Body Corporate 345866 v Russmorr Limited [2014] NZHC 3323 (18 December 2014)

Last Updated: 5 March 2015

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-001051 [2014] NZHC 3323

UNDER	the Declaratory Judgments Act 1908 and the Unit Titles Act 2010
BETWEEN	BODY CORPORATE 345866 First Plaintiff POG MO THON LIMITED Second Plaintiff
AND	RUSSMORR LIMITED Defendant

Hearing:	7-9 April 2014 [Further submissions filed on 20 May 2014]
Counsel:	T J Rainey and J P Wood for the Plaintiffs J L Foster for the Defendant
Judgment:	18 December 2014

_{JUDGMENT OF DUFFY J}

This judgment was delivered by Justice Duffy on 18 December 2014 at 3.00 pm, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

Counsel: J L Foster, Auckland

Solicitors: Rainey Law, Auckland

_{Carson Fox Legal Limited (M L Carson), Auckland}

BODY CORPORATE 345866 and ANOR v RUSSMORR LTD [2014] NZHC 3323 [18 December 2014]

[1] The first plaintiff is the body corporate of a residential unit title development at Whitianga known as Aquasoleil Beach Villas (“Aquasoleil”). The second plaintiff is an owner of one of the units in this development. The defendant (“Russmorr”) is the owner and lessor of one of the other units in the development, which has been referred to at various times as “unit 18” and other times as “unit R” (hereafter referred to as unit R).

[2] The lessee of unit R is a limited liability company known as Aquasoleil Management Limited (“AML”). This company has now been struck off the Companies’ register. However, Russmorr still enjoys the benefits of being lessor of this lease as AML’s performance is guaranteed by the body corporate, which continues to meet AML’s obligations under the lease.

[3] At the time Aquasoleil came into being, the Unit Titles Act 1972 (“1972

Act”) precluded a body corporate from leasing or owning a unit in a unit title development. The developers of some residential unit title developments and the purchasers of units in such developments often saw merit in having an onsite manager. This required provision of residential accommodation for the manager. Because a body corporate could not own or lease a unit, one method of making provision for a manager’s accommodation was for a registered company to either own or lease a unit to accommodate the manager, and for the body corporate to guarantee this company’s performance of its obligations as lessee.

[4] The provision of an onsite manager for Aquasoleil was originally seen to be of benefit for Aquasoleil. However, the body corporate no longer wants to employ a manager for Aquasoleil. The current unit owners see an onsite manager and the accommodation that entails as an unnecessary expense for the body corporate. However, under the terms of the guarantee, the body corporate is obliged to meet AML’s obligations under the lease of unit R for the term of the lease, which has approximately 21 years left to run. The guarantee also obliges the body corporate to meet the costs of refurbishing unit R every 10 years. The lease limits the use of unit R to that of a manager’s residence, so there is no question of the unit being let for another purpose to enable the costs arising from the lease to be met from rental income.

[5] Given the above circumstances, the plaintiffs now seek a way out of the lease and/or the guarantee. Hence, this proceeding in which they challenge the legality of the lease and/or the guarantee and seek declarations of invalidity under the Declaratory Judgments Act 1908. The defendant opposes the making of those declarations; it contends that the arrangements as between it, AML and the body corporate are legal and enforceable. Hence, it is entitled to enjoy the benefit of those arrangements.

Factual background

[6] Aquasoleil was developed by a company called Buffalo Beach Villas Limited (“Buffalo”). On 17 October 2013, Buffalo completed the purchase of the development land and the complex was built between October 2003 and February 2005.

[7] On 19 January 2005, AML was incorporated for the sole purpose of being the lessee of a unit to provide accommodation for a resident manager who would be appointed by the body corporate.

[8] On 25 January 2005, AML adopted a constitution that provided that the 50 shares in AML were to be held on trust by the body corporate secretary for the registered proprietors from time to time of the principal units of Aquasoleil. The number of shares corresponded with the number of principal units. One share was allocated to the proprietor/s of each principal unit. Where there was more than one proprietor, the one share was held jointly. Each share had a right to vote. In this way the unit owners could reach a decision and instruct the trustee. In the absence of instructions from the proprietors/beneficiaries, the trustee/body corporate secretary was given wide powers to act on behalf of, and bind proprietors. Further, it was made explicit that:

The Company shall carry on no other business other than leasing a Unit, for the purpose of providing manager’s accommodation for the manager appointed by the Body Corporate.

[9] In February 2005, Buffalo instructed its solicitor, Howard Morrison, to prepare documents on the basis that the building manager would reside in unit 28.

[10] On 23 February 2005, notice was given of a change to the default body corporate rules. This notice was signed on behalf of Buffalo by Mr Morrison. The amended rules, which Mr Morrison drafted, made it mandatory for the body corporate to procure accommodation for the manager and to pay rent to the proprietor of the manager’s unit.

[11] On 28 April 2005, the unit plan was deposited with Land Information New Zealand (“LINZ”), along with the amended body corporate rules. Separate titles were issued for the units; a body corporate was formed pursuant to s 12 of the

1972 Act and the amended rules were registered. At this time, Buffalo was the original proprietor of all the units.

[12] On 29 April 2005, Russmorr was incorporated. Mr Morrison is the sole director and currently owns 75 per cent of the shares.

[13] On or around May 2005, Buffalo approached Mr Morrison regarding whether the manager could be placed in unit R instead of unit 28. On 12 May 2005, AML resolved to enter into a 30 year lease of unit R upon certain terms and conditions.

The inaugural general meeting

[14] On 13 May 2005, the first body corporate annual general meeting (“AGM”) took place. At this time, Buffalo was still the registered proprietor of all the units. The representative of Buffalo was the sole attendee at the meeting.

[15] At this meeting it was resolved, inter alia, that:

(a) The default body corporate rules are amended as per the rules attached to the minutes;

(b) The body corporate will guarantee the obligations of AML pursuant to a memorandum of lease that was attached to the minutes;

(c) The management agreement with Ross Laerick will be executed and that the body corporate consents to Mr Laerick occupying unit R;

(d) Direct Body Corporate Limited is appointed as the secretary of the body corporate; and

(e) The body corporate acknowledges that the secretary holds all shares in AML.

The lease agreements

[16] On 17 May 2005, AML and Buffalo executed a lease agreement for unit R (“the Buffalo lease”), which the body corporate purported to guarantee (“the Buffalo guarantee”). The lease and the guarantee were contained in the same document. The execution of the Buffalo lease/guarantee was done by a director of Buffalo who signed for that company as lessor. Martin Kells, who was then a director of AML, signed for AML as lessee. The guarantee by the body corporate was executed by Ms Woodhouse as a director of Direct Body Corporate Limited. The common seal of the body corporate was affixed to the guarantee.

