37] Permitted use of the premises is defined in the Reference Schedule in terms: Recreation by occupiers of the Units in the Complex and their invitees when accompanied by an occupier of the Unit in the Complex or other person authorised by the on-site manager of the Complex and such use shall always be in accordance with any rules regulating safe, sensible and considerate use of the Premises as may be made from time to time by the Body Corporate. [38] Finally I note cl (b) of the Second Schedule which is in terms: (b) As between the Guarantor and the Lessor the Guarantor may for all purposes be treated as the Lessee and the Lessor shall be under no obligation to take proceedings against the Lessee before taking proceedings against the Guarantor. [39] I shall return to this provision later in the judgment. Deed of Arrangement and Indemnity [40] In relation to the Permitted Use definition in the Reference Schedule to the Amenities Lease and Guarantee Mr Price submitted that, although use by occupiers of the units may be permitted, there is no right on their part to demand access to the facilities, albeit paid for by the body corporate under its guarantee. He submitted that this was fatal in terms of whether the agreement could ever be considered reasonably necessary in the context of the performance of any body corporate duty, were the analysis ever to get that far. 6 In its written submissions (page 9, footnote 9) the applicant states the return as 16.9 per cent but this appears to be incorrectly based on gross body corporate payments including GST and outgoings.

10 [41] In response, Mr Rainey referred to a Deed of Arrangement and Indemnity in relation to amenities entered into on the same day as the Amenities Lease and Guarantee and which provided for access to the amenities by unit title proprietors provided the body corporate was not in default of its guarantee obligations. This document had not previously been adduced in evidence and was apparently only drawn to Mr Rainey s attention by Mr Hodgkinson when the latter heard Mr Price s submission based on the permitted use point. [42] I received the document on the basis that I would hear submissions at the commencement of the second day of hearing on whether leave was appropriately granted. I also invited Mr Price to address the document in reply to the extent he considered necessary. Having heard submissions on the leave application I grant it accordingly. There is force in Mr Rainey s submission that the point taken by Mr Price was neither foreshadowed in the statement of claim nor in the application for summary judgment (both of which are economically pleaded), nor in the applicant s written submissions filed in advance of hearing. Moreover, however unsatisfactory the situation may be, I regard as more unsatisfactory any judgment given independent of the documented arrangements between the parties. Notice to purchasers [43] The respondents place significant emphasis on what they say was notice to purchasers of the Tremont Apartments of the material provisions in the Developer Agreements. They say that such notification occurred via the relevant agreements for sale and purchase, draft budgets provided at the time of acquisition and updated budgets made available prior to settlement. [44] The relevant provisions of the agreement for sale and purchase are set out below: 16.0 VENDOR S DEVELOPMENT 16.1 The Vendor is constructing on the land situated at 4 Wagener Place, St Lukes, Auckland, New Zealand ( Development ) under the provisions of (among other things) the Resource Management Act 1991 and/or Unit Titles Act 1972 ( Act ) stratum freehold residential apartments ( Units ) of which the property forms part and amenity areas ( Amenities ) generally in accordance with the

