Review of the Unit Titles Act 1972
IV. Issues
Requirement for Bodies Corporate, and Rules of Bodies Corporate
Every unit title development involves the creation of a body corporate. As a matter of law, the body corporate comes into existence on the deposit of the unit plan. At that point, the registered owner of the land is the body corporate. Once one unit has been sold the owners of the units in the unit plan make up the body corporate (section 12, Unit Titles Act).
As will be apparent throughout this discussion document, issues relating to bodies corporate and the role they play in unit title development are central to calls for a comprehensive review of the Unit Titles Act.
In very general terms, the successful functioning of bodies corporate is seen as fundamental to the maintenance and enhancement of unit title developments as positive living environments.
Many unit title owners, however, do not appear to be aware of the importance of the role of the body corporate, or of the fundamental difference between freehold and unit titles. Those differences are, in many ways, reflected in the need for the existence of the body corporate and the duties and functions of bodies corporate. At the same time, it is said that the Act does not always promote good body corporate outcomes.
This discussion document explores many of those issues. The following brief summary of the Act as it currently relates to bodies corporate provides a context for that discussion.
Bodies corporate do not own the common property. The unit owners do. A body corporate is, however, the representative body for the individual unit owners. As such, under the Act, bodies corporate are given a number of duties and functions. Those duties and functions operate as a statutory framework within which the unit owners, represented by the body corporate, are both required and empowered to act for their mutual benefit as the owners of the unit development.
In summary, that framework is intended to ensure that:
• the body corporate insures all buildings and improvements (including individual units) in the development
• the body corporate manages and maintains the common property
• the body corporate enforces the rules applying to the development, including the rules provided by the Act and any rules adopted for the development
• the body corporate can sue and be sued in respect of the development as it if were the owner of the common property, and the owners of the units are, under the Act, made liable individually for judgments against the body corporate.
The body corporate can be seen to act like a mini "local authority" or "town council" for the development, in that they often make the arrangements for, and pay for, services such as waste management, roads, parking and gardening. In reality, bodies corporate – particularly for larger developments – perform many of the functions that local government performs in areas where property is divided into freehold and leasehold titles.
Bodies corporate also perform a range of less formal functions. These are like those performed by voluntary neighbourhood groups, again designed to improve and enhance the living environment provided by unit title developments.
This discussion document will now consider a range of issues relating to bodies corporate.
Bodies corporate and small developments
The Law Commission proposed that:
• where a development comprises no more than 6 units
• the common property consists entirely of driveways or party walls
there should no longer be a compulsory requirement for a body corporate. The Law Commission in effect concluded that relevant duties and functions of bodies corporate under the Unit Titles Act could be performed by the unit holders as an unincorporated "association" of persons.
Questions
19. Do you agree with the Law Commission’s proposal? Please give your reasons.
20. In what other situations should there no longer be a compulsory requirement for a body corporate?
21. What do you think would be the impact of your answers on unit owners, bodies corporate and on business owners?
Bodies corporate – recognise different types
The Unit Titles Act provides a "one size fits all" model for bodies corporate. That is, the statutory framework provided by the Act is the same for all bodies corporate, irrespective of the size or type of the development in question. There are now many different types and sizes of unit title developments, including:
• small residential developments
• terrace residential developments (which may involve large numbers of units but where each unit comprises all the levels in the development)
• large, multi-storey, residential developments
• commercial developments, for example shopping malls
• mixed use developments, often multi-storey, including residential, office and "retail" units
• "time share" developments.
Increasingly, unit owners may be investors, and not occupiers, giving rise to issues involving absentee owners and their tenants.
In Australia, a number of jurisdictions (Queensland, New South Wales and Victoria) either have, or are considering, providing different statutory models for different sizes and/or types of developments. This means that there are different requirements in relation to committees, general meetings, proxies and voting thresholds, for example.
In Queensland, different model rules are provided for "small", "standard", "accommodation" and "commercial" developments. These models are designed to deal respectively with:
• schemes with less than six lots, providing a relatively simple and informal environment (small)
• residential schemes with mostly owner occupiers, providing a highly regulated environment (standard)
• schemes with mostly investor owners who rent out their units (accommodation)
• non-residential business complexes, whether occupied by owners or tenants (commercial).
New South Wales has recently moved to provide a special regime for large (more than 100 unit) schemes.
It has been suggested that in New Zealand the body corporate "model" should also be customised to reflect the type of development involved.
Questions
22. Do you agree that the Unit Titles Act should be amended to provide for different models of bodies corporate depending on the size and/or type of development?
23. If you do agree, what do you think would be a sensible range of models? How should that range best be provided, for example by regulation or by "model" rules?
24. In what ways does the model of bodies corporate need to be tailored depending on the type of development?
25. Are special issues raised by the complexities of high-rise buildings themselves, as opposed to the "type" of development that may occupy such a building? If so, what issues do you see?
Body corporate democracy
The Unit Titles Act controls how unit owners, as members of a body corporate, make decisions.
Certain decisions8 can only be made by a unanimous resolution. A unanimous resolution is one that all unit owners support (not just all unit owners who vote). Other decisions9 must also be unanimous as all unit owners must sign, or otherwise agree to, the relevant application.
