Big changes for bodies corporate and their managers | Dentons

As high-density housing and apartment living becomes increasingly relevant in New Zealand, and many commercial buildings and developments are unit titled, there has been a growing need for good governance of unit titled buildings and regulation of body corporate managers. The Unit Titles (Strengthening Body Corporate Governance and Other Matters) Amendment Act 2020 (the ‘Amendment Act’) responds to these needs and makes significant other changes to the Unit Titles Act 2010 (the ‘Act’). The Amendment Act was passed into law on 9 May 2022 (to take effect on a date yet to be set).

In this article, we cover the following impacts of the Amendment Act:

• The revamped pre-contractual disclosure regime and the consequences of not complying with it.
• The newly introduced regulation of body corporate managers and, to a lesser extent, body corporate committees.
• Stronger focus on ‘large unit title developments’ with more than 10 units.
• More realistic parameters around long-term maintenance plans and their funding.
• Proxy farming and other issues that were missed or left out.

Disclosure regime

The disclosures introduced by the Amendment Act are extensive and, in some instances, broad. The disclosure requirements alone will prompt owners to address issues that are laid bare for prospective purchasers to see.

In addition to the existing disclosure requirements under the Act, the Amendment Act adds the following pre-contract disclosures for all units except ‘off-the-plan’:

Considering the impact of these requirements on the unit title market, our expectation is that greater information in the hands of purchasers will result in more accurate pricing depending on the particular circumstances of a building.

The Amendment Act also allows for information to be redacted from disclosures if protected by privacy, legal privilege or commercial sensitivity.

Not complying with disclosure requirements

The Amendment Act introduces the ability for a purchaser to delay settlement or cancel the contract if the pre-contract disclosure is late, incomplete, inaccurate or not made at all. Currently under the Act, the purchaser can only delay settlement where the pre-settlement statement or additional statement is late.

The purchaser may:

• Delay settlement to the 5th working day after a compliant pre-contract disclosure is provided;
• Give the vendor five working days’ notice to fix a non-compliant disclosure and, if not fixed within that time, give the vendor a further five working days’ notice, after which the purchaser must give notice to within five working days to cancel the contract or proceed to settlement;
• Cancel the contract, if the pre-contract disclosure is provided after entering into the contract;
• Cancel the contract, if any incompleteness or inaccuracy in the disclosure was not noted by the vendor due to information not existing or, despite reasonable efforts, not being found; or
• Cancel the contract, if any incompleteness or inaccuracy substantially reduces the purchaser’s benefit under the contract or substantially increases the purchaser’s burden.

Body corporate manager regime

Previously unregulated, body corporate managers and the standard of services that they offer are a key feature of the Amendment Act. At a minimum, the engagement of body corporate managers must be recorded in a written agreement, which must canvass key terms which include:

• reporting requirements;
• performance targets and reviews; and
• grounds for termination.

Despite these terms being canvassed, there is no rigidity as to the content of these terms. For instance, the performance targets could be quite strict or quite soft depending on the drafting of the agreement. We recommend seeking legal advice before entering into a management agreement for your body corporate to ensure that it complies with the new regulations and serves your body corporate well.

Managers will also be subject to a general code of conduct which requires managers to perform their services:

• professionally and with honesty, fairness, and confidentiality;
• in the body corporate’s best interests;
• having disclosed any conflict of interest;
• openly informing the body corporate of any significant development or issue; and
• at competitive prices.

Body corporate committee regime

The Amendment Act also introduces a brand new obligations on body corporate committees to:

• disclose conflicts of interest;
• comply with a code of conduct and act in the best interests of the body corporate;
• provide minutes of committee meetings – even though it is likely that many committee ‘meetings’ are informal or conducted through email chains.

Large unit title developments

A new distinction between small and large developments provides a slight more tailored application. A ‘large unit title development’ has 10 or more principal units. The body corporate of a large development must:

• engage a body corporate manager, unless 75% of owners vote against it;
• have a long-term maintenance plan covering at least 30 years, noting that the last 20 years can be a fairly high-level indication of maintenance and capital replacement costs;
• review the long-term maintenance plan at least every three years; and
• engage and consult an appropriately qualified building professional when developing the long-term maintenance plan, unless 75% of owners vote against it.

While the requirement for managers and building professionals will add cost to body corporate management, the added rigour of the regime will provide certainty of long-term value to owners and prospective purchasers. If bodies corporate believe that the costs outweigh the benefit, they can opt out by special resolution (a 75% vote).

Long-term maintenance plan

The Amendment Act requires long-term maintenance plans to:

• Cover the common property and building elements;
• state the estimated age and life expectancy of building components;
• estimate the cost of maintenance and replacement of each item covered;
• state whether there is a long-term maintenance fund; and
• if there is no long-term maintenance fund, set out the proposed funding for the plan – prompting bodies corporate to be realistic about the cost of long-term maintenance works.

Audio/visual meeting links and proxy voting

The Amendment Act allows:

• body corporate meetings to take place in person, via audio link and/or via audiovisual link; and
• owners to vote by casting an electronic vote.

While these amendments will likely increase voter turnout at body corporate meetings, the changes do not specifically address the problem of a practice called ‘proxy farming’. Proxy farming occurs when one person collects the proxy votes of many owners and therefore gains significant voting power.

Our recommendation to bodies corporate experiencing proxy farming is to encourage as many owners as possible to join meetings by electronic means (instead of voting by proxy). To enable this, body corporate committees, or more likely managers, will need to set up audiovisual conferences which allow less tech savvy owners to dial in by telephone. Lastly, we recommend strictly applying the rules regarding proxy voting, for instance, whether the proxy form was validly signed and delivered on time.

What was missed or left out?

In addition to proxy farming, the following contenders for change do not feature in the Amendment Act:

• clarifying the distinction between the maintenance responsibilities of the body corporate and of owners (see this previous article);
• solutions for buildings requiring significant work or demolition (see this previous article); and
• additional flexibility for insurance – which is by far the biggest cost borne by unit owners.

Conclusion

The Amendment Act has significant practical implications. Most notably, the disclosure regime will put more information in the hands of purchasers and with that we hope to see:

• less caution towards unit titles as a whole;
• more accurate pricing according to individual circumstances; and
• for all parties, less surprises when buying and selling units.