11 outline plans and specifications annexed. Amenities may be leased to the Body Corporate of Unit Owners VENDOR TO CONSTRUCT UNIT 25.1 (d) In particular but without limitation the Purchaser acknowledges that the Vendor may amalgamate or further subdivide the units shown on the outline plans and specifications and create a lease on commercial terms between the Vendor or nominee as Lessor and the Body Corporate of unit owners as Lessee, in respect of Amenities available to the Development, such as swimming pool, spa pool, sauna, gym, tennis court and recreation room BODY CORPORATE RULES, UNIT TITLE ISSUE AND APPORTIONMENT OF OUTGOINGS ETC 31.1 The Body Corporate that is to be constituted on the deposit of a Unit Plan, shall have as its rules the rules in the form as determined by the Vendor s solicitors acting in their professional capacity having regard to the nature and staging of the Development taking into account the terms of this Agreement and otherwise to be similar to rules used in other multi unit residential developments having similar common area amenities and facilities. The rules may provide for the Purchaser to provide a Power of Attorney to the Vendor. If any Body Corporate levies have been advised to the Purchaser before signing this Agreement they are an estimate only and Clause 7 of the General Conditions of Sale shall not apply. Not less than the working day before the settlement date the Vendor will provide the Purchaser or Purchasers solicitors with: 31.3 The Vendor, as agent for the Body Corporate, may, prior to the settlement date, execute an Agreement with a professional body corporate manager, for a fixed term for the carrying out and management of the duties and powers of the Body Corporate, at standard market remuneration and otherwise on terms and conditions as determined by the Vendor (as agent for the Body Corporate) MANAGEMENT AGREEMENT 40.1 Upon deposit of the Unit Plan the benefits and obligations imposed on the Vendor pursuant to the Management Agreement (if any) shall vest in the Body Corporate. The manager nominated pursuant to the Management Agreement may be an affiliate of the Vendor or the agent. The Management Agreement may provide for: (a) a term of 10 years with two rights of renewal, each of 10 years; and

12 (b) the on-exclusive right to offer tenancy management services to the proprietor of a Unit in terms of the Tenancy Services Agreement. [45] The preliminary budget in turn provides line items for building manager s remuneration and for rental and outgoings associated with provision of the manager s unit. The rental figure is specified as $20,540 and the associated body corporate levies at $2,000. [46] A further line item in the preliminary budget relates to Recreation Area Services and Fees and is in the amount of $85,000. [47] In the final approved budget each of these items shows significant increases. Manager s remuneration increases from $45,000 to $50,000, rental for the Manager s apartment increases by 70 per cent to $35,000, body corporate fees double to $4,000 and the base lease rate for the amenities increases 32 per cent to $112,500 (additional maintenance costs of $10,950 are also for the first time identified). [48] The applicant is critical of the extent of disclosure provided by these documents. It makes the following observations which I accept as valid. [49] Clauses 16.1 and 25.1(d) provide for potential lease arrangements of amenities which in cl 25.1(d) are described as being on commercial terms. What was in fact put in place was a guarantee arrangement which, even allowing for the potential benefit received by the guarantor under cl (b) of the Second Schedule (discussed further at [97]-[104] below), contained a number of terms which were undisclosed and unusual. I put in that category the duration of the lease and guarantee arrangements (999 years) and the fact that the party with ultimate responsibility for performance (the body corporate) had no effective input to the rent review process, albeit what was being described in the Agreement for Sale and Purchase was a lease arrangement. [50] Clauses 31.3 refers to an agreement with a professional body corporate manager for a fixed term at standard market remuneration and otherwise on terms and conditions as determined by the Vendor (as agent of the body corporate).

13 Clause 40.1 specifies that the Management Agreement may provide for a term of 10 years with two equivalent rights of renewal. There is no reference to the Apartment Lease and Guarantee, its duration, or indeed that the manager would reside there. The agency arrangement referred to in cl 31.3 suggests a fiduciary duty to act in the body corporate s best interests. [51] Clause 31.1 is confusing in that it involves a comparison with other multiunit residential developments having similar common area amenities and facilities when the Tremont amenities were not to comprise common property at all. [52] In addition, the applicant points out that the Agreement for Sale and Purchase in evidence is dated August As at that date no resource consent had been obtained for the swimming pool and tennis court. Application in that respect was not made until August 2006 with the only amenities provided for in the initial May 2005 consent being the gymnasium, sauna and spa located on the first floor of the development. The applicant questions how purchasers can be held to have agreed to onerous rental and other arrangements in respect of facilities which were only contemplated at a later date. I do not consider that point persuasive. Clause 25(1)(d) clearly contemplates an expansion of the recreational facilities to include those subsequently provided. [53] In relation to the two budgets, the applicant says that neither disclose the existence of long-term and irrevocable guarantee arrangements in relation to commitments which the body corporate had no power to control the price of and where (as for example with the Apartment Lease and Guarantee) normal guarantor rights are suspended. There is validity in that observation. [54] Finally, the applicant refers to the amended rules and says that there is nothing in them which would have alerted a purchaser to a 999 year amenities commitment (as opposed to being levied from time to time for amounts in respect of the amenities), nor a 30 year apartment lease guarantee which survived termination of the management contract (as opposed to being levied from time to time for actual accommodation costs associated with an extant management contract). Again there is force in that argument.

