ABCDE Investments Ltd and Others v Van Gog

• Jurisdiction: New Zealand
• Judge: Harrison J
• Judgment Date: 06 August 2013
• Neutral Citation: [2013] NZCA 351
• Docket Number: CA345/2012
• Court: Court of Appeal
• Date: 06 August 2013

Between

ABCDE Investments Limited & Ors

Appellant

and

John Bernard Van Gog and Kim Margaret Van Gog

First Respondent

and

Body Corporate S89906

Second Respondent

[2013] NZCA 351

Court:

Arnold, Harrison and Rodney Hansen JJ

CA345/2012

IN THE COURT OF APPEAL OF NEW ZEALAND

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.

Counsel:

T J Rainey and J P Wood for Appellants

M D Branch and K I Bond for Respondents

No appearance for Second Respondent

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.

High Court

7 In recent years some owners including ABCDE have terminated their holiday letting agreements with the Van Gogs. ABCDE applied to the High Court for declaratory relief under the Declaratory Judgments Act 1908, without opposition, that: (a) the amended rules of the Body Corporate were invalid; (b) the management agreement was invalidly entered into by the Body Corporate and was not binding; and (c) if the Body Corporate rules were valid, certain provisions in the amended rules were ultra vires and the management agreement was invalid and void.

8 Collins J granted the first two declarations. The Judge held that the amended Body Corporate rules were invalid because they were not formally adopted by the Body Corporate after it came into existence. Accordingly, the Body Corporate's rules were those set out in the second and third schedules of the Unit Titles Act 1972 (except to the extent altered by the subsequent legislation). 3 As to the management agreement, Collins J held that it had been entered into without authority and was ultra vires. This was because it had been entered into under the invalid amended rules. 4

9 ABCDE also sought a declaration that (a) the Van Gogs were not entitled to the exclusive right to let units to the public; or alternatively (b) the encumbrance was invalid and unenforceable. In upholding the Van Gogs' opposition, Collins J held that the encumbrance was enforceable. He treated the encumbrance as a mortgage by virtue of the existence of a rent charge clause which bound successors in title (that conclusion is not challenged on appeal). 5 He was satisfied that the commercial arrangements constituted by the amended rules and the letting agreements when read together with cl 3 of the encumbrance constitute a restriction on unit owners letting the units except through the building managers' services. 6

10 ABCDE appeals against the High Court judgment on two grounds. First, it said that the encumbrance does not...