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Vermillion Wagener Limited v Body Corporate 401803 [2015] NZCA 313 (21 July 2015)

Last Updated: 31 July 2015

IN THE COURT OF APPEAL OF NEW ZEALAND
BETWEEN
 Appellants
AND
 Respondent
Hearing:
28 April 2015
Court:
Harrison, Keane and Wylie JJ
Counsel:
T J Rainey and J P Wood for Appellants S C Price and I Rosic for Respondent
Judgment:


JUDGMENT OF THE COURT

  1. The appeal is dismissed.
  2. The appellants must pay the respondent costs for a standard appeal on a band A basis together with usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Harrison J)

Introduction

[1] The appellants (collectively Vermillion) are the developer and related companies of a 106 unit 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 an assignment from Vermillion, Tremont is now the lessor. The amenities comprise the swimming pool, spa and sauna, gymnasium, recreation room and a tennis court. As Mr Price noted, amenities such as these would ordinarily form part of the common property. However, this development was structured so that the amenities are privately owned units – owned first by Vermillion and then by Tremont.
[19] The amenities lease guarantee is for a term of 999 years and six working days. The initial rental was $100,000, reviewable every second year to the higher of market rent, CPI increased rent or rent due and payable in the preceding 12 months. Additionally, the lessee is obliged to pay all outgoings including Body Corporate levies, insure the premises, and contribute an amount equal to two per cent of the rental annually towards repair, maintenance and replacement of the lessor’s fixtures.
[20] At the same time the same parties signed what is known as the amenities deed, whereby Vermillion and TMT Amenities Ltd agreed with the Body Corporate to allow unit owners access to and use of the amenities.

Issue

[21] The issue in this case is straightforward: whether the Body Corporate had the legal power to guarantee obligations assumed by third parties under two separate leases; or, more particularly as Mr Price put it, whether it was reasonably necessary for the Body Corporate when performing its duties under the UTA 1972, or the rules, to enter into non-subrogated long term obligations to pay rental and other charges due under the two leases.
[22] The Body Corporate’s powers and duties are covered by discrete provisions of the UTA 1972 and its rules; thus the issue will be determined by applying settled principles of statutory and contractual interpretation.

Decision

(a) Apartment lease and management agreement

[23] There is no question that, on the application for summary judgment, Muir J correctly required the Body Corporate to establish that there is no real question to be tried.[7] Mr Rainey submitted that Muir J erred in finding that the Body Corporate had discharged that burden when finding that clause 3.4 of the management agreement and the guarantee of the apartment lease were ultra vires. He advanced these main arguments in support:
[24] As is apparent from this summary, the foundation for Mr Rainey’s submission was the existence of three related powers under the Body Corporate’s rules and, to a lesser extent, a statutory duty. We shall address the powers ground first, bearing in mind that, as Mr Price emphasised, a Body Corporate is a creature of statute and its powers and duties are tightly prescribed by the unit titles legislation. The Body Corporate has three relevant sources of power – (a) express powers under the provisions of the UTA 1972; (b) express powers under the rules; and (c) derived powers under s 16 of the UTA 1972. Mr Rainey relies on the second and third sources of power to support Vermillion’s appeal against the apartment lease finding.
[25] In the High Court Mr Rainey’s primary submission was based on the second source of power – that in giving the guarantee the Body Corporate exercised a power which was reasonably necessary for the exercise of powers under the default or amended rules to appoint a building manager. We are satisfied that Muir J correctly rejected this submission, characterised by Mr Price as being based upon derivation of a power from a power.[10] Despite Mr Rainey’s disclaimer, we are satisfied that his argument on appeal is the same argument as that advanced in the High Court.
[26] Where a Body Corporate relies on a default rule, that rule must be valid pursuant to s 37(5) of the UTA 1972 which prohibits the conferring of powers by amending rules “which are not incidental to the performance of the duties or powers imposed upon it by the [UTA 1972]”. The amending rules are only valid to the extent that they confer powers which are incidental to the performance of express statutory powers or duties. It is unnecessary for us to address Mr Price’s submission that the default rules fell foul of s 37(5). That is because we are satisfied that neither the default rules nor the 2008 amended rules upon which Mr Rainey relied[11] conferred a power on the Body Corporate, incidental to an express statutory duty or power, to guarantee the manager’s lease obligations. None of the default rules nor the amended rules could possibly be construed as authorising or obliging the Body Corporate to assume that contractual duty.
[27] Mr Rainey’s argument relied alternatively on the Body Corporate’s express power under its amended rules to enter into the management agreement on such terms as it may approve. In his submission that included a power under cl 3.4 of the management agreement to guarantee the manager’s obligations under the lease. However, cl 3.4 does not assist: if there was no underlying duty to provide a guarantee, an agreement with a third party cannot confer the necessary authority. Without an identifiable duty, cl 3.4 cannot stand.
[28] In essence Mr Rainey relied on three different but complementary and orthodox powers under the Body Corporate’s default or amended rules. All are to similar effect – at their highest they authorised the Body Corporate to employ a manager on such terms and conditions as it saw fit or may approve. But, whatever powers are invoked, Mr Rainey’s argument suffers from the same fundamental omission – a failure to identify the particular duty to which giving a guarantee was incidental or referable when exercising those powers, highlighting the absence of any legal foundation for the Body Corporate’s assumption of the impugned obligation.
[29] In our judgment the existence of a power, whatever its source, is not enough to authorise the Body Corporate to guarantee a third party obligation which has no tenable relationship with an underlying legal duty. As Muir J found,[12] without an identified duty within the rules to secure accommodation for the manager and more importantly, for the Body Corporate to assume a primary obligation to pay the manager’s rent, the guarantee cannot possibly be justified. A power, for example, to accommodate a manager or guarantee its obligations cannot possibly be inherent in the power to engage the manager.
[30] As Muir J found:

[72] ... a power to appoint a building manager does not, in turn, empower the body corporate to enter into any related agreements simply because they are said to be reasonably necessary or incidental to the exercise of that power. Beyond entry into of the management agreement itself the exercise of the power must be anchored to a duty in the Act or the rules.[13]

[31] Mr Rainey advanced less forcefully an alternative argument that:
[32] When advancing its derivative powers argument based on s 16 of the UTA 1972, Vermillion must show that it was exercising a power which was “reasonably necessary to enable it to carry out the duties imposed on it by [the UTA 1972] and by its rules”. Contrary to Mr Rainey’s submission, the question of whether a power is “reasonably necessary” for the statutory purpose is to be determined objectively, and not by what Mr Hodgkinson or his companies subjectively considered necessary.
[33] We reject Mr Rainey’s submission. As we have found, he has failed to identify any duty for which it was reasonably necessary for the Body Corporate to provide accommodation for a building manager or, more particularly, that giving a guarantee was reasonably necessary to performance of any of the duties imposed by ss 15(1)(a), (f) or (h). In the normal course any arrangement between the members of the Body Corporate and the manager to meet or subsidise rental would be met by a contractual provision for reimbursement of the rental component or part of it. It would not be satisfied by an obligation in the name of a guarantee to pay rental to the owner or lessor of the manager’s unit.
[34] Ultimately, Mr Rainey’s arguments fail because as Muir J succinctly explained:

[67] The powers authorised are powers reasonably necessary to carry out identified duties. The body corporate is not empowered to do anything which is reasonably necessary in the context of something it is empowered to do. Everything must ultimately be referable to its duties.

[35] This ground of appeal must fail.

(b) Amenities lease

[36] Mr Rainey submitted that the same analysis applied to Vermillion’s appeal against Muir J’s finding on the guarantee of the amenities lease. He acknowledged, however, that the legal foundation for this argument was more limited. As in the High Court,[14] he accepted that Vermillion cannot rely on a power derived from a duty under s 16.
[37] Instead, Mr Rainey relied upon r 3.4 of the amended rules as the source of the Body Corporate’s power to guarantee performance of the amenities lease. That rule authorised the Body Corporate to:

Enter into any agreement with a Proprietor or an Occupier of any Unit for the provision of amenities or services by it to the Unit or to the Proprietor or Occupier, provided such agreement does not detract from the rights of any other Proprietor or Occupier of any other unit.