14 [55] In the context of the vires agreement all this is in my view however largely irrelevant. Although the Court of Appeal in Berachan Investments Ltd v Body Corporate clearly viewed as unattractive the prospect of bodies corporate coming along years after the event to claim their own rules were ultra vires to the advantage of some proprietors and disadvantage of others when all such proprietors had bought into the complex on the basis of the amended rules, 8 the Court reinforced at [51](b) that expectations and general notions of fairness are ultimately subordinate to the need for compliance with the legislation. [56] In that context I accept the submission of the applicant that not only is the proposition that expectations can somehow be determinative of vires unsupported by authority, but it would be contrary to the accepted position that an ultra vires act is void ab initio and incapable of ratification. 9 If express ratification cannot save an ultra vires act, then knowledge or expectations cannot either. [57] I accept however that in the s 140 UTA 2010 context to which I will refer later, the state of the purchaser s knowledge may well be a relevant consideration and one which would militate against summary judgment at this stage. I am persuaded by Mr Rainey s submission that a court should be reluctant to declare harsh or unconscionable arrangements knowingly entered into by parties at arms length. Having regard to my conclusions on the vires of the Amenities and Apartment Guarantees, this issue is relevant only to the Management Agreement. In that context, as Mr Rainey submits, purchasers were fully appraised of the potential duration of the arrangement and were given a reasonably fair indication (by virtue of the preliminary budget) of likely initial costs. Nor could have they been surprised that there would be some mechanism for periodic review of relevant payments over the potential 30 year life of the arrangement. I will return to these issues in the context of the s 140 claim Berachan Investments Ltd v Body Corporate [2012] NZCA 256, [2012] 3 NZLR 72. At [42]. Cabaret Holdings Ltd v Meeanee Sports and Rodeo Club (Inc) [1982] 1 NZLR 673 (CA) cited in Low v Body Corporate [2011] 2 NZLR 263 (HC) at [31].

15 Summary judgment principles [58] These are well established and summarised in the Court of Appeal judgment in Krukziener v Hanover Finance Ltd. 10 In particular the applicant carries the onus of establishing that there is no real question to be tried. Declarations as to vires are available in the summary judgment context. 11 [59] The respondents argue that although it may be appropriate to consider by way of summary judgment whether, as a matter of law, a body corporate has the power to enter into a particular transaction, questions of whether it has appropriately exercised that power are inherently unsuitable for determination by summary judgment because they, in turn, invoke an analysis under s 16 of the 1972 Act concerning whether the exercise of the power was reasonably necessary. They say that only by reference to the factual nuances available from a full hearing can such issues be appropriately adjudicated. They rely in this respect on the decision of Lang J in Russell Management Ltd v Body Corporate and in particular his Honour s observations that: 12 [44] There must therefore be an issue as to whether it (sic) a management agreement for such a lengthy term could be reasonably necessary. [45] The plaintiffs may also be able to establish that a lengthy term is appropriate in contracts of this type. For that reason I do not consider that this particular issue should be determined using the summary judgment procedure. It should instead be determined at trial. [60] Because the decision I make about the vires of the Developer Agreements does not ultimately turn on a reasonably necessary analysis, but rather is based on the absence of a duty to which the purported powers can attach, the respondents point is not ultimately germane. However, in my view, care needs to be taken in elevating the observations of Lang J to a general proscription on summary judgment where reasonably necessary issues arise. Russell Management involved a defendant s application for summary judgment where different principles apply. The plaintiff in such case is entitled to have his or her claim determined at trial unless it Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162. Velich v Body Corporate (2005) 5 NZ ConC 194,138 (CA). Russell Management Ltd v Body Corporate (2009) 6 NZ ConC 194,699 (HC) at [44]- [45].