These requirements have a number of practical implications. For example, in reality a "redevelopment" may involve a simple and innocuous change to a unit title, like a "boundary adjustment". But all unit owners, not only those affected, must agree.
These requirements for unanimity reflect the view that the body corporate should not be able to take actions that could fundamentally interfere with the "property rights" each unit owner has, unless each unit owner has actually agreed to the proposal.
The question is whether these provisions strike an appropriate balance between the wishes of the majority and the interests of individual owners.
The Law Commission reported that, at least for the requirement for unanimity on changes to the compulsory rules, its view and those of submitters were that the requirement should be maintained. More recently, the Auckland Regional Council’s Case for Review suggested that changes to the unanimity requirements may be appropriate.
An alternative approach, which would respond to calls for increased flexibility and which would also perhaps more appropriately balance majority and minority interests in a way that recognised the fundamental community of interests involved in a unit title development, would be to:
• replace the requirement for unanimity with the requirement for a super majority (say 75% or 80%)
• provide for that majority to come, as is the usual case, from those who vote
• give opponents of any relevant proposal a buy-out right, like that provided by the Companies Act 1993 to shareholders who vote against key resolutions.
Recognising the different dynamics that exist in developments of various sizes and types, such change could be limited to large residential schemes, commercial schemes and mixed use schemes.
Questions
26. Do you agree that the requirement for unanimity should be relaxed? If so, for what decisions, and what majority, should replace the requirement for unanimity?
27. Should reform go as far as "normalising" the required majorities, so that the majority would only have to come from those voting, rather than those entitled to vote?
28. Would you agree to relaxing the unanimity requirement for all schemes, or do you think that the relaxation should be limited to, say large residential, commercial and "mixed" schemes? For those purposes, how would you define a "large residential scheme"?
29. Do you think individual owners who vote against a proposal requiring a "super majority" should, in certain circumstances, be given a buy-out option, like that provided by the Companies Act?
30. What do you think would be the impact of your answers on unit owners, bodies corporate and on business owners?
Relief from the requirement for unanimity
The Unit Titles Act does currently provide a mechanism for the High Court to dispense with the requirement for unanimity where an 80% majority has been achieved. The High Court has taken, in the one case to be reported directly involving section 42 of the Act,10 a "hands off" approach. The Court appeared to be interested only in procedural matters, and did not look to the substance of the majority’s decision. It indicated that in the absence of procedural irregularity, the decision of a "substantial majority" should not be "thwarted" by a hold out minority.
This would appear to potentially reduce the protections provided by the requirement for unanimity to a requirement for an 80% vote
Question
31. If the need to obtain unanimous votes is retained, do you agree with the Law Commission that criteria should be provided to protect the minority? If yes, what criteria do you suggest? What do you think would be the impact of your suggestions on unit owners, bodies corporate and on business owners?
Unit entitlements
Before a unit plan can be deposited and unit titles created, a "unit entitlement" must be assigned to every unit by a registered valuer. Valuers take a wide range of factors into account in setting unit entitlements, but are required to do so "on the basis of the relative value of the unit in relation to each of the other units in the unit plan".
The unit entitlement fixed for a unit determines, for the first and each subsequent owner of that unit, a range of matters including:
• their share in the common property
• their responsibility to contribute to the cost incurred by the body corporate in insuring, managing and maintaining the common property
• their voting rights, where a poll of owners is required
• the relative size of their residual interest in the property if the unit plan is cancelled.
Once set, the unit entitlement may only be varied in very limited circumstances.
Two main issues arise. Firstly, is "relative value" the right way to determine all these matters? For example, should relative value always determine common property maintenance obligations? A large relatively high value ground floor unit could end up paying more for lift services it does not use than a less valuable smaller top floor unit, even though the value of that top floor unit would be further reduced if the lift did not work.
Secondly, relative values change over time for a variety of reasons. There is no way (short of a redevelopment) to recognise such changes at the present time.
Questions
32. Do you think relative value is the right concept to be used to fix unit entitlements, given the range of matters determined by unit entitlements? If yes, why do you support it?
33. Should there be a more flexible approach to these issues? For example, could scheme rules be used to set entitlements in a way that better matches the benefits and costs of different aspects of unit developments? Would a better approach be to provide for some concept of a "fair and reasonable charge" set by the body corporate for the allocation of common costs, with individual owners having rights to object? Should there be provision for owners to enter into voluntary agreements to pay for certain expenses on the basis of who benefits, rather than unit entitlement?
34. Whatever approach is adopted, should there be an obligation for bodies corporate to review the apportionment of rights and obligations over time?
35. How should owners be protected from unreasonable changes, if the approach to these issues is made more flexible? The Unit Titles Act does currently provide some flexibility. In limited circumstances (work benefiting one or more units only, or work benefiting one or more units substantially more than other units) "other" unit holders may be excused from an obligation to contribute.11 It is not clear, however, how useful those provisions are in addressing this issue. Should the body corporate itself be given more discretion, subject to appropriate rights of objection?