[38] In summary, Mr Rainey submitted that r 3.4 empowered the Body Corporate to enter into the amenities deed whereby it agreed to provide all its members with the use of and access to the amenities. The guarantee enabled the Body Corporate members to secure access to the amenities. Thus the guarantee was, Mr Rainey said, part and parcel of the agreement and thus within the express power under amended r 3.4. It was unnecessary to identify a specific duty in the UTA 1972 or in the rules or to establish that the exercise of the power was reasonably necessary to carry out that duty.
[39] Again, this argument does not survive analysis for the same reasons as the challenge to the management lease guarantee failed. But Mr Rainey’s argument does not even reach that threshold. The apparent springboard for his argument, the amenities deed, is of no assistance.
[40] The amenities deed was entered into between Vermillion as owner of the amenities, TMT Amenities Ltd, which leased the amenities, and the Body Corporate. By the amenities deed Vermillion and TMT simply agreed with the Body Corporate to consent to access by its members to and use of the amenities. The amenities deed was not an agreement by which the Body Corporate agreed to provide all its members with access to and use of the amenities. Only Vermillion, subject to TMT’s consent, could grant Body Corporate members access to and use of the amenities.
[41] Also, as Muir J correctly found, r 3.4 is simply an empowering provision, authorising the Body Corporate to enter into an agreement with the owner of a unit to provide amenities or services to Body Corporate members: it does not impose any duties relating to the provision of amenities.[15] Moreover, we agree with Mr Price that r 3.4 could not possibly apply because the guarantee is not an agreement between the Body Corporate and the proprietor or an occupier of any unit for the Body Corporate to provide amenities or services. Rule 3.4 did not empower the Body Corporate to enter into an agreement to procure the services and amenities at issue.
[42] However, even if Mr Rainey had been able to satisfy us that r 3.4 should be interpreted as he submitted, his argument could not possibly succeed. He failed to establish how the Body Corporate’s provision of a guarantee of TMT’s rental and related obligations could be reasonably necessary to enable members of the Body Corporate to secure access to the amenities. A proposition that a guarantee was “part and parcel of the agreement”, and thus within any power given by r 3.4, defies serious consideration.
[43] Mr Rainey also submitted that the terms of the resource consents for the development required Vermillion to put in place the unusual contractual structure for the provision of amenities. Assuming for these purposes that his proposition is correct, it cannot operate as the source of a duty to give a guarantee.
[44] Mr Rainey’s argument that the High Court erred in declaring the amenities lease to be void fails.

Result

[45] The appeal is dismissed.
[46] The appellants must pay the Body Corporate costs for a standard appeal on a band A basis together with usual disbursements.


Solicitors:
Rainey Law, Auckland for Appellants
Minter Ellison Rudd Watts, Auckland for Respondent

[1] Body Corporate 401803 v Vermillion Wagener Ltd [2015] NZHC 285, (2015) 15 NZCPR 758.

[2] The Body Corporate had earlier defended a challenge to its resolutions requiring Tremont to contribute toward the legal costs of the summary judgment application by levies imposed on all unit owners including Tremont: Tremont Holdings Ltd v Body Corporate 401803 [2014] NZHC 988, (2014) 15 NZCPR 525. In a judgment delivered concurrently today (Tremont Holdings Ltd v Body Corporate 401803 [2015] NZCA 314), this Court has dismissed an appeal by Tremont.

[3] At [115] and [122].

[4] At [104] and [105].

[5] At [32].

[6] At [29].

[7] At [58]; Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162.

[8] Unit Titles Act 1972 [UTA 1972], s 15(1)(h).

[9] Default Rule 11(b) in the Second Schedule to the UTA 1972, which is materially the same as amended Rule 11.2.

[10] At [113]–[115].

[11] Default rule 11(b); and amended rules 11.2, 3.6 and 2.10.

[12] At [115].

[13] Body Corporate 396711 v Sentinel Management Ltd [2012] NZHC 1957, (2012) 13 NZCPR 418 at [74].

[14] At [85].

[15] At [90].

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