16 is clearly hopeless. 13 To state the obvious, every case must be considered on its own facts. Were it not for my primary findings on duty, I accept that there are aspects of this case which would have militated against summary judgment. I discuss one example at [105] below. Ultra vires - principles [61] I distil the following principles from the 1972 Act and the authorities. [62] The ultra vires doctrine applies in the body corporate context. 14 It can have two distinct aspects: (a) that some amendment or addition to the rules modifying the duties or powers of the body corporate is ultra vires; or (b) that the body corporate has entered into transactions or agreements or otherwise acted in a way that is ultra vires the powers of the body corporate set out in the rules. 15 [63] Amended or additional rules which are ultra vires have no effect and the default rules will apply. [64] Transactions or agreements entered into ultra vires the powers of the body corporate are void ab initio. It is for that reason that the arguments of both applicant and respondents on the vires pleading proceeded under the UTA 1972 which applied at the time the Developer Agreements were entered into. [65] Although, in the context of a scheme under s 48 the Court might take into account voluntary acceptance of obligation, or legitimate expectation among owners to ameliorate an ultra vires finding, those principles do not apply in cases like the present (see [56] above). [66] The central provision is s 16 of the UTA 1972, which provides in part: Jones v Attorney-General [2003] UKPC 48, [2004] 1 NZLR 433 (PC). Low v Body Corporate , above n 9. Body Corporate v Sentinel Management Ltd, above n 3, at [66].

17 Subject to the provisions of this Act, the body corporate shall have all such powers as are reasonably necessary to enable it to carry out the duties imposed on it by this Act and by its rules. [67] The powers authorised are powers reasonably necessary to carry out identified duties. The body corporate is not empowered to do anything which is reasonably necessary in the context of something it is empowered to do. Everything must ultimately be referable to its duties. [68] The duties are defined in s 15. The Body Corporate has the duty to carry out any duties imposed on it by the rules and as particularised in subss (b) to (j). The latter were summarised by Paterson J in Chambers v Strata Title Administration Ltd: 16 The duties specified in the Act relate to insuring the buildings and other improvements on the land, paying the premium on the insurance policies, keeping the common property in a state of good repair, complying with notices issued by local authority or public body requiring repair work, the control, management and administration of the common property, the enforcement of any lease or license under which the land is held, the enforcement of any contract of insurance, the establishment of the maintenance fund for administrative and other expenses, and the levying of the proprietors to maintain this fund. [69] The statutory rules in cl 2, Schedule 2 of the 1972 Act provide, again in the words of Paterson J, for: 17 the repair and maintenance of chattels, fixtures and fittings, the repair and maintenance of essential services and the production on request by certain people of insurance policies. [70] In circumstances where a power is identified in the default rules (as, for example, the power in cl 11(b) of Schedule 2 of the 1972 Act) for the committee to employ for and on behalf of the body corporate such agents and servants as it thinks fit in connection with the control, management and administration of the common property in the exercise and performance of the powers and duties of the body corporate ) it is implicit in s 16 that the exercise of such powers (e.g. by entry into a management agreement) is reasonably necessary to enable the body corporate to Chambers v Strata Title Administration Ltd (2005) 5 NZ ConvC 193,864 (HC) at [41]. At [41].

