Apartment owners rebel against deal

Continued from page 17

The contracts were often for long fixed terms of 30 years or more, and the fees paid to the building manager could also be quite generous.

The more generous the fees and the longer the term of the contract, the more the building manager would pay to acquire it and the more money the developer would make from the sale.

The developer would receive this money as an up-front cash payment and the building manager would look to recover the money paid over the term of the contract.

So the money would be indirectly costed into the building’s body corporate levies and passed on to the apartment owners.

Once installed, the building manager would have a business with a reliable income stream for the next 30 years or more and, if they wanted to quit the contract, they could sell it to someone else.

That means building management contracts have a capital value that is related to the income stream they generate and the length of their term.

Although this arrangement has been very lucrative for many developers, it may not have been such a good deal for the people who bought their apartments or any subsequent buyers.

By the time the original apartment buyers settled their purchases and took control of the building’s body corporate, which holds the contract with the building manager on behalf of the owners, the building management contract was often already locked into place.

Many body corporate committees have become concerned that such long-term arrangements mean their building manager has little incentive to perform to a high standard or charge competitive fees, because the contract might not come up for renewal for 30 years or more.

Over the past few years, there has been an increasing trend for bodies corporate to pursue legal remedies to try to get such contracts overturned or modified. The latest action was brought by the body corporate of a mid-rise apartment building on Beaumont St, opposite Victoria Park in central Auckland.

The building’s management contract was originally for a term of 35 years and still had 29 years to run, with the building manager’s fee set at $30,078 plus GST per year, indexed annually to the Consumer Price Index.

The building manager bought the management contract in 2006 for $130,000 plus GST and was seeking to on-sell it to another party for $120,000.

The building’s body corporate applied to the Tenancy Tribunal to have the contract cancelled, on the grounds that it was harsh or unconscionable.

Although the Unit Titles Act gives the tribunal the authority to determine such matters, a problem arose because the act limits the tribunal’s jurisdiction to cases where the amount of money involved is $50,000 or less.

The tribunal’s adjudicator was not sure how the sum involved should be determined in this case.

If an order to cancel the contract was granted, it would not require either party to pay anything, so on that basis, the $50,000 threshold would not be breached.

But if the potential loss in value to the building manager – either the potential sale price of $120,000 or the future income stream for the remainder of its term – was used to calculate the sum involved, then the $50,000 threshold would be breached.

So the adjudicator referred the matter to the High Court to determine how the value of the

This arrangement has been very lucrative for many developers . . .

contract should be calculated, which would in turn decide whether the matter would need to be decided by the Tenancy Tribunal or the courts.

In his reserved decision, Justice Wylie said that the value of the contract was above the Tenancy Tribunal’s $50,000 threshold and therefore the matter would need to go to court for a hearing.

Craig Leishman, the director of Boutique Body Corporates, which is the secretary to the Body Corporate involved, said it was likely the matter would now be taken to the District Court for a decision and he hoped the court would find in their favour.

Leishman said the body corporate’s main concern was the duration of the contract.

‘‘A [nearly] 30-year term, they think it’s onerous,’’ he said.

A similar case, brought by the body corporate of an apartment building on Auckland’s North Shore, had already been successfully argued through the courts, resulting in the building management contract being cancelled.

‘‘The judge in that [case] was unequivocal and said a contract of 30 years is harsh and unconscionable . . . so whether or not that would be supported by another judge, we’ll have to wait and see,’’ he said.

However, the case is unlikely to be the only one to test the validity of such contracts in the new year.

In his judgment, Justice Wylie noted the Beaumont St apartment case was ‘‘something of a test case and that there are a number of proceedings before the [Tenancy] Tribunal which will be affected by the judgment’’.