[17] On 18 May 2005, a management agreement between the body corporate and a Ross Laverick was signed, with the agreement to commence on 1 June 2005.

[18] The first units to be transferred from Buffalo took place on 24 May 2005. On

27 May 2005, ownership of unit R was transferred from Buffalo to Russmorr.

[19] On 11 July 2005, LINZ refused to register the Buffalo lease because Buffalo was no longer the registered proprietor of unit R.

[20] On 14 July 2005, a second lease relating to unit R was executed. The lease was between Russmorr as lessor and AML as lessee (“the Russmorr lease”). This lease also made provision for the body corporate to guarantee the lessee’s obligations in the same way that the Buffalo lease had done (“the Russmorr guarantee”). The terms of the guarantee included the acknowledgment that the guarantee was given in consideration of Russmorr having entered into the lease with AML at the body corporate’s request. The only difference between the Russmorr lease/guarantee and the earlier Buffalo lease/guarantee was the identity of the lessor.

[21] The agreed statement of facts records that the Russmorr lease/guarantee was executed in the following way. The lease on unit R was executed by Mr Morrison on behalf of Russmorr as lessor. Ms Woodhouse, who was then a director of AML, signed on behalf of AML as the lessee. By then, Direct Body Corporate Limited was the trustee shareholder of the shares in AML. Ms Woodhouse acting as director of Body Corporate Direct Limited signed on behalf of the secretary as guarantor of the lease. She also affixed the seal of the body corporate on the document. The parties’ execution of the lease/guarantee was witnessed by Nicola McKenzie. Mr Morrison acting as solicitor for AML certified the lease as correct for the purposes of the Land Transfer Act 1952.

[22] Since this time, Russmorr has continued to lease unit R to AML, despite that company being de-registered from the Companies Register. Russmorr has received rental payments from the body corporate pursuant to the obligations that the guarantee purportedly places on the body corporate.

[23] The guarantee provisions in the Russmorr lease provide that the body corporate guarantees payment of the annual rental and the lessee’s performance of the covenants in the lease. The body corporate also covenants with the lessor that its obligations cannot be released like a surety, and that the guarantee is authorised by the body corporate rules.

[24] Under the Russmorr lease/guarantee, unit R is leased to AML for a period of

30 years from 20 May 2005 for an annual rental. The lease provides for rent reviews from time to time. The Russmorr lease was registered on the title of unit R on

21 July 2005. The Russmorr lease imposes a duty on the lessee to replace all of the lessor’s fittings and fixtures every 10 years and restricts the use of unit R to a specified permitted use; namely, as “Body Corporate manager’s residence”. In reality, it is the body corporate that is financially responsible for discharging the lessee’s obligations under this lease.

Subsequent events

[25] On 1 August 2005, Crockers Body Corporate Management Limited took over from Direct Body Corporate Limited as the body corporate secretary.

[26] On 12 September 2005, at a body corporate annual general meeting, there were complaints about the Russmorr lease and the terms of that lease.

[27] On 30 September 2005, Buffalo was put into liquidation.

[28] On 26 January 2006, the shares in AML were transferred to the body corporate.

[29] At the AGM on 18 April 2006, the proprietors of the Aquasoleil units expressed further dissatisfaction with the terms of the Russmorr lease. However, it appears that such concerns were not raised again at the AGMs between 2007 and

2011.

[30] AML was struck off the Companies Register on 10 July 2007.

[31] All parties agree that from May 2005, the body corporate has always employed a manager who has been accommodated in unit R.

Causes of action

[32] The plaintiffs’ first cause of action is based upon the ultra vires principle. Here the plaintiffs contend that the body corporate did not have power to guarantee the obligations of AML under the Russmorr Lease as:

(a) The guarantee of the Russmorr lease was not reasonably necessary to enable the body corporate to carry out the duties imposed by the 1972

Act; and

(b) The amended body corporate rules were not adopted in accordance with the 1972 Act.

In the alternative, if the amended rules were validly adopted, or if the body corporate could have entered into the lease/guarantee by virtue of the 1972 Act, the body corporate did not authorise the secretary to guarantee AML’s obligations under the lease.

[33] In the second cause of action, the plaintiffs contend that if it was within the power of the body corporate to guarantee a lease of one of the units, then this specific guarantee was beyond the powers of the body corporate.

[34] The third cause of action claims that it was unlawful for a body corporate under s 37(5) of the 1972 Act to acquire or hold any interest in land, and that the sole purpose of AML was to evade this restriction in the 1972 Act.

[35] The fifth cause of action claims that Russmorr was an accessory to a breach of a fiduciary duty owed by Buffalo as developer to the body corporate. The plaintiffs claim that the fiduciary duty was breached as Buffalo did not disclose the terms of the lease to the incoming members of the body corporate and that Russmorr, in full knowledge of the circumstances of the duty, aided the breach by accepting the lease contract.

[36] The seventh cause of action claims relief under s 140 of the Unit Titles Act

2010 (“2010 Act”).

[37] The fourth and sixth causes of action have been abandoned.

Statement of defence and counterclaim

[38] The defendant denies that the guarantee was ultra vires the powers of the body corporate and says that the guarantee was expressly authorised by the amended rules. The defendant says that the secretary was authorised to enter into the Russmorr lease on behalf of the body corporate by the resolutions of 13 May 2005 and the amended rules.

[39] The defendant denies that the specific terms of the guarantee were outside the powers of the body corporate and that leases for the provision of manager’s accommodation are typically for long periods of time.

[40] The defendant denies that the body corporate acquired an interest in land under s 37(5) of the 1972 Act and that the lessee company, AML, was not a sham.

[41] The defendant denies that Buffalo owed fiduciary duties to the body corporate and says that the fact that the cost of the manager’s accommodation would be funded by the body corporate was disclosed to the incoming members of the body corporate.

[42] The defendant denies that the Russmorr lease was a service contract under s 140 of the 2010 Act and, therefore, relief cannot be claimed under that section.

[43] The defendant also raises three affirmative defences. First, as a defence to the first cause of action, if the Russmorr lease/guarantee was not validly authorised and executed (which is denied), the plaintiffs are estopped from denying it was validly authorised and executed.

[44] As a defence to the fifth cause of action, the defendant says that it arose more than six years before the proceedings were commenced and, therefore, it is barred by the Limitation Act 1950. In the alternative, if the fifth cause of action is not time barred, the plaintiffs are barred by the doctrine of laches.

[45] The defendant puts forward one counterclaim and says that if the Russmorr lease was executed without the authority of the body corporate (which is denied), pursuant to s 233 of the Property Law Act 2007, the defendant purchased the reversion of the Buffalo lease and took the benefit and burden of the Buffalo lease, which included the body corporate’s guarantee.

