As high density housing and apartments become increasingly relevant in New Zealand, and many commercial buildings and developments are titled, there has been a growing need for good governance of titled buildings and regulation of managers of legal persons. The Unit Titles (Strengthening Corporate Governance and Other Matters) Amendment Act 2020 (the “Amending Act”) addresses these needs and makes other significant changes to the Unit Titles Act 2010 of unity (the “Law”). The amending law was enacted on May 9, 2022 (to take effect on a date yet to be determined).
In this article, we cover the following impacts of the Amendment Act:
- The revamped pre-contractual disclosure regime and the consequences of non-compliance.
- The new regulation of directors of legal persons and, to a lesser extent, committees of legal persons.
- Increased focus on “large unit title developments” with more than 10 units.
- More realistic parameters around long-term maintenance plans and their funding.
- Proxy farming and other issues that have been missed or overlooked.
The disclosures introduced by the amending law are extensive and, in some cases, broad. Disclosure requirements alone will incentivize homeowners to address issues that are laid bare for potential buyers to see.
In addition to existing disclosure requirements under the law, the amending law adds the following pre-contractual disclosures for all units except “off-plan” units:
Given the impact of these requirements on the unit title market, we expect that more information in the hands of buyers will result in more accurate pricing based on a building’s particular circumstances.
The Amendment Act also allows information to be severed from disclosures if it is protected by privacy, legal privilege, or commercial sensitivity.
Failing to comply with disclosure requirements
The amending law introduces the possibility for a buyer to delay payment or to cancel the contract if the pre-contractual disclosure is late, incomplete, inaccurate or has not been made at all. Currently, under the Act, the buyer can only delay payment if the pre-payment statement or supplemental statement is late.
The buyer can:
- Delay settlement to the 5th business day after a compliant pre-contractual disclosure has been provided;
- Give Seller five business days’ notice to correct a non-compliant disclosure and, if not corrected within that time, give Seller another five business days’ notice, after which time Buyer must give notice within five working days to cancel the contract or make the payment;
- Withdraw from the contract, if the pre-contractual disclosure is provided after the conclusion of the contract;
- Withdraw from the contract, if an incompleteness or inaccuracy in the disclosure has not been noted by the seller due to information that does not exist or, despite reasonable efforts, cannot be found; Where
- Withdraw from the contract, if an incompleteness or inaccuracy significantly reduces the buyer’s benefit under the contract or significantly increases the buyer’s burden.
Regime of the manager of the legal person
Previously unregulated corporate officers and the quality of services they provide is a key feature of the Amendment Act. At a minimum, the commitment of corporate officers should be documented in a written agreement, which should seek key terms that include:
- reporting requirements;
- performance targets and assessments; and
- grounds for termination.
Although these terms are demarcated, there is no rigidity as to the content of these terms. For example, performance targets could be quite strict or quite flexible depending on the wording of the agreement. We recommend that you seek legal advice before entering into a management agreement for your corporation to ensure that it complies with the new regulations and serves your corporation well.
Managers will also be subject to a general code of conduct which obliges managers to perform their services:
- professionally and with honesty, fairness and confidentiality;
- in the best interests of the legal person;
- have disclosed any conflict of interest;
- openly inform the legal person of any significant developments or issues; and
- at competitive prices.
System of the committee of legal persons
The amending law also introduces a whole new obligation for the committees of legal persons to:
- disclose conflicts of interest;
- comply with a code of conduct and act in the best interest of the legal person;
- provide minutes of committee meetings – although it is likely that many committee “meetings” will be informal or conducted through chain emails.
Major single title developments
A new distinction between small and large developments offers a slightly more personalized application. A “large unit title development” has 10 or more main units. The legal person of a major development must:
- hire a legal entity manager, unless 75% of the owners vote against;
- have a long-term maintenance plan covering at least 30 years, noting that the past 20 years can be a fairly high indication of capital maintenance and replacement costs;
- review the long-term maintenance plan at least every three years; and
- engage and consult with a suitably qualified building professional when developing the long-term maintenance plan, unless 75% of owners vote against it.
While the requirement for building managers and professionals will add costs to corporate management, the increased stringency of the regime will provide certainty of long-term value to owners and potential buyers. If the corporations believe that the costs outweigh the benefits, they can opt out by special resolution (75% vote).
Long term maintenance plan
The amending law requires long-term maintenance plans for:
- Cover common property and building elements;
- state the estimated age and lifespan of building components;
- estimate the cost of maintaining and replacing each covered item;
- indicate whether there is a long-term maintenance fund; and
- if there is no long-term maintenance fund, specify the proposed funding for the plan – urging corporations to be realistic about the cost of long-term maintenance work.
Audio/visual links for meetings and proxy voting
The amending law allows:
- meetings of legal persons to be held in person, by audio link and/or by audiovisual link; and
- owners to vote by electronic vote.
While these changes will likely increase attendance at corporate meetings, the changes do not specifically address the problem of a practice called “proxy farming.” Proxy farming occurs when one person collects the proxy votes of many landowners and thereby gains significant voting power.
Our recommendation for corporations experimenting with proxy farming is to encourage as many owners as possible to join meetings electronically (instead of voting by proxy). To do this, corporate committees, or more likely managers, will need to set up audio-visual conferencing allowing less tech-savvy owners to dial in over the phone. Finally, we recommend that you strictly apply the rules relating to proxy voting, for example, if the proxy form has been validly signed and delivered on time.
What was missed or overlooked?
In addition to proxy farming, the following candidates for change are not included in the amending law:
- clarify the distinction between the maintenance responsibilities of the corporation and the owners (see this previous article);
- solutions for buildings requiring major work or demolition (see this previous article); and
- added flexibility for insurance – which is by far the biggest cost borne by unit owners.
The amending law has important practical implications. In particular, the disclosure regime will put more information in the hands of buyers and with this we hope to see:
- less caution with unit titles as a whole;
- more accurate pricing based on individual circumstances; and
- for all parties, fewer surprises when buying and selling units.