Body Corporate 396711 & or v Sentinel Management Ltd Hc Ak Civ

• Jurisdiction: New Zealand
• Judge: Woolford J
• Judgment Date: 08 August 2012
• Neutral Citation: [2012] NZHC 1957
• Docket Number: CIV 2010-404-007754
• Court: High Court
• Date: 08 August 2012

Under the Declaratory Judgements Act 1908

In The Matter Of the Unit Titles Act 2010

Between

Body Corporate 396711

First Plaintiff

and

Dennis John Ansley

Second Plaintiff

and

Sentinel Management Limited

Defendant

[2012] NZHC 1957

CIV 2010-404-007754

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

Application by plaintiffs for declarations that a management agreement with the defendant was ultra vires and invalid — alleged agreement conferred rights on the defendant which had significantly reduced the plaintiff's ability to manage the building in the democratic framework created by the Unit Titles Act 2010 (“UTA 2010”) — apartment block initially covered by default rules in the Unit Titles Act 1972 (“UTA 1972”) — Body Corporate Rules amended by the developer so that units could only be let or sold by the defendant — whether the amended rules were valid — whether the rules were ultra vires UTA 1972 — whether invalid rules could be severed — whether the vendor had breached fiduciary duties to the purchasers — whether there had been a breach of duties analogous to those of promoters — whether there was an unconscionable bargain — whether the management agreement was harsh or unconscionable and should be set aside under s140 UTA 2010 (compensation for, or termination of, service contracts).

Counsel:

T J Rainey and J P Wood for Plaintiffs N R Campbell for Defendant

RESERVED JUDGMENT OF Woolford J

Woolford J

This judgment was delivered by me on Wednesday, 8 August 2012 at 11:00 am pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Contents
Introduction	[1]
Factual background	[7]
The Pleadings	[19]
Statutory Framework	[22]
UTA 1972 – title	[24]
UTA 1972 –governance	[27]
UTA 2010 – title	[30]
UTA 2010–governance	[32]
First Cause of Action – validity of the amended rules	[33]
Counsels' submissions	[34]
Legal Principles – amendment	[36]
Application – Schedule 2 rules	[47]
Application – Schedule 3 rules	[56]
Conclusion	[61]
Second Cause of Action – ultra vires UTA 1972	[62]
Counsels' submissions	[63]
Legal Principles – ultra vires	[65]
Ultra vires the UTA 1972	[69]
Ultra vires the rules	[73]
Framing the legal arguments in this case	[75]
Legal principles – severance	[79]
Application – ultra vires	[83]
The Letting Service	[84]
The Real Estate Sale Service	[100]
The Sentinel Residents Service	[102]
The Management Service	[103]
Conclusions – ultra vires terms	[114]
Application – severance	[115]
Conclusion – second cause of action	[121]
Third Cause of Action – breach of vendor's duties	[122]
Counsels' submissions	[124]
Legal principles – vendor's duties to purchaser	[126]
Legal principles – Dishonest assistance	[134]
Legal principles – relief	[137]
Legal principles – affirmation	[139]
Application – vendor's duties to purchaser	[140]
Application – dishonest assistance	[149]
Application – relief	[156]
Application – affirmation	[159]
Conclusion	[160]
Fourth Cause of Action – breach of promoter's duties	[161]
Counsels' submissions	[162]
Legal principles – promoter's duties	[164]
Legal principles - remedy	[176]
Legal Principles – affirmation	[181]
Application – promoter's duties	[182]
Application – dishonest assistance	[198]
Application - remedy	[199]
Conclusion	[202]
Fifth Cause of Action – unconscionable bargain	[203]
Counsels' submissions	[204]
Legal principles – unconscionable bargain	[206]
Application — unconscionable bargain	[207]
Conclusion	[201]
Sixth Cause of Action – Section 140 UTA 2010	[211]
Counsels' submissions	[212]
Legal principles – section 140 UTA 2010	[214]
Legislative History	[215]
Comparable statutory provisions	[216]
Interpretation	[219]
Comparable legal standards: harsh and unconscionable	[221]
Comparable legal standards: oppressiveness	[222]
Comparable legal standards: unconscionability	[225]
Application – time period	[232]
Application – harsh and unconscionable	[246]
Conclusion	[267]
Result	[269]
Relief	[270]
Costs	[227]

Introduction

1 The Sentinel is a 30 storey residential complex containing 117 apartments and a number of retail shops situated in Takapuna on Auckland's North Shore. It is a unit title development.