Plaintiffs’ submissions

[46] The plaintiffs submit that the body corporate had no authority to enter a contract of guarantee under the 1972 Act. Section 16 of the 1972 Act provides that

the body corporate shall have all such powers as are “reasonably necessary” to enable it to carry out the duties imposed by the Act and by the body corporate rules. The plaintiffs say that none of the powers imposed upon it by the Act require the giving of a guarantee for the lease of one of the units as a reasonable necessity.

[47] The plaintiffs accept that a guarantee may be reasonably necessary for a body corporate to carry out its duties imposed on it by properly amended body corporate rules. However, in this case, the plaintiffs submit that the amended rules were invalid, as the notice of change of rules was executed prior to the body corporate coming into existence. The plaintiffs say that a body corporate must be in existence to amend the rules pursuant to s 37 of the 1972 Act. Whilst the body corporate resolved to amend the rules at the AGM on 13 May 2005, the plaintiffs submit that this resolution does not seek to ratify a previous act and as there was no subsequent notice of change of rules under s 37(7) of the 1972 Act, the attempted amendment of the rules never became effective.

[48] The plaintiffs submit that if the body corporate had power to enter the guarantee, there was no actual or ostensible authority on the part of the secretary to sign the guarantee. The plaintiffs say that the body corporate secretary did not have authority to commit the body corporate to obligations, as a body corporate resolution delegating the power to enter into a guarantee was required.

[49] Further, the use of the common seal was in breach of the rules in schedule 2 of the 1972 Act, therefore, the guarantee was not signed by the body corporate. In the alternative, the plaintiffs say that if the resolutions at the AGM on 13 May 2005 were sufficient to provide the secretary with authority to execute a guarantee, then that authority was for the Buffalo lease and that there was no subsequent resolution to give authority to enter into the guarantee of the later Russmorr lease.

[50] The plaintiffs submit that if the body corporate had power to enter into guarantees pursuant to the 1972 Act or the rules, then this particular lease/guarantee exceeds what is reasonably necessary for the body corporate to carry out its duties. The plaintiffs submit that it has no power under the 1972 Act or the rules to take on an obligation to pay rent on unit R for 30 years. The plaintiffs say that if the body

corporate decided to dispense with a manager, then it could not continue to pay rent as that obligation would not be necessary to enable it to carry out any of its duties. Therefore, the guarantee was not part and parcel of the employment agreement of a building manager.

[51] Under the third cause of action, the plaintiffs submit that the body corporate acquired an interest in land under the terms of the Russmorr lease, which is in breach of s 37(5) of the 1972 Act. Therefore, the transaction is ultra vires and void. The plaintiffs submit that in this case, the body corporate has an interest in land, obtained “via the backdoor” through the incorporation of AML and that the Court should look behind the corporate veil to prevent a deliberate evasion of an existing duty. As AML was established to take an interest that the body corporate could not, AML should be treated as a sham.

[52] In further submissions, the plaintiffs submit that if the transaction is not seen to be a sham, then the body corporate acquired an equitable interest in land as AML entered into the Russmorr lease, funded by the body corporate and for the body corporate’s exclusive benefit. As a consequence, the plaintiffs submit that the body corporate acquired a beneficial or equitable interest in the leasehold estate held by AML by virtue of either a constructive trust or a resulting trust.

[53] Under the fifth cause of action, the plaintiffs submit that Buffalo as the developer owed a fiduciary duty to the body corporate to keep it sufficiently well informed of the transactions that it was committing the body corporate to while it was in control. The plaintiffs say that such a fiduciary position arose due to the imbalance of power between the parties. The plaintiffs submit that Russmorr was an accessory to Buffalo’s breach, as it knew of all the background circumstances behind the Russmorr lease and guarantee.

[54] Under the seventh cause of action, the plaintiffs say that s 140 of the

2010 Act is applicable as the Russmorr lease and guarantee is a service agreement that was entered into during the control period. The plaintiffs submit that the definition of “service contract” must serve the purposes for which ss 139 and 140 were enacted, which was to prevent a developer from disadvantaging the incoming

owners. The plaintiffs submit that as the terms of the lease bind the body corporate to pay a rental that is significantly above market value for a period of 30 years while the lessor can terminate on nine months’ notice, this Court should find that the lease and guarantee is harsh and unconscionable. The plaintiffs ask for the lease and guarantee to be terminated under s 140.

Defendant’s submissions

[55] The defendant raises a number of factual issues. First, it submits that the agreements for sale and purchase of individual units authorised Buffalo to enter into arrangements to provide accommodation for a manager. Secondly, it was intended from the outset that there would be an onsite manager and that was how the development was marketed for sale. Thirdly, it is submitted that the initial annual rental of $18,750 was below market rental for such a unit.

[56] In relation to the first cause of action, the defendant submits that the guarantee of the Russmorr lease was not ultra vires the powers of the body corporate as it was expressly authorised by the amended body corporate rules. The defendant says that the amended rules were validly adopted and were effective either at the time of notification to LINZ on 28 April 2005, or by reason of the AGM resolutions on 13 May 2005. The defendant submits that the resolution made it clear that it was ratifying a change that had already been effected. Further, as an affirmative defence, the body corporate is estopped from denying the validity of the lease, as the body corporate has paid the rent on unit R without question and Russmorr has relied on the assumption that the lease was valid.

[57] In relation to the argument that the lease/guarantee was ultra vires the 1972

Act, the defendant submits that it is clear that a body corporate can engage a manager and that a manager has been described as essential in a large unit development. The defendant here refers to Low v Body Corporate 384911 [2011] 2

NZLR 263 (HC) at [35]. The defendant submits that a long-term lease was a reasonable necessity to ensure that the body corporate fulfilled the representations that the developer made to the purchasers that there would be an onsite manager.

[58] As a defence to the second cause of action, the defendant submits that the guarantee was within the powers of the body corporate and that leases to provide accommodation to managers are typically for terms of 10 to 30 years. Further, the defendant says that it would be impractical to have a lease that terminated with each management agreement.

[59] Under the third cause of action, the defendant submits that the corporate structure adopted for the lease arrangement was not an abuse of the doctrine of separate legal personalities. The defendant says that the arrangements were transparent and fulfil an appropriate commercial purpose.

[60] In response to the plaintiffs’ further submissions on an equitable interest in land, the defendant submits that it understood the question from the bench (which prompted the further submissions) to be whether the equitable principle of subrogation meant that the body corporate acquired an equitable interest in land. The defendant submits that subrogation would not be appropriate in the present case.

[61] The defendant submits that the body corporate had contractual rights under the guarantee but they do not of themselves constitute an interest in land. Further, the defendant says that a resulting trust, as argued by the plaintiffs, has no application as the body corporate never had a legal interest that it transferred to another entity.

