Recent Court decision on s74 schemes and cost apportionment

Rainey Law have advised BCCG of a very recent decision of the Court of Appeal on s74 Schemes (which also touches on the issue of allocation of costs based on who benefits vs utility interest) as follows:

"The Court of Appeal has delivered an important decision on section 74 schemes under the Unit Titles Act [see full document below]. In the Uptown development in Auckland the body corporate was split on the correct allocation of repairs, with a small minority of owners, the owners of commercial units on the ground floor insisting that the scheme of repairs approved by the High Court in September 2017 unfairly allocated them too much of the repair costs due to their relatively high utility interest.

The background to the decision was that the repairs were originally estimated to be $6.3 million and were primarily weather-tightness repairs on the exterior of levels 1 to 3 of the 4 storey complex. The repair bill blew-out to approximately $15 million when it was discovered that the upper floors were inadequately fireproofed.

The body corporate had obtained a section 74 scheme very early in the piece and had it remained in place the owners of levels 1 to 3 would have picked up the vast majority of the cost of the new fire work. It applied to vary the scheme in order to spread the new costs amongst all owners, regardless of where the defects were located, and the High Court approved this.

The owners of the commercial units on the ground floor felt this swung too far in the opposite direction and appealed the decision to the Court of Appeal.

Prior to this decision the Court of Appeal has never overturned a scheme approved by the High Court. The primary reason the Court of Appeal intervened was due to an error in the approach of the High Court. The High Court had found that, where a body corporate undertakes work (as it must do under section 138), there is a presumption that the cost of the work will be allocated by utility interest. That presumption may be rebutted if a dissident owner proves that it is unfair to allocate that way. The Court of Appeal found that this presumption was incorrect, that purchasers of units in body corporates must be taken to understand that money raised for repairs may be allocated, in appropriate circumstances, to the owners that have substantially benefited from the repairs.

In the circumstances of the Uptown complex the Court of Appeal did however agree that repair of the fire defects had a benefit to all owners and it was fair to spread the burden amongst all owners.

The residential owners had the benefit of a Crown contribution from the FAP. In a win for the commercial owners the Court of Appeal found that the costs should be allocated after the FAP money was deducted, effectively exposing them to a share of costs reduced by several millions of dollars."

Court of Appeal Decision document

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