Buyer beware: The law is failing to protect Kiwi apartment owners

by Maria Slade / 05 July, 2017
 More people are living in apartments as house prices rise, but are the laws protecting apartment dwellers strong enough? Photo / Getty Images

If you're an apartment owner under the illusion you're protected by the law when things go wrong, you might want to think again. Maria Slade examines the five things apartment buyers and owners need to be aware of.

As skyrocketing house prices increasingly push people towards apartment living, there are concerns the laws governing the multi-unit sector are failing owners.

Proposed reforms of New Zealand’s inadequate apartment legislation are little more than tinkering and go nowhere near far enough, property experts say.

The government is about to introduce changes to the Unit Titles Act, the main law covering our rapidly growing apartment and townhouse market.

The Unit Titles Act, covering important areas of apartment life such as maintenance of buildings and how bodies corporate should operate, has been variously described as opaque, incomplete, and a lame duck.

It currently allows complexes to opt out of putting funds aside for long term maintenance - meaning new owners down the track will face the full cost of big ticket items such as reclads or new roofs.

The planned changes would still allow complexes of under 30 units - over half of all complexes in New Zealand - to opt out of having long term maintenance funds.

The review also fails to provide for licensing of body corporate managers. Virtually every multi-unit complex employs a manager to perform key tasks including the handling of large sums of money, and yet the sector is completely unregulated.

Commentators say without a proper overhaul of the law apartment and townhouse owners face the prospect of escalating numbers of disputes and properties falling into disrepair.

Property lawyer John Greenwood has been lobbying for improved unit titles legislation since the 1990s, and says many of the same challenges persist today.

The Ministry of Business, Innovation and Employment’s (MBIE) latest review merely cherry-picks the issues, he says.  

“It looks after 15 per cent of some of the problems, it doesn’t look after the other 85 per cent, in my view.”

The government is seemingly unwilling to deal with the social aspects of a growing apartment sector, and the piecemeal approach to legislation risks creating more problems.

“It’s staggering to me that we still haven’t had full research on apartment living in New Zealand,” Greenwood says.

“It’s a community living arrangement, a lot of New Zealanders don’t understand that.”

In the face of vague legislation it has been left to the courts to try to fill the regulatory gaps and adjudicate in an increasing number of body corporate disputes, he says.

A tale of two bodies corporate

It’s better to be on the body corporate committee than not because then you can have an influence, says Angela Buckland, the owner of a townhouse in a complex of 41 in Auckland’s Onehunga.

The savvy 28-year-old technical assistant for a large corporate bought her first home three years ago, and has figured out the social implications of intensified living.

She researched her complex’s body corporate thoroughly before purchasing, and was happy with the way it was run - well maintained, with a healthy Long Term Maintenance Fund.

However part of the building’s cladding is plaster, and even though it has no weathertightness issues it still gets tarred with the leaky building brush. Because Angela had done her homework she made sure that was reflected in the price she paid for her townhouse.

“My lawyer told me not to buy it. He said, ‘buy a brick and tile unit’. But I wanted to live centrally and I wanted a reasonable-sized house. Hey, if I’ve got to reclad it I’ve factored that in.”

She and her fellow body corporate members are now at the tricky point of considering whether to invest in a reclad and thus increase the value of their properties, rather than continuing to spend large sums on maintaining the plaster. A third of the committee are opposed and the issue is “very emotional”, she says.

“But let’s look at what’s good for the whole. As a committee we’re not here for our own interests, we’re here for the whole.”

Ingrid Smith works at the same corporate as Buckland and coincidentally owns a townhouse in a similar-sized complex just a couple of streets away from her colleague.

Smith is also alert to what it means to be part of a body corporate, but for more negative reasons than Buckland.

Her complex has undergone a multi-million dollar weathertightness remediation, and the hundreds of hours of work the body corporate chairwoman ended up investing in the project took a heavy emotional toll, Smith says.

Even though the complex pays both its chair and its committee members, all the work fell to the chairwoman.

“The others just weren’t involved, they were basically just on the committee to find out the details.

“I had her Mum having to come and knock on my door telling me I need to get over there, she’s in tears and an absolute mess.”

Smith ended up taking over the administration of the complex’s Facebook page because residents were leaving abusive and bullying comments.

Both Buckland and Smith say there’s no picking and choosing body corporate members for their suitability, and there are no rules on how they should conduct themselves. “Most of them don’t really know what they’re up to, they’re just making it up as they go along. We’re putting our faith in these guys and really they’re just Joe Bloggs off the street,” Smith says.

What apartment owners need to know

Property commentators highlight an extensive litany of problems with the existing Unit Titles Act. Here is a list of five main points apartment buyers and owners should be aware of.  