[62] Under the fifth cause of action, the defendant submits that the only fiduciary duty which was owed by Buffalo to the body corporate was a duty not to profit and that there is no allegation that Buffalo profited from the terms of the lease. As a defence, the defendant submits either that this cause of action arose more than six years before the proceedings were commenced and therefore is barred by the Limitation Act 1950, or that the plaintiffs are barred by the doctrine of laches.

[63] Under the seventh cause of action, the defendant acknowledges that the Buffalo lease was entered into during the control period and submits that it could be said that the Russmorr lease was also entered into within the control period, although

it was in fact executed outside the control period. The defendant submits that both leases are not service contracts and that the terms are not harsh or unconscionable.

[64] As regards the counterclaim, the defendant argues that when it acquired unit R, it acquired Buffalo’s reversionary expectant in the Buffalo lease/guarantee. Further, that any question of the surrender of that lease/guarantee hangs on the Russmorr lease/guarantee being legal and effective. If the later lease is invalid, then the former lease remains alive and enforceable against the body corporate.

Analysis

Was the Russmorr guarantee validly authorised and executed?

[65] Russmorr contends that the Russmorr guarantee was validly authorised and executed by the body corporate. The key questions are whether: (a) the body corporate had the power to give this guarantee; (b) if it did, whether in the circumstances the body corporate authorised the giving of the guarantee; and (c) if it did, whether the guarantee was properly executed by the body corporate.

[66] I shall consider the second and third questions first. It is only if they are favourably answered for Russmorr that the first question becomes relevant.

[67] The body corporate took no formal steps to authorise the giving of the Russmorr guarantee. This guarantee appears to have been a response to the predicament that arose from LINZ’s refusal to register the Buffalo lease/guarantee.

[68] Mr Morrison was the solicitor for Buffalo and he was the sole director of Russmorr. He knew that the body corporate had taken steps which, in his view, amounted to the body corporate authorising a guarantee of the Buffalo lease. However, by 14 July 2005, Russmorr had purchased unit R and became the registered owner of unit R. So Mr Morrison prepared a new lease on the same terms as the Buffalo lease/guarantee but with Russmorr as lessor. He signed it on behalf of Russmorr, Ms Woodhouse signed on behalf of the lessee AML and on behalf of the

body corporate secretary. The seal of the body corporate was affixed to the document. Mr Morrison as solicitor for AML certified the lease as correct.

[69] Against this background, Russmorr argues that the 13 May 2005 resolution for the body corporate to agree to the Buffalo lease/guarantee can provide the authority for the body corporate to agree to the Russmorr lease/guarantee and, in addition, the amended body corporate rules authorised such a guarantee.

[70] Russmorr’s argument overlooks the fact that the resolution of 13 May 2005 expressly referred to the Buffalo lease/guarantee and on 17 May 2005 the body corporate was a party to the execution of the Buffalo lease/guarantee. Thus, this is not a case where one of the parties to an authorised lease was simply substituted with another. Here, the authority given by the resolution was carried into action with the execution of the Buffalo lease/guarantee. Once this event occurred, the authority given by that resolution was spent. It cannot be relied upon to authorise the body corporate’s agreement to a second lease/guarantee.

[71] Furthermore, the authority given by the 13 May 2005 resolution cannot be applied to the Russmorr lease/guarantee as it was a separate legal arrangement from the Buffalo lease/guarantee. The two leases and guarantees involved different parties. Each arose on a different occasion; one was capable of registration, whereas the other was not.

[72] A contract to lease must be in writing and signed by the party to be charged with the lease: see s 49A(1) of the Property Law Act 1952 (which was then in force) and s 2 of the Contracts Enforcement Act 1956. A lease instrument must be certain as to the parties to the lease: see s 115(2) of the Land Transfer Act. The need for certainty of terms was spelt out by Tipping J in T A Dellaca Ltd v PDL Industries Ltd [1992] 3 NZLR 88 (HC) at 97-98:

Section 2(2) of the [Contracts Enforcement] Act provides that a contract such as that in issue in the present case shall not be enforceable by action unless the contract or some memorandum or note thereof is in writing and is signed by the party to be charged therewith or by some other person lawfully authorised by him. It is beyond doubt that the contract, memorandum or note must contain all the material terms of the contract sought to be enforced.

[73] I am satisfied, therefore, that the resolution of 13 May 2005 cannot be relied upon as authority from the body corporate for its entering into the Russmorr lease/guarantee.

[74] For the following reasons, I have formed the view that the Russmorr lease/guarantee cannot bind the body corporate. The parties do not agree on whether the amended body corporate rules are valid. However, for present purposes, their validity is irrelevant. Neither the default rules under the 1972 Act, nor the amended rules would have allowed for what occurred with the Russmorr guarantee.

[75] First, the body corporate did not formally decide to bind itself to the Russmorr lease/guarantee. There was a body corporate resolution to enter into the Buffalo lease/guarantee on the terms contained in that document, but not with the Russmorr lease/guarantee.

[76] Secondly, there was no body corporate resolution that expressly delegated power to the secretary to enter into the Russmorr lease/guarantee on the body corporate’s behalf. Without that, the secretary had no power to bind the body corporate to the Russmorr lease/guarantee: see r 11(d) of Schedule 2 of the 1972 Act and r 5.4(d) of the amended rules.

[77] Thirdly, the secretary had no apparent or ostensible authority to bind the body corporate to the Russmorr lease/guarantee. Apparent authority requires a holding out, or representation made by the principal to a third party: see Dollars & Sense Finance Ltd [2008] NZSC[2008] NZSC 20; , [2008] 2 NZLR 557 at [9]. In this case, I cannot see that the body corporate had held out to Russmorr, as the third party, that the secretary had been delegated the power to enter into the lease/guarantee on behalf of the body corporate. Nothing in the resolutions of the AGM on 13 May 2005, the default rules, or the amended rules suggest such a holding out or representation.

[78] Fourthly, the secretary’s act of signing the Russmorr lease/guarantee was

never ratified by the body corporate.

[79] Lastly, the use of the seal did not bind the body corporate. The 1972 Act is silent as to the effect of the seal: see Body Corporate 206697 v Chen (2009) 10

NZCPR 22 (HC) at [19]-[20]. There is nothing in the amended rules that suggest that the affixation of the seal is capable of binding the body corporate in the absence of a resolution or a delegation of power.

[80] Accordingly, the body corporate never agreed to enter into the terms of the arrangement regarding unit R as provided for in the Russmorr lease/guarantee. Insofar as the body corporate secretary, through the actions of Ms Woodhouse, purported to make the body corporate a party to this arrangement, those actions were done without the requisite authority and so were ultra vires.