18 carry out duties imposed by the Act and rules. It is not necessary in that context to identify, for example, a discrete duty to enter into a management contract. 18 [71] To that end management agreements are not per se ultra vires, but specific terms in them may still be challenged as not reasonably necessary to enable disposition of duties. 19 [72] However, a power to appoint a building manager does not, in turn, empower the body corporate to enter into any related agreements simply because they are said to be reasonably necessary or incidental to the exercise of that power. Beyond entry into of the management agreement itself the exercise of the power must be anchored to a duty in the Act or the rules. 20 [73] These principles apply in relation to amended rules which are, in material terms, the same as default rules (as, for example, in this case amended r 3.4 which is materially similar to Schedule 2 default r 3(d) and the provisions of amended r 3.6 in so far as it envisages engagement of a management company). [74] Where the challenge is to an amended rule, s 37(5) of the 1972 Act is engaged. Such amendment shall relate to: 37 Rules (5) the control, management, administration and use or enjoyment of the units or the common property, or the regulation of the body corporate, or the powers and duties of the body corporate (other than those conferred or imposed by this Act) [75] And must be: incidental to the performance of the duties or powers imposed on it by this Act Low v Body Corporate , above n 9, at [59]. See Chambers v Strata Title Administration Ltd (2009) 10 NZ CPR 221 (HC) at [44]; and Low v Body Corporate , above n 9, at [86]-[90] delegation and letting rights services provisions identified as ultra vires Body Corporate v Sentinel Management Ltd, above n 3, at [74].

19 [76] Incidental means naturally attached to or arising from or naturally appertaining to any of the duties and powers set out in the Act. 21 [77] An amended rule which appreciably expands powers and duties beyond those set out in the default rule cannot be seen as incidental to the body corporate s existing powers and duties. 22 [78] The statutory language permits the Court to have regard to the particular characteristics of a particular unit title development to assess what is incidental to a body corporate s performance of its duties or powers in terms of s 37(5). 23 [79] A rule which purports to confer a power or impose a duty on a body corporate by way of amendment to the Third Schedule is not incidental to the performance of an existing power or duty because the Third Schedule confers no powers or duties at all on the body corporate. Its sole function is to impose restrictions upon unit owners. 24 [80] No amended rule may enable the body corporate to hold any interest in land. 25 The Amenities Lease and Guarantee - vires [81] This is acknowledged by counsel for the respondents as the most challenging aspect of the application for the reasons identified in [5] above. [82] The genesis of the arrangements is explained in Mr Hodgkinson s affidavit in opposition where he says that there were a number of options by which the valuable resource of the amenities could be made available to the unit owners, including: (a) Ownership by all members of the body corporate as common property, in respect of which he relies on an estimate from Barnes, Chambers v Strata Title Administration Ltd, above n 16, at [44] cited in Body Corporate v Sentinel Management Ltd, above n 3, at [71]. Velich v Body Corporate , above n 11, at [31]. Berechan Investments Ltd v Body Corporate , above n 7, at [39]. Wu v Body Corporate (2010) 10 NZCPR 917 at [34] and [40]. Proviso to s 37(5) of the Unit Titles Act 1972.

20 Beagley and Doherr, quantity surveyors, to say that the price per unit would have increased by a sum of $28,000; or (b) Instead of the owners buying the amenities, they could pay for their use, the 999 year lease being for no reason other than to ensure that so long as the body corporate exists the residents will have access to the amenities. [83] As to the source of the power to enter into the guarantee, the respondents starting point is r 3.4 of the amended rules (which substantially duplicates default r 3(d)). [84] That provision provides that the body corporate may: Enter into any agreement with a Proprietor or an Occupier of any Unit for the provision of amenities or services by it to the unit or to the proprietor or occupier, provided such agreement does not detract from the rights of any other proprietor or occupier of any other unit. [85] Mr Rainey acknowledges that because the rule on its face relates to the provision of services by the body corporate to unit holders, his argument necessarily involves a two-step process in establishing the vires of the guarantee: (a) The provision of the amenities by the body corporate to the occupiers through the rules; (b) The securing of that provision through the lease and guarantee which he says is reasonably necessary within the terms of s 16. [86] In respect of the first limb, Mr Rainey acknowledges that the respondents must be able to demonstrate somewhere within the amended rules a duty to provide the amenities. That is for the reason previously explained that the powers under s 16 are referable to duties in the Act and rules provided by them. Nor obviously can a duty be indentified in the document under examination, in this case the Deed of Arrangement and Indemnity in relation to amenities. The source of the duty must lie in the amended rules (there is no relevant source within the Act).

