Review of the Unit Titles Act 1972
IV. Issues
Duties and Functions of Bodies Corporate
The Unit Titles Act currently provides a range of functions and duties of bodies corporate. This part of the discussion document addresses the issue of whether those duties and functions are still appropriate and adequate.
Clarify role of bodies corporate?
The comment is often made, both in New Zealand and overseas, that neither the concept of a "body corporate", nor its role, are well understood. This lack of understanding both reflects, and contributes to, a lack of understanding of:
• the differences between freehold titles and unit titles
• the basic legal features of unit titles and unit developments
• living in unit developments.12
The term "body corporate" is itself not a well known one. Furthermore, the fact that one body corporate is distinguished from all other bodies corporate only by a number may not help matters. Although the Unit Titles Act sets out a list of duties (section 15), and other provisions of the Act itself and the statutory rules describe a number of the functions of bodies corporate, there is no clear statement of the overall role of bodies corporate to provide a framework within which those duties and functions can be understood.
Some ways to help address these issues would be to:
• find a better term than "body corporate" to call the legal body that is made up of and represents owners. Perhaps "community corporation", together with a reference to the chosen name of the development, for example, "The Elysian Fields Community Corporation" could be a better approach
• include a statement of the overall function of bodies corporate in the Act.
Questions
36. Do you agree that the concept "body corporate" and the overall functions of a body corporate are not well understood? Please give reasons for your response.
37. Would some other name be better? Do you like the approach "The ABC Community Corporation", or do you have other suggestions?
38. Is there a place in the Unit Titles Act for a general statement of the function of bodies corporate? If so, what matters might be included in that statement?
Financial planning and reporting
As the size and complexity of developments increases, so does the task of the body corporate. The Auckland Regional Council’s Case for Review (para 4.5.1) commented on this phenomenon in the following way:
One feature common to many medium- and higher-density-housing schemes throughout the world is the importance placed upon the collection and use of funds from owners. The present Act is unable to deal adequately with current issues, which are created by the increased diversity and size of developments. Often the payment and use of financial contributions for the development are an area of significant disharmony between unit holders; individual owners and the body corporate; and the body corporate and the body corporate management.
The Unit Titles Act only deals in general terms with this very important aspect of a body corporate’s functions. In other jurisdictions, considerably more attention is paid to these issues.13
The suggestion here is that bodies corporate should be explicitly required to plan in advance, on at least an annual basis, for regular recurring maintenance and for more significant and "lumpy" expenditure. At the same time, the way in which bodies corporate deal with and are accountable for the moneys they levy should be clarified, particularly by requiring trust accounts for common funds and improved standards of financial reporting to owners.
Any such requirements would, however, need to be proportionate to the size and complexity of a development, and hence to the task of the body corporate.
Questions
39. Do you think there should be a specific requirement for bodies corporate to prepare financial plans and budgets? If so, what matters should be covered by such financial plans and budgets?
40. Should there be a requirement for common funds to be held in trust accounts? Please provide reasons.
41. Are the financial reporting provisions of the Unit Titles Act adequate? If not, how can they be improved?
42. What do you think would be the impact of your answers on unit owners, bodies corporate and on business owners?
Sinking funds
In addition to requiring a fairly steady level of expenditure on regular maintenance items, bodies corporate will also, from time to time, be called upon to spend significant sums of money to meet one-off capital or maintenance items, for example replacement of lifts in a high-rise development, or major unexpected expenses such as a burst sewer main.
If a body corporate needs to raise all the money required to meet such expenditure at once from the owners at the time those owners:
• can be met with unexpected costs that they may have difficulty paying
• could, in effect, be meeting a disproportionate share of the cost of maintaining the development over time because they happened to be the owners when this large item of capital expenditure needs to be made.
A way of addressing these issues is to establish what are known as "sinking funds". Sinking funds are funds raised by regular levies over time that are held to meet significant items of capital expenditure.
Some jurisdictions require bodies corporate to maintain sinking funds. There is no such requirement in New Zealand. Furthermore, even where a body corporate wanted to establish a sinking fund, it could be difficult to do so under the Unit Titles Act as it is currently drafted.
It has been suggested that if sinking funds were mandatory, developments affected by the "leaky buildings" problem would have been in a far better position to cope with the difficult issues raised by the need to effect substantial repairs to address those problems.
Questions
43. Do you think the Unit Titles Act adequately empowers a body corporate to establish a sinking fund?
44. Do you think that the Unit Titles Act could be improved by providing a regime for instituting and maintaining sinking funds for capital works, whether or not it is compulsory to do so? If so, what features should be included in such a regime?
45. Do you think that the Unit Titles Act should require sinking funds to be established by all or some (for example large, complex unit developments) bodies corporate?
46. Do you think the Unit Titles Act should go further and prescribe maintenance obligations, along with the requirement to establish a sinking fund for long-term planned maintenance?
47. Should claims against third parties for the repair or maintenance of common property be made only by the body corporate, or should individual owners also be entitled to make an individual claim against third parties for damage to, or diminution in the value of, their interest in the common property?
Insurance
The Unit Titles Act makes it compulsory for a body corporate to insure all buildings and other significant improvements for full replacement value.
Questions
48. How should the current requirement for compulsory insurance be changed? Are there other issues relating to insurance that you think a review of the Unit Titles Act should take into account such as insurance during staged developments, or who is responsible for an insurance excess?