[81] Furthermore, based on the above findings, s 2(2) of Contracts Enforcement Act was not complied with. Subsection 2 provides that an enforceable contract under that section must be in writing and be “signed by the party to be charged therewith or by some other person lawfully authorised by him”. The body corporate did not sign the Russmorr lease/guarantee and the secretary was not lawfully authorised to sign on behalf of the body corporate.

Estoppel

[82] The defendant raises as a defence that the body corporate is estopped from denying the validity of the Russmorr lease/guarantee as the defendant has relied on the assumption that this lease/guarantee was validly executed on behalf of the body corporate and that the body corporate has encouraged that assumption by complying with the terms of the lease/guarantee without question for over seven years. Therefore, the defendant claims that it would be unconscionable for the body corporate to now assert that the guarantee was not validly executed.

[83] It is settled that estoppel “cannot operate to make lawful that which is unlawful”: Mansion House Kawau Ltd v Stapleton [1948] NZLR 1015 (SC) at 1019. Likewise, Fry LJ said in British Mutual Banking Co Ltd v Charnwood Forest Railway Co (1887) 18 QBD 714 (CA) at 719 that “no corporate body can be bound

by estoppel to do something beyond their powers”. In this case, the Russmorr guarantee is invalid as it was not lawfully authorised and executed.

[84] Gresson J in Mansion House Kawau Ltd v Stapleton went on to say at 1019:

Where both parties either know, or have the means of knowing, that [the lease] was executed in contravention of a statute, neither will be estopped from proving those facts which render the lease void. The Court itself, upon illegality appearing upon the evidence, must take notice of it.

[85] At all material times, Mr Morrison was the solicitor for Buffalo. He prepared the amended body corporate rules and drafted the Buffalo and Russmorr leases. Therefore, he had personal knowledge of how the amended rules operated and how they differed to the default rules. As solicitor for Buffalo, he can also be taken to have knowledge of the default rules.

[86] Under cross-examination, Mr Morrison admitted that when it came to authorising the execution of the Buffalo lease/guarantee, he would have known that the body corporate was required to have some authority to do this and he accepted that this was the purpose of the resolution at the AGM of 13 May 2005, the minutes of which were drafted by him. However, when it came to the Russmorr lease/guarantee, Mr Morrison was less forthcoming. He accepted that once he knew the Buffalo lease/guarantee could not be registered, there was a choice between proceeding with the unregistered Buffalo lease/guarantee, or entering into a new lease with Russmorr as lessor. When he was asked if he knew that the secretary had no authority to execute the Russmorr lease/guarantee on behalf of the body corporate, rather than answer yes or no, his response was to refer to the amended rules and the Russmorr lease/guarantee being a “simple substitution of the Buffalo” lease/guarantee. He did accept that the only resolution for the body corporate to guarantee a lease of unit R was in relation to the Buffalo lease.

[87] The relevant amended rules provide authority for the body corporate to procure accommodation for a manager:

2.1 Mandatory Powers: The Body Corporate Shall:

...

(f) procure that the Manager’s Unit is used solely for the purposes of

providing the Manager with accommodation;

(g) procure that the Manager is provided with accommodation and pay the Proprietor of the Manager’s Unit the agreed rental together with all amounts due by the Proprietor pursuant to Rule 1.4 of the second schedule.

[88] It is arguable as to whether rule 2.1(f) and (g) authorised the body corporate to guarantee a long running lease of unit R, but they certainly did not authorise the secretary to make that decision for the body corporate. Nor did they provide for the secretary to decide to substitute one lease/guarantee for another, particularly in circumstances where one lease was unregisterable and the other was not, and where there was a different lessor for each lease/guarantee. These circumstances required elections to be made. The secretary had no authority under the rules to make such elections for the body corporate. Insofar as the amended rules may have allowed the body corporate to procure accommodation for a manager and to pay a rental for that accommodation, those rules still required the body corporate to make those decisions. Resolutions to do so were required either by a general meeting of the body corporate, or (where appropriate) by a committee meeting, or by someone holding properly delegated authority. Nothing of this nature applied when it came to the execution of the Russmorr lease/guarantee. No one suggested there was any urgency that required Mr Morrison for Russmorr and Ms Woodhouse for AML and the body corporate to act as they did. Nor were their actions subsequently brought to the attention of the body corporate for ratification. Thus, the body corporate never had the opportunity to turn its mind to the question of whether it wanted to substitute the Russmorr lease/guarantee for the Buffalo lease/guarantee.

[89] I find Mr Morrison’s evidence on the approach that he took to the execution of the Russmorr lease/guarantee unsatisfactory. He admitted that he knew a body corporate resolution was necessary to authorise the body corporate’s execution of the Buffalo lease/guarantee. It is hard to see why he would not also have realised that the same was required for the Russmorr lease/guarantee. Yet when asked if he knew the secretary lacked authority to execute the Russmorr lease/guarantee, he avoided giving a direct yes or no response. I find this to be evasive. As the solicitor who

drafted the amended rules, he would have been aware of their limited scope when it

came to the secretary’s ability to make decisions binding on the body corporate.

[90] Under cross-examination, Mr Morrison offered the explanation that all that he and Ms Woodhouse were doing were giving effect to the bargain that was already struck. This was also covered in his evidence in chief. In short, his view was that Russmorr did not need a registered lease and could have relied instead on the reversionary expectant of the unregistered Buffalo lease, but that AML and the body corporate expected, and so would want a registered lease. In Mr Morrison’s view, the substitution of the Russmorr lease/guarantee for the Buffalo lease/guarantee was merely done to give effect to the “bargain” the others had already obtained regarding unit R. But this explanation does not and cannot explain why the substitution of a registerable lease for an unregisterable lease was not first referred to the body corporate for it to decide. If the substitution was no more than a perfunctory act to ensure the body corporate and AML received what they had already bargained for, I cannot see why the decision to make the substitution was not referred back to the body corporate. Nor can I see why, as an alternative, ratification could not later take place. In the end, I am left in the position where I find that Mr Morrison has failed to provide the Court with a satisfactory answer as to why the Russmorr lease/guarantee was executed in the manner that occurred.

[91] A reasonable solicitor with Mr Morrison’s knowledge would have realised that the secretary had no authority to bind the body corporate to the Russmorr lease/guarantee. This, coupled with Mr Morrison’s failure to provide a satisfactory answer to the question of whether he knew that the secretary lacked authority, are enough to led me to infer that at the time the Russmorr lease/guarantee was executed, he did know that the secretary had no authority to execute it.

