Low and Others v Body Corporate

• Jurisdiction: New Zealand
• Judge: Heath J
• Judgment Date: 21 February 2011
• Neutral Citation: [2011] NZHC 148
• Docket Number: CIV 2010-404-5760
• Court: High Court
• Date: 21 February 2011

Under Part 19 of the High Court Rules

In the Matter of the Unit Titles Act 1972

Between

Colin Jee Fai Low & Ors

Applicants

and

Body Corporate 384911

First Respondent

and

Melview Viaduct Harbour Limited (In Receivership)

Second Respondent

and

Lighter Quay Hotel Management Limited (In Receivership)

Third Respondent

and

Galway Property Services Limited

Fourth Respondent

and

Galway Auckland Property Services Limited

Fifth Defendant

[2011] NZHC 148

CIV 2010-404-5760

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

Application for an order declaring various rules of the defendant body corporate ultra vires — Westin Hotel complex — defendant made changes to default Body Corporate rules — whether building management and secretarial services agreements made in reliance on rule changes were valid — whether there was a material difference between the actual Body Corporate rules and the default rules under Schedule 2 Unit Titles Act 1972 (rules that may be amended by unanimous resolution) — whether the appointment of a manager and secretary were incidental to the powers and duties imposed on a Body Corporate under s37(5) Unit Titles Act 1972 (any amendment to any rule shall relate to the control, or administration of the units or common property).

Counsel:

P G Skelton and R A Edwards for Applicants

No appearance by, or on behalf of First Defendant

S B Thompson for Second and Third Respondents

H Cull QC for Fourth Respondent

J K Goodall for Fifth Respondent

Counsel:

P G Skelton, PO Box 4314, Shortland Street, Auckland

H Cull QC, PO Box 5947, Wellington

J K Goodall, PO Box 1778, Shortland Street, Auckland

JUDGMENT OF Heath J

Contents

Introduction	[1]
Preliminary issues
(a) Service of the proceedings	[7]
(b) The parties' stances	[8]
(c) Is the adopted procedure appropriate?	[12]
The structure of the Westin development	[15]
The scheme of the Act	[20]
The ultra vires principle	[27]
The Management Agreement
(a) The relevant rules	[34]
(b) Competing submissions	[38]
(c) Analysis	[41]
The Secretarial Services Agreement
(a) The relevant rules	[67]
(b) Competing submissions	[70]
(c) Analysis	[74]
Are other rules ultra vires?	[86]
Severance of terms	[91]
Result	[96]

Introduction

1 Litigation in respect of the Westin Hotel in Auckland continues. 1 On this occasion Mr Low and 113 co-applicants, each of whom own serviced apartments within the hotel's unit title complex, seek orders declaring various rules of Body Corporate 384911 (the Body Corporate) ultra vires. 2 An attack is also made on two agreements into which the Body Corporate entered in reliance on challenged rules: a building management agreement (the management agreement) and one for the provision of secretarial services (the secretarial services agreement).

2 The Body Corporate was created on 24 April 2007, following deposit of a unit plan under the Unit Titles Act 1972 (the Act). The duties and powers of a body corporate are set out in ss 15 and 16 of the Act.

3 Default rules govern the way in which a body corporate is managed. They are contained in Schedules 2 and 3 to the Act. Those in Schedule 2 may be varied by unanimous resolution, while Schedule 3 rules may be amended by a simple majority. 3

4 Immediately before deposit of the unit plan, the developer, Melview Viaduct Harbour Ltd (Melview), was the registered proprietor of the land. On deposit, it became the Body Corporate. 4 That being so, it was entitled to add to (and did), vary or revoke some of the default rules. The present applicants complain that a number of the changes made to the default rules are ultra vires.

5 Under the powers conferred by the adapted rules, the Body Corporate entered into two agreements. The two agreements are dated 15 May 2007. Both were between the Body Corporate and Galway Property Services Ltd (Galway). They dealt respectively with management of the building complex and the provision of secretarial services. Both Melview and Galway are companies associated with Mr McKenna, the person responsible for the Westin Hotel development.

6 On 30 April 2009, Galway assigned the benefit of the management and secretarial services agreements to a sister company, Galway Auckland Property Services Ltd (Galway Auckland), another McKenna entity.