21 [87] In support of the proposition that the amended rules contain a duty to provide the amenities the respondents rely on: (a) A suite of provisions, including cls 1.10, , , 2.1, 2.6 and 2.9 which it was accepted by Mr Rainey are in large part machinery ; (b) Clause 3.4 (above); and (c) (Primarily) cls 16 and 17 in the Third Schedule. [88] I address each in turn. [89] I do not consider the machinery provisions assist. There is nothing in them from which the necessary duty can be distilled. In so far as they require unit holders or the body corporate to pay costs associated with the amenities or require the body corporate to raise corresponding levies (cls , 2.6 and 2.9), I accept the submission of the applicant that these cannot of themselves be the source of a duty to enter into the arrangements in the first place and that a similar argument was dismissed in Body Corporate v Broadway Developments Ltd. 26 [90] Clause 3.4 invites the same conclusion. It is an empowering provision under the heading of what the body corporate may do. It imposes no duty relating to the provision of amenities. [91] Although, adopting the principles established in Low, a contract between body corporate and proprietors for the provision of amenities or services would not require identification of a specific duty in the Act or in the rules in that respect (albeit individual terms might still be challenged as not reasonably necessary), that is not what is in issue here. Rather it is a third party contract. Any reliance on cl 3.4 involves, in my analysis, deriving one power from another which is not what is contemplated by s Body Corporate v Broadway Developments Ltd (2011) NZCPR 627 (HC) at [52]-[54].

22 [92] In any event, I do not consider it reasonably arguable that the terms of the lease and guarantee were reasonably necessary within the s 16 context. The most relevant consideration in that respect seems to me to be the duration of the lease and guarantee (999 years) which bears no relationship to the economic life of the development and which, in the event of any ultimate redevelopment proposal could be a source of considerable lessor leverage. The applicants also raise the issue of what rights to the amenities the units, proprietors or occupiers actually acquire under the document. I will address that issue separately. [93] Clauses 16 and 17 of the Third Schedule, on which Mr Rainey primarily relies, are in the following terms: 16. The above facilities are only for use by Occupiers or their guests when accompanied by an Occupier. None of the above facilities shall be used outside the hours permitted by rules made by the Body Corporate or the Building Manager with the authority of the Body Corporate. 17. No Proprietor, their tenants or invitees shall, unless previously authorised by the Committee of the Body Corporate or the Building Manager make any change or adjustment to any of the settings or equipment in the above areas. [94] These clauses are not, on their face, empowering provisions, let alone ones from which a duty can be distilled. Their purpose, consistent with their inclusion in the Third Schedule, is to impose restrictions on the use of the amenities by proprietors. It is significant that in the default Third Schedule all provisions are premised by the words A proprietor or occupier of any unit shall not. The amended Third Schedule is likewise replete with shall not restrictions. [95] That in turn gives rise to another fatal problem. As Lang J observed in Wu v Body Corporate , 27 Schedule 3 amended rules cannot be a source of powers or duties in any event. Any attempt to amend those terms would not be incidental within the terms of s 37(5). [96] I am left in the position therefore where I cannot identify either in the Act or the amended rules any duty to provide amenities to which the purported power in 27 Wu v Body Corporate , above n 24, at [40].