 

  1. Nowhere to turn if things go wrong

Currently any ordinary person can sit on a body corporate committee as long as they are a unit owner, and there is nowhere for them to go for help or support. Bizarrely, body corporate disputes are heard by the Tenancy Tribunal, and it can cost as much as $3300 to take a case there. Sector experts have called for an apartment Ombudsman or Commissioner to be established, such as exists in Queensland. But MBIE says the Ombudsman model is not a “proportionate” response to the problem. It does however agree that government agencies could take a more joined up approach to the sector, and has proposed reducing Tenancy Tribunal fees. Property lawyer John Greenwood says this is disappointing. “It needs a specialist panel almost to deal with the problems (of the Unit Titles Act) because even my fellow lawyers have different views on the interpretation aspects in the legislation, because it’s poorly drafted,” he said. The Home Owners and Buyers Association of New Zealand (HOBANZ) is not convinced a separate entity is necessary, but it is calling for specialist adjudicators, a unit titles information service, and a searchable online register of bodies corporate containing information such as the operational rules and any Tenancy Tribunal or court decisions involving the body corporate.

 

  1. The funding of long term maintenance

Apartment complexes are required to have a Long Term Maintenance Plan (LTMP), setting out the work which will need to be done on the building going into the future and how much it will cost. But currently LTMPs only have to be for 10 years which many experts say is completely inadequate because the big ticket items such as roofs, cladding and lifts won’t need replacing in that time. Another problem is that the quality of LTMPs varies wildly. In some cases they are prepared by the body corporate committee themselves or the body corporate manager, people who are highly unlikely to have the necessary building knowledge. MBIE proposes extending the timeframe for LTMPs to 30 years, and requiring that they be signed off by an appropriately qualified surveyor, and this is strongly supported by groups such as HOBANZ.

However the commentators say the changes don’t go far enough in making sure complexes build up enough funds to pay for the necessary maintenance. The current Unit Titles Act allows bodies corporate to opt out of putting money into a Long Term Maintenance Fund (LTMF). Property experts say without an adequate LTMF any new owners buying into the building further down the track could be hit with huge costs when expensive work needs doing. MBIE proposes requiring larger complexes to have a LTMF but allowing bodies corporate in complexes of 10-29 units to opt out if they wish. HOBANZ opposes any opt-out clause. “If the government is not prepared to make the requirement for a LTMF mandatory then the resulting liability must be recorded on the balance sheet of the body corporate so current and future owners are aware of their exposure,” it says.

 

  1. Allowing complexes to opt out of the law

At the moment complexes of under 10 units are exempt from having to form a body corporate. Many commentators have expressed concern about this, not least because much of the projected future growth in intensified living will be small apartment and townhouse complexes. The MBIE review itself reports that half of all complexes in New Zealand are under 30 units. Despite this it recommends keeping the status quo for complexes of under 10, and allowing those with fewer than 30 units to opt out of a number of requirements including having a Long Term Maintenance Fund. HOBANZ says differentiating between complexes solely on size ignores a whole raft of other factors, such as types of buildings and and the use of the complex - for example, whether they are owner-occupied, tenanted, or used for short-stay rentals.

 

  1. Lack of regulation of body corporate managers

Virtually every multi-unit complex in the country hires a body corporate manager to do the legwork of running the building. But the current law is completely silent on their role. There is no system of professional registration, no minimum qualifications, no requirement for them to hold any funds they are handling in trust, and no standard management contracts. Yet MBIE has rejected calls to regulate the sector. Its preferred approach is to encourage voluntary self-regulation through industry bodies. HOBANZ says body corporate managers should be licensed, in the same way real estate agents and builders are. One of the big problems it highlights is that managers’ income streams are often not transparent - for example, in addition to earning fees from the body corporate they may also be clipping the ticket on the provision of services such utilities. “If the entire business model is opaque, then a code of conduct and professional organisation… will not fully address the problem,” HOBANZ says.

 

  1. Difficulties in getting information before buying an apartment

At the moment the rules around what information must be given to interested apartment buyers are convoluted and costly, with the essential material provided in three stages. For example, before you sign the sale and purchase agreement there is no requirement to give you any information about the complex’s Long Term Maintenance Plan or insurance cover. There is also no compulsion to tell you whether the building has weathertightness issues, unless there has been a court case or a government claim. In addition the apartment owner can charge the buyer to provide important information such as the body corporate financial statements, and there are reports of some charging as much as $2000. To top it all off there is limited comeback if the information turns out to be incomplete or false. MBIE proposes changing the disclosure regime so that information is provided in one step to a purchaser. HOBANZ agrees it’s appropriate that all the key pre-contract material is given to a prospective buyer upfront, but says updated information should also be provided prior to settlement, as things can change and settlement can often take several months. It also calls for buyers to have a much more extensive list of information, including a copy of the Long Term Maintenance Plan and information about any weathertightness, structural integrity or fire compliance repairs that have been carried out on the building.

 

Maria Slade is the author of Buyer Beware: A New Zealand Home Buyer’s Guide published by Penguin Random.

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