[92] As Russmorr’s sole director, Mr Morrison’s knowledge can be attributed to Russmorr. The leading authority on attribution is Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 NZLR 7 (PC) where Lord Hoffmann said at 11:

A company exists because there is a rule (usually in a statute) which says that a persona ficta shall be deemed to exist and to have certain of the

powers, rights and duties of a natural person. But there would be little sense in deeming such a persona ficta to exist unless there were also rules to tell one what acts were to count as acts of the company. It is therefore a necessary part of corporate personality that there should be rules by which acts are attributed to the company. These may be called “the rules of attribution”.

[93] Later at 12, Lord Hoffmann said:

The company's primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations.

[94] Mr Morrison’s knowledge of the default rules and the amended rules of the

body corporate can be attributed to Russmorr in the following ways.

[95] First, as Russmorr’s agent; the law of agency generally imputes the agent’s knowledge to the principal where that knowledge was acquired within the scope of the agency. Secondly, although Lord Hoffmann cautioned at 15 that the test of the “directing mind and will” should not be applied as a rule of attribution in every case, it is an appropriate test to apply here. Mr Morrison as the sole director and one of two shareholders of Russmorr is the “ego and centre of the personality of the corporation”: Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 at 713.

[96] It follows that Russmorr knew that the body corporate had not agreed to the terms of the Russmorr lease/guarantee and that this lease/guarantee was not executed in a manner that conformed to either the default rules or the amended rules. Thus, Russmorr knew, or had the means of knowing that the Russmorr lease/guarantee was not legally authorised and executed. This is a further reason why it cannot now argue estoppel to bind the body corporate to an invalid lease/guarantee.

Consequences of invalidity

[97] I have found that as regards enforcement of the guarantee provisions of the Russmorr lease/guarantee, those are invalid as the body corporate never agreed to those provisions and never executed the Russmorr lease/guarantee. The next question is what effect does this have on the lease between Russmorr and AML?

[98] Russmorr has not referred to the effect of an invalidity finding on the lessee, AML. Russmorr’s submission on the impact of a finding of invalidity of the Russmorr lease/guarantee is as follows:

If the Russmorr lease did not bind the Body Corporate it had no legal effect in relation to the Body Corporate which means the Buffalo Beach Lease remains extant and binding on the Body Corporate.

[99] Thus, Russmorr appears to assume that if the body corporate’s guarantee of the Russmorr lease is found to be invalid and unenforceable, such a finding would render the entire Russmorr lease/guarantee invalid; so the immediate next consideration would be the Buffalo lease/guarantee. However, this overlooks the role of AML as lessee of the Russmorr lease/guarantee.

[100] Russmorr’s oversight may be due to the fact AML is now a struck-off company and, in substance, the only parties who are, and have always been actively involved in this lease/guarantee are Russmorr as lessor and the body corporate as guarantor. However, unless the arrangement is a sham, this commercial reality cannot detract from the legal form of the arrangement, under which AML has its own independent legal role.

[101] Clause 25.1 of the Russmorr lease/guarantee records that Russmorr grants the lease to AML at the request of the body corporate and in consideration of the body corporate guaranteeing AML’s payment of the annual rental and performance of the lease. Thus, the lease of unit R by Russmorr is founded on this guarantee, which has now been found to be invalid. Ordinarily, this could be enough for a Court to find that the entire foundation on which the lease of unit R was based was absent and so the entire lease/guarantee was unenforceable. However, there are other factors at play here.

[102] The body corporate never covenanted that it had authority to agree to the Russmorr lease/guarantee. Under cl 25.2(f), the body corporate covenanted that the guarantee was authorised by the rules of the body corporate. But this provision is not applicable here, as I have found that the body corporate never agreed to enter into the arrangements contained in the Russmorr lease/guarantee. So this is not a question of whether the rules authorised the body corporate to enter into this type of

arrangement. This is a case where the body corporate never turned its mind to the question of whether it should enter into the Russmorr lease/guarantee. That decision was made for it by the ultras vires actions of Ms Woodhouse. Thus, Russmorr cannot rely on this provision to establish that it was entitled to treat the body corporate as being properly authorised to enter into the Russmorr lease/guarantee.

[103] I have already found that Russmorr, as lessor under the Russmorr lease/guarantee: (a) knew that the body corporate had not agreed to the lease/guarantee; and (b) therefore, Russmorr knew the lease/guarantee was not lawfully executed by the body corporate. It follows from this that Russmorr would also have known that: (a) the body corporate had not requested Russmorr to enter into the lease with AML; and (b) could not provide the guarantee in consideration of Russmorr entering into a lease with AML (as was expressed in clause 25.1). These factual conclusions are inferences that logically flow from the legal conclusion that Mr Morrison’s knowledge of the body corporate’s rules as solicitor for Buffalo can be attributed to Russmorr.

[104] As regards the lessee, AML, the sole director of this company, at the time that the Russmorr lease/guarantee was entered into, was Ms Woodhouse. At that time, she was also a director of the company that was the body corporate secretary for Aquasoleil and the shareholder/trustee of the shares in AML. Ms Woodhouse did not give evidence. It is open to me to infer from the evidence that was before me that as the natural person responsible for discharging the role of secretary, Ms Woodhouse would have known that there was no body corporate resolution to agree to the terms of the Russmorr lease/guarantee. She would also have known that neither the default rules, nor the amended rules authorised the body corporate secretary to decide on behalf of the body corporate to enter into arrangements like the Russmorr lease/guarantee.

[105] In terms of the principles of attribution of knowledge to which I have already referred, and given Ms Woodhouse’s role as sole director of AML, the knowledge that Ms Woodhouse had as an officer of the body corporate secretary is attributable to AML.

[106] It follows that at the time of execution, the persons representing, or purporting to represent the parties to the Russmorr lease/guarantee either knew, or had the means of knowing but closed their eyes to the fact, that the guarantee on which the lease was based was invalid. Despite their knowledge, they proceeded to execute this lease/guarantee. This circumstance shows that at the time of execution, Russmorr and AML did not treat cl 25.1 as having the paramountcy that a literal reading of the clause would suggest. Alternatively, Russmorr and AML may not have been overly concerned by the fact that the guarantor of AML’s performance of the lease had no authority to bind itself in the way that the Russmorr lease/guarantee provided for. In any event, both Russmorr and AML entered into the lease/guarantee either knowing, or with the means of knowing that the guarantee given by the body corporate was invalid and unenforceable. Further, given this knowledge, Russmorr and AML could have required, or requested the body corporate to take the appropriate procedural steps to ensure it had the necessary authority to agree to the Russmorr lease/guarantee. This was not done. So, faced with the risk that the Russmorr guarantee was invalid and unenforceable, Mr Morrison for Russmorr and Ms Woodhouse for AML proceeded to execute the Russmorr lease, which Mr Morrison then certified for registration purposes on AML’s behalf. This is enough to satisfy me that they were prepared to agree to the Russmorr lease/guarantee, even if the guarantee by the body corporate was invalid and so unenforceable. Thus, they should now be held to this lease.