Preliminary issues

(a) Service of the proceedings

7 Orders were made requiring service on other parties, including the owners of all other units in the hotel complex. I am satisfied that service has been effected on all parties whom I directed to be served.

(b) The parties' stances

8 Sanley New Zealand Ltd, the proprietor of 22 accommodation units, consents to the orders sought. Melview is now in receivership, as is the hotel operator, Lighter Quay Hotel Management Ltd (Lighter Quay). 5 Counsel for the receivers of each of those companies have advised that they abide the decision of the Court.

9 The Body Corporate has taken no steps in relation to the present application. Before the hearing, through its counsel, it indicated that it too abided the decision of the Court.

10 While Galway and Galway Auckland do not oppose declarations that some of the rules are ultra vires, they have been actively opposed to others. They are the companies that will suffer adverse economic consequences if those other orders were made.

11 Both Galway and Galway Auckland have (effectively) conceded that amended rules dealing with two significant aspects are ultra vires. The first relates to restrictions on a proprietor's right to deal with his or her individual unit by prohibiting the grant of “Letting Service Rights” to anyone other than the hotel operator or the proprietor of Unit H9 (Melview). The second involves the prohibition on use, lease, or grant of management rights in respect of an individual unit without the consent of the building manager.

Is the adopted procedure appropriate?

12 When the proceeding was filed, Mr Low sought leave to proceed by way of an originating application. 6 I granted permission on 7 September 2010. That meant that the issues would be determined based on affidavit evidence. Save for

exceptional circumstances, there is no cross-examination of witnesses on an application of that type. 7

13 While no steps were taken to set aside my order, Ms Cull QC, for Galway, supported by Mr Goodall, for Galway Auckland, submitted that the originating application procedure was inappropriate to resolve any aspects of the proceeding that involved contested facts. One example given was whether there were good commercial reasons for entering into the management and secretarial services agreements.

14 I accept Ms Cull's submission, in part. To the extent that the Court's inquiry is into the validity of the rules governing the Body Corporate, legal questions arise which can be determined by reference to the Act (including the default rules) and the actual rules adopted by the Body Corporate. However, if the enforceability of either agreement turned on questions of fact and degree that would need to be determined after hearing witnesses, it would be open for the Court to decline to provide any declaration on those issues, as a matter of discretion. 8

The structure of the Westin development

15 To understand the context in which the present application is brought, it is necessary to explain the structures that were put in place to enable the hotel business to operate.

16 The Westin Hotel is situated on the Viaduct Basin, in central Auckland. The freehold title to the land is owned by Viaduct Harbour Holdings Ltd (Viaduct). On 22 November 2006, that company entered into a ground lease of the land to Melview. Once it had obtained that lease, Melview was able to construct the hotel complex. When the unit plan was deposited, 9 Melview obtained a stratum leasehold estate in respect of each of the units and became the Body Corporate. 10

17 Melview entered into a sub-lease of each residential unit in favour of Lighter Quay (another McKenna entity) entitling that company to make the units available for use by a hotel operator. In turn, Lighter Quay granted rights in favour of Westin Hotel Management LP, to use the premises under the “Westin” hotel brand. In return, Lighter Quay managed the hotel business.

18 Melview set about selling most of the leasehold interests in the units to individual investors, subject to the lease in favour of Lighter Quay. For present purposes, I assume (in favour of Galway and Galway Auckland) that before the investors decided to buy the units each obtained appropriate independent legal advice and had the opportunity to view the rules, the two challenged agreements and any other relevant documents that might have affected the interest each was acquiring.

19 There are 173 residential units in the Westin Hotel. Of those, Mr Low and his co-applicants own 114, or 66%. Melview retained ownership of 16 of the residential units, as well as “management units”, comprising facilities such as the hotel restaurant, gymnasium, spa and reception areas. In terms of unit entitlement, 11 Mr Low and his co-applicants control 55%, while Melview's combined ownership of residential and management units represents 24.2%.

The scheme of the Act

20 The 1972 Act has been described as a “statutory moulding” of the Torrens system of land registration to provide for the ownership of flats and business premises. 12 The three purposes that can be gleaned from the Long Title to the Act are: 13

• a) Facilitation of the subdivision of land into units that are to be owned by individual proprietors;

• b) Facilitation of its subdivision into common property that is to be owned by all unit proprietors as tenants in common; and

• c) Provision for the use and management of the units and...