ABCDE Investments Ltd and Others v Van Gog

JurisdictionNew Zealand
CourtCourt of Appeal
JudgeHarrison J
Judgment Date06 Aug 2013
Neutral Citation[2013] NZCA 351
Docket NumberCA345/2012

[2013] NZCA 351

IN THE COURT OF APPEAL OF NEW ZEALAND

Court:

Arnold, Harrison and Rodney Hansen JJ

CA345/2012

Between
ABCDE Investments Limited & Ors
Appellant
and
John Bernard Van Gog and Kim Margaret Van Gog
First Respondent

and

Body Corporate S89906
Second Respondent
Counsel:

T J Rainey and J P Wood for Appellants

M D Branch and K I Bond for Respondents

No appearance for Second Respondent

Appeal against a High Court decision on the validity of a memorandum of encumbrance over a residential complex — encumbrance provided that the encumbrancee was entitled exclusively to exercise the letting service in respect of the units and that the Body Corporate could enter into an appropriate agreement with the building managers — management agreement subsequently declared invalid — whether a valid management contract was necessary to enforce the encumbrance — whether the encumbrance contained all essential terms necessary to give rise to an enforceable contract between the managers and owners.

Held: The decisive issue was to determine the operative effect of the first part of cl 3. The meaning of the words used in cl 3 was plain and unequivocal. The first part of that provision operated to give the building managers an exclusive right to exercise a letting service. The right stood alone and was enforceable. It did not require any party to act and it did not oblige the owners to appoint the building managers or to do anything else.

The agreement in the first part of cl 3 operated as a restriction on an owner's rights of use of a unit to the extent that an owner wishing to let a unit for short stay accommodation had to use the building managers' services. This prohibition was not of absolute effect; it only took effect where an owner decided to let a unit.

The definition of “letting service” provided by the amended Body Corporate rules applied notwithstanding that the rules were not validly adopted. They were nevertheless in existence and specifically referred to and effectively incorporated by cl 3. The fact of invalidity did not exclude the rules from consideration for this purpose. They specifically defined a “letting Service” as: “the exclusive right of the Building Manager to let Units out for rent or reward to third parties on behalf of the Proprietor of the relevant units”. Therefore the first part of cl 3 was an unconditional agreement by owners granting the building managers the exclusive right to let their units, which the building managers were entitled to enforce in the usual way.

It was not necessary for the Body Corporate to enter into a management agreement for the first part of cl 3 to be enforceable. The first part was not merely declaratory as argued by ABCDE. The second part of cl 3 was no more than the owners' acknowledgement of the building managers' authority, which existed independently of the encumbrance, to enter into a management agreement with the Body Corporate and was arguably superfluous. It could not be read as qualifying or subsuming the effect of the unconditional agreement found in the first part.

ABCDE's second argument on the enforceability of the encumbrance was that it did not give rise to terms necessary to ensure its enforceability. This argument proceeded on the premise that cl 3 imposes a positive obligation on the parties to enter into a formal letting agreement.

The HC erred in taking into account the standard form letting agreement as fully explaining the basis upon which the building managers conduct letting services on behalf of owners. That was because the letting agreements were not signed until after the encumbrance was executed.

However, the validity of individual letting agreements entered into directly between owners and the building managers could not be called into question. The letting agreements remained binding on and enforceable against the parties. They stood independently of the encumbrance. Once it was accepted that cl 3 was of negative effect, there was no need to embark on a separate inquiry into whether the encumbrance was enforceable by virtue of the absence of essential terms. The prohibitory effect of the encumbrance was enforceable on its own. It did not require incorporation of any additional terms.

Appeal dismissed.

JUDGMENT OF THE COURT

A The appeal is dismissed.

B The appellants must pay the first respondents costs on a standard band A basis together with usual and reasonable disbursements.

REASONS OF THE COURT

(Given by Harrison J)

Introduction
1

The Terraces is a 23 unit residential complex at Mount Maunganui which has been subdivided into units under the Unit Titles legislation. 1 The relevant planning instruments prohibit owners from residing permanently in their units or retaining permanent tenants and limit the units to being used for short stay accommodation of not more than three months (that is, essentially as holiday accommodation). Owners have used their units in this way since the development was completed in 2000.

