Vermillion Wagener Ltd, Tremont Holdings Ltd, Sage Property Management Ltd and Tmt Amenities Ltd v Body Corporate 401803

• Jurisdiction: New Zealand
• Judge: Harrison J
• Judgment Date: 21 July 2015
• Neutral Citation: [2015] NZCA 313
• Docket Number: CA150/2015
• Court: Court of Appeal
• Date: 21 July 2015

BETWEEN

Vermillion Wagener Limited, Tremont Holdings Limited, Sage Property Management Limited and Tmt amenities limited

Appellants

and

Body Corporate 401803

Respondent

[2015] NZCA 313

Court:

Harrison, Keane and Wylie JJ

CA150/2015

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal against a High Court decision that agreements by a Body Corporate (BC) to guarantee and assume primary liability for all rental and other sums payable by third parties to the appellants, as lessor of three units within the complex, were invalid — appellant was the developer of the unit title development — owned a residential unit which was used as a residence by the complex manager — also leased amenities units to a company which agreed to provide the amenities to the BC members — BC had been meeting the rental payments on the units — the manager was related to the director/shareholder of the lessor company — whether the agreements to guarantee and assume liability for the rent were ultra vires the BC's powers — whether s16 Unit Titles Act 1972 (body corporate shall have all such powers as are reasonably necessary to enable it to carry out the duties imposed on it by this Act) provided authority for entry into the agreements.

Counsel:

T J Rainey and J P Wood for Appellants

S C Price and I Rosic for Respondent

• A The appeal is dismissed.

• B The appellants must pay the respondent costs for a standard appeal on a band A basis together with usual disbursements.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Harrison J)

Introduction

1 The appellants (collectively Vermillion) are the developer and related companies of a 106unit title residential development in St Lukes, Auckland, known as the Tremont complex. The respondent, Body Corporate 401803, is the Body Corporate.

2 At issue on this appeal from a judgment of Muir J in the High Court 1 is the validity of agreements by the Body Corporate to guarantee and assume primary liability for all rental and other sums payable by third parties to Vermillion Wagener Ltd, and its related and successor company Tremont Holdings Ltd, as lessor of three units within the complex — one being a residential unit occupied by the complex manager, Sage Property Management Ltd (Sage) (the apartment lease); the other two units comprising a swimming pool, tennis courts, gymnasium and other amenities (the amenities lease).

3 In the period between June 2008 and June 2013 the Body Corporate paid Vermillion and Tremont about $1.32 million under the agreements but has since suspended payments pending the result of this litigation.

4 The Body Corporate applied for summary judgment on its claim that both guarantees, and a related guarantee obligation imposed by the management agreement with Sage, were void. 2 Muir J held that the Body Corporate had no power to guarantee the apartment lease in the absence of an express duty under the Unit Titles Act 1972 (the UTA 1972), which was then in force, or the amended rules, to secure accommodation for the building manager. 3 The Judge also held that the Body Corporate had no separate duty to provide the amenities and thus no power to guarantee the amenities lease. 4 As Vermillion had no arguable defence to the Body Corporate's claim, summary judgment was entered. Vermillion now appeals.

5 The Body Corporate has not cross-appealed against Muir J's dismissal of its application for summary judgment on the alternative ground that the agreements

were harsh and unconscionable and should be terminated under's 140 of the Unit Titles Act 2010, which applied to that claim

Background

6 In 2002 Vermillion Wagener Ltd was incorporated for the purpose of developing the Tremont complex. Its sole director and majority shareholder is Geoffrey Hodgkinson. Between 2004 and 2007 Vermillion obtained resource consents to construct the complex and amenities which it subsequently developed. Vermillion was the initial owner of all the units within the complex on completion.

7 Before us Mr Rainey emphasised evidence from Mr Hodgkinson that Vermillion applied for a separate resource consent for the proposed pool and tennis court on the ground that they would enhance the quality of life of the unit owners and occupiers. As part of its application Vermillion proposed to amend the Body Corporate rules, and later did so, to include conditions for the use and enjoyment of the tennis court and swimming pool by unit owners and occupiers.

8 Mr Rainey also emphasised that the complex was designed to have a resident building manager to enforce the rules and operate as a point of contact for any complaints; and that the manager's residence was specified in the resource consent application as being located adjacent to the amenities area.