[107] There is a further reason why the invalidity of the Russmorr guarantee should not render void the Russmorr lease. Clause 19 of the Russmorr lease provides as follows:

Partial Invalidity:

If any provision of this lease is or becomes invalid or unenforceable, that provision shall be deemed deleted from this lease and such invalidity or unenforceability shall not affect the other provisions of this lease, all of which shall remain in full force and effect to the extent permitted by law, subject to any modifications made necessary by the deletion of the invalid or unenforceable provision.

[108] If the reference in cl 19 to “lease” is read as referring to all the parts of the

lease, including the guarantee contained therein, it would follow that pursuant to

clause 19, a finding that the guarantee was invalid would not affect the other provisions of the lease. If the reference to “lease” in cl 19 refers purely to the lease provisions exclusive of the guarantee provisions, from such an interpretation it would follow that the guarantee, although contained in the same document, was of separate legal effect and, therefore, severable. Accordingly, any finding of invalidity of the guarantee would not necessarily impact on the lease. Thus, by virtue of cl 19, the lease between Russmorr and AML can remain alive and enforceable, despite the Russmorr guarantee being invalid and of no legal effect.

[109] I realise that in substance the body corporate has always been responsible for performance of the lessee’s obligations under the Russmorr lease/guarantee. However, in response to the plaintiffs’ cause of action alleging that the arrangement was a sham designed to avoid the prohibitions in the 1972 Act against body corporates leasing units, Russmorr argues that the arrangement was not a sham and that it had a commercial purpose. Here, Russmorr invokes the form of the Russmorr lease/guarantee, which is predicated on there being a lessee of unit R that is distinct and legally separate from the body corporate.

[110] The severing of the guarantee from the Russmorr lease leaves the lessor/lessee relationship intact. Russmorr may now find itself with a penniless, struck-off company for a lessee, but that is a commercial consideration, not a legal one. At the time the Russmorr lease/guarantee was executed, AML may have been penniless, as it lacked an income-earning capacity, but in law it had legal personality. It was legally capable of contracting with Russmorr. That it did so as lessee of the Russmorr lease/guarantee warrants legal recognition. Further, the shares of AML were held by the secretary of the body corporate in trust for the registered proprietors of the Aquasoleil units. It was legally open to those persons to choose to fund AML directly. Once AML received funds in this way, it could have discharged its rental obligations under the Russmorr lease/guarantee. No recourse to the guarantee was required. Thus, the arrangement was not legally dependent on the Russmorr lease/guarantee being enforceable as against the body corporate. Provided AML received funds, it could discharge its obligations under the Russmorr lease/guarantee. To fail to recognise AML’s legal role in the arrangement would be to disregard the

form of transaction that the parties had chosen. In other words, to treat the form of the agreement as nothing more than a sham.

[111] I realise that later in 2005, when there was a change in body corporate secretary and Crockers Body Corporate Management Limited took over this role, the shareholding in AML was transferred to the body corporate in 2006. This was wrong. Mr Morrison said that AML’s constitution did not provide for this. It is also open to doubt as to whether the body corporate had authority to hold the shares in AML. However, the later change to the shareholding of AML that was made by Crockers Body Corporate Management Limited cannot affect the form of the arrangement that the parties to the Russmorr lease/guarantee chose to adopt on

14 July 2005.

[112] Thus, Russmorr can hardly complain if the form of the arrangement, including the role of AML as lessee, is recognised when it comes to looking at the consequences of a finding that the body corporate has no legally enforceable role in the arrangement. I see no reason why the invalid guarantee cannot, pursuant to cl 19, be severed from the Russmorr lease.

[113] The findings that I have reached mean that I am satisfied that the body corporate is entitled to the declaration of the invalidity of the Russmorr guarantee that it sought as part of the first cause of action.

The reversionary interest in the Buffalo lease/guarantee

[114] In its counterclaim, Russmorr asserts that it holds the reversionary interest in the Buffalo lease/guarantee and that s 233(1) of the Property Law Act 2007 permits Russmorr to enforce obligations that the body corporate assumed under the Buffalo lease/guarantee. This raises the question of whether the execution of the Russmorr lease/guarantee was effective to surrender the Buffalo lease/guarantee. The body corporate argues that once Russmorr and the other parties entered into the Russmorr lease/guarantee, the Buffalo lease/guarantee was surrendered by operation of law. Russmorr argues that any question of the surrender of the Buffalo lease/guarantee hinges on the Russmorr lease/guarantee being legal and effective.

[115] Surrender by operation of law does not require express words of surrender, but there must be conduct that evidences a mutual intention to determine a lease: see discussion in Benjamin v Wareham Associates (NZ) Ltd (1990) 1 NZ ConvC 190,638 at 190,642. In Bennion and others New Zealand Land Law (2^nd ed, Brookers, Wellington, 2009) at [8.18.04], the authors say that “it is only where there would be an inconsistency between the acceptance of a new lease and continuation of the old

one that the latter needs to be considered surrendered”.

[116] As the purchaser of unit R from Buffalo, Russmorr obtained Buffalo’s reversionary interest in the unregistered Buffalo lease. But then Russmorr entered into the Russmorr lease/guarantee with the knowledge and/or means of knowing that the body corporate had not agreed to the Russmorr lease/guarantee. AML acted in the same manner as Russmorr. If the lessor and lessee of an unregistered lease, the performance of which is guaranteed by a third party, mutually choose to enter into a subsequent lease with knowledge that the guarantee of the subsequent lease is, or even is likely to be invalid; and then register the subsequent lease, this conduct indicates to me that they have mutually chosen the benefits of the subsequent lease over those of the earlier lease. They have also mutually assumed the risk of the guarantee of the second lease being invalid, and in the face of that risk, they have mutually chosen to proceed with the second lease nonetheless. This in turn indicates to me that by this conduct they have mutually agreed to the surrender of the earlier lease. This is a circumstance where the acceptance of the new lease (the Russmorr lease) is inconsistent with the continuation of the Buffalo lease.

[117] Further, the reversionary expectant of the Buffalo lease cannot be extant if Russmorr and AML continue to be bound by the Russmorr lease/guarantee (as I have found), particularly since it is a registered lease and any rights that either Russmorr or AML had in the Buffalo lease/guarantee (Russmorr as holder of the reversionary expectant and AML as lessee) are treated as surrendered on the execution and subsequent registration of the Russmorr lease/guarantee. Nor in such circumstances could Russmorr simply rely on the guarantee given by the body corporate under the Buffalo lease/guarantee for performance of the later lease, as that earlier guarantee can only relate to the lessee’s performance of the Buffalo lease/guarantee.