23 this case can be linked. As such, I do not consider it reasonably arguable that the entry into the guarantee constituted a lawful exercise of power by the body corporate. [97] A further problem arises out of the specific terms of the guarantee and, in particular cl (b) of the Second Schedule headed Guarantee and Indemnity and which provides: As between the Guarantor and the Lessor the Guarantor may for all purposes be treated as the Lessee and the Lessor shall be under no obligation to take proceedings against the Lessee before taking proceedings against the Guarantor. [98] To some extent there were internal tensions within both the applicant s and respondents arguments when it came to interpretation of this provision. [99] For the applicant it was said that: (a) The lease and guarantee did not deliver any right to the amenities to the occupiers. All that could be said was that recreational activities by them were a permitted use under the document. (b) Nevertheless, it was said that, pursuant to cl (b), the body corporate acquired an interest in land inconsistent with s 37(5) of the Act. (c) Despite (a) above, the guarantee constituted a service contract for the purposes of s 140 of the UTA [100] For the respondents it was said that: (a) The fact that as between Guarantor and Lessor the Guarantor may be treated for all purposes as Lessee meant that the provision of amenities could be enforce[d] (Mr Rainey s word) as if the body corporate were Lessee. (b) Although all of the benefits of a lessee were available to the body corporate, nevertheless the arrangement at no time offended s 37(5).

24 (c) Despite the purported provision of amenities to units, proprietors or occupiers by the document it nevertheless did not constitute a service contract for the purposes of s 140 of the UTA [101] The key issue for present purposes is whether cl (b) can be construed as conferring on the body corporate an interest in land in breach of the proscription in s 37(5). [102] In rejecting that proposition, Mr Rainey relied on the decision in Body Corporate v Chen 28 where Keane J held that provisions constituting the body corporate prime obligor (it assumed under the guarantee the primary financial obligation not contingent upon default by the lessor and was obliged to satisfy such obligations before the lessee attempts to do so ) did not mean that it obtained any correlative interest. Nothing in the deed suggests that. It took on the burden without the benefit. 29 [103] However the relevant provision in this case goes significantly further than constituting the body corporate the prime obligor. It may, as between the Guarantor and the Lessor, for all purposes be treated as the Lessee. While the word treated is perhaps suggestive of an analysis based on lessor rights, the fact that it is for all purposes to be so treated takes the case into a category where, in my assessment, a lessee interest may be asserted which would in turn breach s 37(5). In endeavouring to have the best of both worlds the lessor in my opinion transgresses into what is proscribed. That conclusion is reinforced by Mr Rainey s submission that cl (b) gives the guarantor powers to enforce the lease as if it were the lessee. [104] If cl (b) of the Guarantee and Indemnity does not in fact confer that power, then the result would be to fortify the applicant s argument that there is nothing reasonably necessary about arrangements which, although in terms of the Reference Schedule to the lease permit the lessee to allow recreation by occupiers of the units, provide the occupiers with no right to demand it. At that point it would be necessary to consider the Deed of Arrangement and Indemnity in relation to Body Corporate v Chen (2009) 10 NZCPR 22 (HC). At 30.

25 amenities by which lessor and lessee consent to unit title proprietors and their tenants, occupiers and invitees having access to the amenities. [105] I have difficulty in seeing how the Deed of Arrangement and Indemnity can be called in aid of the vires of the Amenities Lease and Guarantee unless it is suggested that it is somehow relevant to its interpretation. However, since that is a proposition which in my judgment would be reasonably arguable, I would have declined summary judgment if the case had turned on this point. In my assessment however the issue is not decisive. The Apartment Lease and Guarantee vires [106] The amended rules do not directly provide (either by way of power or duty) for the body corporate to enter into arrangements (whether by way of guarantee or otherwise) for the provision of manager accommodation. [107] There are a number of provisions which assume such power or duty including: (a) Clause whereby a proprietor shall Pay their Unit Entitlement share of the levy relating to the Amenities and Building Managers [sic] apartment ; (b) Clause 2.6 whereby the body corporate shall Pay any costs and expenses incurred for the management of the Body Corporate, the Building, the Common Areas and Amenities including without limitation the Building Manager s fee ; and (c) Clause 2.10 whereby the body corporate shall Levy the Proprietor of every Principal Unit for the cost of providing the Building Managers [sic] representative with on site accommodation as required by the Resource Consent for the Building which runs with the Land as a continuing obligation.