9 On 3 June 2008 the Body Corporate, of which Vermillion was the sole member, resolved to amend the default operational rules under the UTA 1972. Amended rules were approved accordingly. Mr Hodgkinson signed the minutes and the notice of change of rules on behalf of both Vermillion and the Body Corporate. Immediately after the rules were amended, Vermillion and the Body Corporate entered into the three impugned agreements.

10 In August 2008 Mr Hodgkinson incorporated Tremont, which in November 2008 bought the units in issue — the manager's and the amenities units — and is now the lessor of all three to the Body Corporate. Mr Hodgkinson's partner, Lilly Zhang, owns 50 per cent of the shares in Sage, which manages the complex. Mr Rainey does not suggest that the rule changes and agreements were arm's length transactions. It is plain that Mr Hodgkinson controlled all parties and stood to benefit from the Body Corporate's guarantees through his corporate shareholding in the lessors.

Agreements

11 The three agreements — the apartment lease, the management agreement and the amenities lease — require a little more scrutiny.

(a) Apartment lease

12 Vermillion as lessor, Sage as lessee and the Body Corporate as guarantor were the original parties to the apartment lease for unit 123, a three bedroom residence. Tremont, as assignee of Vermillion's interest, is now the lessor. The initial term was for 10 years and six working days, with two rights of renewal each for further terms of 10 years exercisable by Sage. The Body Corporate has no power to terminate the guarantee, which continues in force even if the management agreement is terminated for any reason at all.

13 The guarantee is found in Schedule 3 of the lease which imposes liability on the Body Corporate for, among other things, all the manager's obligations including payment of rent. Clause 7 of the lease is in these unusual terms, as Muir J noted: 5

To the fullest extent permitted by the law, the Guarantor waives such of the rights of the guarantor as surety or indemnifier (legal, equitable, statutory or otherwise) it may at any time be inconsistent with any of the provisions of this guarantee and indemnity. Furthermore the Guarantor shall not take any proceedings or action against the Lessee arising in any way in relation to this lease without the prior written consent of the Lessor which the Lessor may refuse in its complete discretion.

14 Mr Price referred to the express prohibition imposed by the guarantee on the Body Corporate from exercising a guarantor's right of subrogation without the lessor's consent. The Body Corporate is, to all intents and purposes, the solely liable party with no effective rights of recourse against Sage in the event of default. Tremont adopted the practice of invoicing the Body Corporate direct for rental rather than first seeking payment from Sage.

15 The initial rental for the apartment lease was set at $35,000 per annum plus GST. Additionally, the Body Corporate was required to pay what were called tenancy costs including maintenance and repair costs for the unit, utility charges due and unpaid by Sage, body corporate levies, premia due on contents and loss of rent insurance policies and any taxation liability other than for income tax.

16 At the time of the hearing in the High Court in December 2014 the gross amount paid by the Body Corporate to Tremont for the manager's apartment, including outgoings, exceeded $1,000 weekly. Based on evidence of average weekly rents payable for other units in the complex, Muir J was satisfied that this rate was approximately 50 per cent over market. 6

(b) Management agreement

17 The management agreement is for a term of 30 years. The management fee, originally fixed at $53,000 annually plus GST is reviewable annually. Clause 3.4 provides:

As part of the Resource Consent issued for the Tremont Apartments, which requires compliance on a continuing basis, the Building Manager is required via an authorised representative to occupy the Manager's Unit in the Building. This will be a residential Unit leased to the Building Manager for that purpose. The Body Corporate shall unconditionally and irrevocably guarantee the lessee's obligations under that lease. Any breach by the Building Manager of the lessee's obligations in that lease shall not be a breach of this agreement. The Unit will have special facilities inbuilt allowing the monitoring of fire detection and security systems which will be necessary for the safe operation and supervision of the building. The Building Manager's authorised representative must be able to conduct the day to day administration duties of the Building Manager in terms of this agreement. The Body Corporate shall pay for local and regional council rates and the Body Corporate levy for the Manager's Unit and shall pay the Building Manager an appropriate allowance for mobile telephone and office phone lines, gas, electricity and water utility services.

(Emphasis added.)

(c) Amenities lease and deed

18 Vermillion as lessor, TMT Amenities Ltd as lessee and the Body Corporate were the parties to the amenities lease. Again by virtue of...