A body corporate facing significant remedial works should consider a range of options before making a decision how to proceed. One incentive towards a complete reclad is the recommendation, in the Select Committee report issued this month on the new interest limitation tax rules¹, that leaky homes that have been substantially (at least 75%) re-clad should be excluded from the new interest deductibility rules. However, remediating the issues may not always be the best option for a body corporate with case law suggesting consideration of alternative options².

Remediation projects often over run in both time and cost, with some recent examples going over budget by 10s of millions of dollars. One option is the redevelopment of the site with collapsing of the unit title structure and sale of the land and airspace. This may be an attractive commercial option particularly where there is significant value in the site as a whole and/or the costs of repair are uneconomic. There have been a number of successful applications to the court to achieve this,³ including the recent case High Court case Body Corporate 210106 v Respondents (the Zone Apartments).⁴  

In Body Corporate 210106 v Respondents, the High Court considered an application by the body corporate of a 12-unit residential complex located in Edinburgh Street in Auckland which had weathertightness defects that were estimated to cost between $7.5 and $8.5 million to repair. This was considered cost prohibitive, and the Body Corporate had passed a resolution to sell the complex as a redevelopment opportunity. As such, the application sought two orders: firstly, for the cancellation of the unit plan,⁵ and second, for the sale of the land and division of the proceeds between the owners.⁶ 

Cancellation of the unit title plan

Before granting an order to cancel a unit title plan, the court must consider whether it is just and equitable to do so having regard to the rights and interests of all affected parties. The court highlighted that the body corporate was unable to remedy the weathertightness defects and, as a result, could not perform its duties of repair and maintenance under the Unit Titles Act. Without remediation, the units were rendered unsafe for occupation and no longer fit for purpose as residential accommodation. 

The court then considered the unit owners’ position. The majority of owners were in favour of the sale. None of the owners formally opposed the application or provided an alternative to remedy the defects. The court was satisfied on the circumstances that it was just and equitable the body corporate be dissolved, and the unit title plan be cancelled.

Order for sale of the land

In determining whether an order for sale of land is appropriate, the court must consider certain matters⁷ including the hardship that would be caused to the body corporate by the refusal of the order in comparison with the hardship that would be caused to the owners. 

The court noted in this case that all owners would benefit equally from the order and that the sale price was above market valuation. The property was in a high-value area and the owners would realise the residual value in the land through the sale with proceeds distributed proportionately based on their ownership interests. The court said no respondent identified any hardship that would arise from the making of the order. Instead,  hardship would be caused to the body corporate in refusing the order – “such would amount to requiring unit owners to continue owning a building no longer fit for habitation”. The court was satisfied that it was appropriate to order the sale of the land.

Conclusion

There are a number of procedural steps a body corporate needs to take to achieve a sale of the whole development (in addition to the court application). Any agreement for sale and purchase would need to be structured to accommodate the process of obtaining a cancellation and order of sale. 

However, not only do recent cases illustrate that these are achievable, the option of cashing out of a leaky (or other defective) body corporate development should be given serious consideration (as part of a robust body corporate decision-making process) when faced with significant remedial works.

1. Taxation (Annual Rates for 2021-22, GST, and Remedial Matters) Bill
2. Body Corporate 78693 v Gibson Sheat Shelf Company No. 28 Ltd [2020] NZHC 825
3. In circumstances where there is not otherwise unanimous agreement of owners (which would not require a Court application)
4. Body Corporate 210106 v Respondents As Set Out in Schedule 1 to Application [2022] NZHC 255
5. Under section 188 Unit Titles Act 2010
6. Under section 339(1) of the Property Law Act 2007
7. As set out in section 342 of the Property Law Act 2007