[118] It follows that Russmorr cannot now rely on the Buffalo lease/guarantee to recover payment of annual rental and to enforce performance of the other covenants in that lease by the body corporate. This finding leaves the registered proprietors of the Aquasoleil units in a position where if they want to continue with a resident manager they can, through providing funds directly to AML so that this company can then discharge its obligations as lessee. On the other hand, if they do not fund AML, Russmorr will have available to it the legal remedies of a lessor whose lessee is in default of payment of rent.

Was the Russmorr lease/guarantee a sham to avoid the prohibition against body corporates leasing units?

[119] Section 37(5) of the 1972 Act prohibited a body corporate from leasing a unit in the unit title development. The parties acknowledge that this is why there was the arrangement whereby AML leased unit R but never paid rent on unit R and never as lessee enjoyed rights of occupation of unit R. The Russmorr lease/guarantee has worked to date, despite AML being a stuck off company from 10 July 2007 because the body corporate has performed AML’s obligations under the Russmorr lease/guarantee. AML’s absence in any regard has had no impact on the performance of the lease/guarantee.

[120] The test for a sham is a rule of general application. In general, a sham occurs where parties have entered into a transaction in a form or manner that does not represent their actual common intention.

[121] The sham rule was concisely expressed by Tipping J in Chen v Butterfield

(1996) 7 NZCLC 261,086 (HC) at 261,090:

A document will be a sham when it is deliberately drawn so as to give the appearance of creating legal consequences different from those which the parties intend. If the difference is inadvertent then, of course, it may be a case for rectification. But for the document to be a sham it is necessary that the parties have in mind legal consequence A but deliberately, for whatever reason, draw their document so as to appear to create legal consequence B. If the parties contract each intending that the liability on one side is to be that of a company and not that of its human members, such an arrangement is neither a sham nor a facade concealing the true facts. The document simply reflects what the parties intend and that is the end of the matter.

[122] The need to look at the true nature of the transaction was stressed by the

Court of Appeal in Attorney-General v Equiticorp Industries Group Ltd [1996] 1

NZLR 528 at 538, citing Richardson J in NZI Bank Ltd v Euro-National Corporation

Ltd [1992] 3 NZLR 528 (CA) at 539:

The legal principles are well settled. First the true nature of a transaction can only be ascertained by careful consideration of the legal arrangements actually entered into and carried out. It is not to be determined by an assessment of the broad substance of the transaction measured by the overall economic consequences to the participants. The forms adopted cannot be dismissed as mere machinery for effecting other purposes. At common law there is no half-way house between sham and characterisation of the transaction according to the true nature of the legal arrangements actually entered into and carried out. A document may be brushed aside if and to the extent that it is a sham in two situations. The first is where the document does not reflect the true agreement between the parties in which case the cloak is removed and recognition is given to their common intentions. The second is where the document was bona fide in inception but the parties have departed from their initial agreement while leaving the original documentation to stand unaltered. Once it is established that a transaction is not a sham its legal effect will be respected.

[123] The arrangement whereby AML leased unit R was a means by which accommodation for a resident manager at Aquasoleil was provided. So long as the registered proprietors wanted a resident manager, the arrangement was capable of working in more than one way. It did work with the body corporate paying the rent for unit R and discharging the lessee’s other obligations. However, the registered proprietors could have chosen to fund AML separately. At the time the arrangement was entered into, the shares in AML were held by the secretary of the body corporate in trust for the registered proprietors. This is what the form of the arrangement provided for. Each unit was allocated a share so the registered proprietors were able to exercise a vote and to give instructions to the shareholding trustee. So the registered proprietors could have exercised their voting rights in AML and in that way made decisions on behalf of AML. The registered proprietors could have raised funds from themselves and paid those funds directly to AML to cover the cost of leasing unit R. They could not be compelled to do so in the way that a body corporate can compel the payment of levies under the 1972 Act or the 2010 Act. But provided the registered proprietors were willing to support the lease of a manager’s unit, there was no legal obstacle to AML discharging its obligations under the Russmorr lease. Payment via the guarantee by the body corporate gave Russmorr

greater security because it would be easier to enforce payment of a debt by the body corporate. However, I do not think this consideration is enough to render AML’s role as being no more than a “façade concealing the true facts”.

[124] In the present case, the body corporate and, therefore, at least a majority of the registered proprietors no longer wish to have a resident manager at Aquasoleil. From their perspective, the arrangement may appear to be drawn to avoid the consequences of s 37(5) of the 1972 Act. However, from the perspective of a body corporate and registered proprietors who did want to provide residential accommodation for a manager, the arrangement can, in principle, be seen to reflect no more than their intention to put in place a legal form, which allows for the provision of this accommodation. In my view, the Russmorr lease/guarantee reflects the true agreement between the parties as to the legal form of their relationship. That finding has had detrimental implications for Russmorr insofar as I have found that the lease between Russmorr and AML can survive the invalidity of the guarantee given by the body corporate. Whilst the parties have acted in a way that left AML to be no more than a straw man, that is not the legal effect of the Russmorr lease/guarantee. It follows that this lease/guarantee is and was not a sham. Thus, the third cause of action must fail.

Accessory liability of Russmorr

[125] In the fifth cause of action, the plaintiffs contend that Russmorr has accessory liability for a breach of fiduciary duty of Buffalo to the body corporate. The allegation here, at [53] of the amended statement of claim, is that at a time when Buffalo controlled the body corporate, it resolved to enter into a lease with Russmorr. The terms of that lease were not disclosed to the incoming members of the body corporate. There are further allegations about how the lease was disadvantageous to the body corporate. However, the allegation that Buffalo controlled the body corporate and resolved to enter into a lease with Russmorr is contrary to the evidence in this case. There is no evidence that Buffalo, having control of the body corporate, resolved to enter into a lease with Russmorr. The evidence is quite different. It is clear that no one resolved to enter into the Russmorr lease/guarantee. The only resolution to enter into a lease is the resolution that the

body corporate made on 13 May 2005 for it to be a party to the Buffalo lease/guarantee. That lease was surrendered on the execution of the Russmorr lease/guarantee on 14 July 2005. It follows that the fifth cause of action must fail.

Other causes of action

[126] The findings that I have made herein make it unnecessary for me to reach determinations on the remaining causes of action or parts thereof.

Result

[127] I make the following declarations:

(a) The secretary had no authority to agree to, and to execute the guarantee by the body corporate of the obligations of AML pursuant to the Russmorr lease/guarantee;

(b) The body corporate is not bound by the terms of the Russmorr lease/guarantee;

(c) As regards the body corporate, the Russmorr lease/guarantee is invalid and unenforceable;

(d) As between Russmorr and AML, the Russmorr lease is valid and enforceable.

[128] The parties have leave to file memoranda as to costs.

Duffy J