Body Corporate 401803 (the 103 Tremont apartment complex in St Lukes, Auckland) has recently been to the Court of Appeal. At issue was the validity of guarantees given by the body corporate to third parties under leases of 3 units – the manager’s apartment, the swimming pool, tennis courts, gymnasium and other amenities. Between June 2008 and June 2013 the body corporate had paid about $1.32m under these agreements.
The body corporate argued that the guarantees were void. The Court of Appeal agreed in a decision dated 21 July 2015. A guarantee must derive from the body corporate rules in place at the time and neither the old rules nor the 1972 Unit Titles Act 1972 allowed for the guarantees.
The lessors argued that one of the reasons for this structure was that it was a requirement of the resource consent. You do see resource consents that require common amenities to be owned or managed in a particular manner and developers and their planners need to ensure they are consulting with their property lawyers at resource consent stage.
In my view the real issue here was that the structure the developer put in place endeavoured to preserve what the ultimate owners saw as an unfair income stream for the benefit of the developer and parties associated with them. The evidence was that the rent for the manager’s apartment was more than twice the market rent. The manager’s apartment lease was for 30 years. The lease did not automatically terminate if the management contract terminated. The running costs for the swimming pool, gymnasium and other amenities are more typically payable via body corporate levies with the actual assets owned by the body corporate. Here the lease of these areas was for a term of 999 years and 6 working days. The initial rental was $100,000.00 pa reviewable every second year to the higher of market or CPI. All outgoings were also payable under the lease including the contribution of 2% of the rental annually towards repair and maintenance and replacement of the lessor’s fixtures.
Owners can come to resent these kinds of structures if they are not properly done. The Unit Titles Act 2010 includes developer’s duties, so when setting up long term contracts the developers owe duties to the ultimate owners. These kind of structures will create legal liability for developers now, not just problems for the managers or ultimate owners. The 2010 Act might include wider poers to guarantee though. This was not a case about harsh and unconscionable service contracts. The High Court had held that the leases were not able to be terminated under the 2010 Act for that reason. The body corporate did not appeal that decision.
The developer and associated company were also found liable to contribute toward the legal costs the body corporate had incurred in successfully bringing these challenges.