2 The first plaintiff, Body Corporate 396711 (the Body Corporate), is the building's body corporate initially constituted under the Unit Titles Act 1972 (UTA 1972). The second plaintiff, Dennis John Ansley, owns one of the apartments in the building. The defendant, Sentinel Management Limited (SML), is the building manager and a party to a long-term management agreement with the Body Corporate which was entered into when both parties were controlled by the sole director and shareholder of the development company.

3 According to the plaintiffs, although the management agreement ostensibly relates to the management of the common property in the building, in substance it confers valuable rights on SML which have significantly reduced the Body Corporate's ability to manage the building within the democratic framework created by the Unit Titles Act 2010 (UTA 2010), the successor statute to the UTA 1972.

4 The plaintiffs' case is that the management agreement is invalid and unenforceable. They say there are several alternative grounds on which the Court can reach that conclusion. The first and most orthodox ground is that several provisions of the management agreement are ultra vires the UTA 1972 and, because these provisions cannot be severed from the remainder of the provisions, the agreement is wholly void. A related issue is the validity of amended rules for the Body Corporate which were deposited with the District Land Registrar on 14 February 2008. It is said that the rules were not amended in accordance with s 37 of the UTA 1972 and accordingly the amended rules have not been validly adopted.

5 The second ground relates to the circumstances in which the Body Corporate agreed to enter into the management agreement with SML. A large number of apartments had been conditionally sold prior to completion of the building and it is said that the development company held title to those apartments as constructive trustee for the purchasers as at the date of the management agreement. By exercising the development company's power as the sole member of the Body Corporate to enter into the agreement, it is said that the sole director and shareholder breached his fiduciary duty to those purchasers. Alternatively, it is said the development company was in a position analogous to a promoter and owed the Body Corporate fiduciary duties, including the duty not to allow its own interests to conflict with the interests of the Body Corporate. Finally, it is said that as at the date of the agreement the Body Corporate was acting under a disability and unable to act in its own best interests because it was under the complete control of the sole director and shareholder of the development company. The agreement was therefore an unconscionable bargain.

6 The third ground is an express statutory right of cancellation of agreements entered into by developers which was introduced by s 140 of the UTA 2010. This allows “the appropriate decision maker” to cancel a service contract entered into during the “control period” if the contract is harsh or unconscionable.

Factual background

7 At all material times the land on which the Sentinel was built was owned by Takapuna Village Limited (TVL). TVL was the developer of the Sentinel and as such was the initial owner of each of the apartments when the unit plan for the development was deposited and the titles to the units issued. The sole director and shareholder of TVL was Richard John Martin.

8 The second plaintiff, Mr Ansley, entered into a written agreement with TVL on 15 December 2003 to purchase an apartment in the building. The sale and purchase agreement was conditional on:

The initial conditions in the sale and purchase agreement were met and the development proceeded. The Sentinel was essentially completed in early 2008.

• (a) TVL obtaining a minimum level of sales of apartments by 30 November 2005;

• (b) TVL being satisfied it would obtain all necessary building, subdivision and other consents by 30 April 2006;

• (c) Practical completion of the apartment; and

• (d) Title to the unit being issued.

9 On 7 February 2008, a unit plan for the Sentinel was deposited with the District Land Registrar. Upon deposit of the unit plan, the Body Corporate was incorporated under the provisions of the UTA 1972 and the titles to the apartments were issued to TVL, which became the sole registered proprietor of the apartments and sole member of the Body Corporate.

10 On its incorporation the Body Corporate was governed by the default rules provided in Schedules 2 and 3 of the UTA 1972.

11 On 13 February 2008, Mr Martin signed a Notice of Change of Rules for the Body Corporate which stated that on that day, 13 February 2008, the rules for the Body Corporate were amended by the adoption of the rules annexed to the notice and furthermore that the amended rules had been duly authorised and approved by unanimous resolution of the all the proprietors who constituted the Body Corporate. The amended rules were received by the District Land Registrar on 14 February 2008. On 15 February 2008 the amended rules were recorded on the supplementary record sheet for the Body Corporate.

12 On 14 February 2008, with practical completion of...