2

While the units are self-contained residences, the complex is operated in a way similar to a motel. Building managers who own one of the units, unit 23 (the management unit), offer accommodation services on behalf of owners who wish to let their units for short terms. The relationship between the managers and the owners is governed by a series of contractual instruments including a memorandum of encumbrance. Seven of the unit owners (collectively ABCDE) challenge the validity of the encumbrance, and appeal against the judgment of Collins J in the High Court dismissing an application for a declaration that the encumbrance is unenforceable. 2

Facts
3

The relevant facts are not in dispute and can be summarised briefly as follows:

  • (a) On 8 November 2000 the directors of Ocean Beach Custodians Ltd (OBCL), the developer of the Terraces, signed a notice of change of the amended rules to be lodged for the proposed body corporate.

  • (b) On 27 November 2000 the directors of OBCL signed the memorandum of encumbrance in the capacities of both encumbrancor (as registered proprietor of units 1–22) and encumbrancee (as registered proprietor of unit 23). By virtue of this encumbrance, OBCL (as proprietor of unit 23) agreed to pay itself (as proprietor of

    units 1–22) a rent charge of $1 per year for 999 years and abide by the relevant covenants.
  • (c) On 6 December 2000 the unit plan of the Terraces was deposited. Body Corporate S89906 came into existence under the Unit Titles Act 1972. OBCL was the original owner of all the units. On the same day the memorandum of encumbrance was entered onto the titles to units 1–22. Unfortunately, however, the Body Corporate did not formally adopt the amended rules.

  • (d) On 20 December 2000 a management agreement was entered into between the Body Corporate and the proprietors of unit 23 as building managers. That agreement contained provisions granting the building managers the exclusive right to exercise the letting service on the property but acknowledging that unit proprietors could use letting services provided by others off the property.

  • (e) When taking possession of units new owners signed agreements with the managers authorising the latter to operate the letting of their units to the public for short term visitor accommodation. The letting agreement provided that the building managers were the owner's “exclusive agent and representative to act as Building Manager for the Owner” and that they had “an authority and exclusive right to negotiate tenancies with existing and prospective tenants on terms approved by the Owner”. It also covered the managers' remuneration, allocation of expenses and provided for rights of termination. The managers provided management services for short term visitor accommodation on the basis of the letting agreements.

4

Clauses 3 and 4 of the encumbrance are at the centre of this argument. Clause 3 reads relevantly:

The proprietor of the relevant unit … agrees that the Encumbrancee is entitled exclusively to exercise the Letting Service in respect of the Units and for that purpose the Body Corporate may enter into an appropriate agreement with the Encumbrancee on such terms and conditions as the Body Corporate may deem fit (all as set out in body corporate rules registered on or about the date of registration of this encumbrance).

5

Clause 4 relevantly provides:

The proprietor of the relevant unit comprising the Land agrees with and for the benefit of the Encumbrancee that the Body Corporate shall not without the prior written consent of the Encumbrancee:

  • (a) authorise any person to, nor permit any person nor any of its staff, nor itself exercise the Letting Service or any letting service of the same or similar nature as that carried on by the Encumbrancee; or

  • (b) licence, lease or grant restrictive or exclusive use of any part of the common property other than to the Encumbrancee for the purpose of allowing any person to exercise the Letting Service or carry on any letting service (all as set out in body corporate rules registered on or about the date of registration of this encumbrance).

6

Letting arrangements entered into by the building managers on behalf of unit owners apparently worked without incident for some years. The present managers, the first respondents John and Kim Van Gog, purchased the management unit in 2005 and subsequently bought two other units in the complex. At the same time they took an assignment of the management agreement entitling them to act as managers for the balance of a 20 year term.

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1 cases
  • Newhaven Waldorf Management Ltd v Allen
    • New Zealand
    • High Court
    • 9 November 2015
    ...136; Body Corporate No 396711 v Sentinel Management Ltd [2012] NZHC 1957, (2012) 13 NZCPR 418. 14 See ABCDE Investments Ltd v Van Gog [2013] NZCA 351, (2013) 14 NZCPR 736 (CA)....