Fran O'Sullivan: Body corp moves by Govt long overdue

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Kaye’s website not needed as there’s already evidence for action
The Metropolis, where Fran O'Sullivan sits on the body corporate committee.   Picture / Nick Reed
The Metropolis, where Fran O'Sullivan sits on the body corporate committee. Picture / Nick Reed

It's absurd that Cabinet minister Nikki Kaye is having to launch a website to spotlight the body corporate sector's woes when there is already enough credible evidence to persuade any in-tune Government to move straight to tightening up the Unit Titles Act.

There been enough stories in the Herald over the past year by our redoubtable property editor Anne Gibson - and evidence aplenty from body corporate committees, the tenancy tribunal and investors - to provoke the regulatory bodies and ministries ranging from the Financial Markets Authority, the Ministry of Business, Innovation and Employment and Housing to get off their collective butts and do something about it now.

But instead an Auckland-based MP is having to launch a website to hear about problems people have with the sector which is in charge of large apartment buildings and other properties.

Frankly this is akin to Kaye having to find the evidence first to muster her own Government colleagues to do something (as her press statement effectively says).

But her colleagues Paul Goldsmith (Commerce Minister) or Nick Smith (Housing Minister) could initiate a proper review of the UTA when they return to work in Wellington next week.

What the Cabinet minister is focused on is the lack of easily accessible information about bodies corporate and transparency around the management of bodies corporate. She instances that bodies corporate have no publicly searchable register, unlike other legal entities such as companies.

Nikki Kaye.
Nikki Kaye.

Her comparison with the company regime is the fundamental point and is in line with my own contention that investments in unit titles should be treated as commercial investments, not simply housing.

The main problem with body corporates - where a range of interests can be assembled from all manner of investor classes: home owners, commercial investors, serviced apartment operators, retailers and more - is the Unit Titles Act treats them simply as an exercise in collective living.

The smaller ones may be exactly that with all the dynamics of living in a family: good and bad.

But many of the major apartment blocks which have sprung up around Auckland to accommodate the explosion in residents and serve the interests of offshore investors also have to marry residential and commercial interests.

As always the main issue is governance.

Body corporates are governed by executive committees elected by members (owners). Their competency ranges from highly skilled professionals to the palpably incapable. Frequently one or two workhorses carry the load.

A significant risk for body corporates is the disproportionate exercise of power where a single player can lobby offshore owners and others to get enough proxy votes to either stack committees or vote against the size of levies needed to ensure buildings are maintained. The game goes like this: the player persuades others to give him or her their proxies by committing to keep expenses (levies) down irrespective of the property's condition and making sure to elect body corporate committee members who promise to slash costs to the bone.

This not only limits costs but can depreciate values enabling others to scoop up units at a depressed price rather than taking the measures which would aid the capital appreciation of the investments.

Other jurisdictions - notably Queensland - address this by limiting the number of proxies any one owner can muster for an AGM or EGM.

The second way to combat the undue exercise of power is to make it mandatory for body corporates to not only produce a long-term maintenance plan but to also actually fund the required maintenance work in the year outlined in the plan.

Currently, owners in improperly governed body corporates can find themselves in a situation where a group of owners that don't want to fund their share of the maintenance bills opt to stall the necessary maintenance programme instead of proceeding to timetable.

Other risks can be resolved by having a system where body corporate committee members who act against the interests of the body corporate as a whole should be subject to banning orders akin to the process of banning commercial directors.

Factors leading to this could include commercial incompetence, alienating suppliers, cooking the books and the minutes and involving the body corporate in unnecessary legal bills.

The next major issue is management.

The problem is in badly governed body corporates, large sums of money can flush through bank accounts administered by secretaries with (as it stands) no guarantee that levies reach the appropriate body corporate bank account.

In one recent case which went to the Tenancy Tribunal an adjudicator commented: "Had the same facts arisen in the context of a solicitor's trust account, the inevitable result would have been an inspection of the trust account by the New Zealand Law Society, probably followed by disciplinary action. There appears to be no comparable regulatory regime overseeing trust accounts operated by secretary/managers for bodies corporate.

"There is no regulatory body governing them, no code of conduct and no disciplinary processes available when one abuses their powers. At the same time, though, they are effectively trustees of many millions of dollars of owners' money, not all of which is well managed as this case shows."

Again it is a simple matter to tighten the legislation, and, take submissions via the select committee process rather than wasting time on a website exercise.

As a disclosure: I'm into my third year serving on the committee of the biggest body corporate in New Zealand - the stylish $350 million Metropolis - having been elected to this voluntary committee after a fractious period which began when an earlier committee was ousted in what to all intents and purposes mirrored a boardroom coup.

The great irony of the spill - the first in the Metropolis history - was having to sit through former Shareholders Association head honcho Bruce Shepherd's lecture to the assembled owners as to why the existing committee had to go. Shepherd was there on a proxy - but it wasn't long before four of the team he had promoted had resigned from the new committee, prompting an EGM to elect new members (including me) so there was a quorum to get the job done.

The Metropolis ranks on a par with any of the major corporate towers running up Shortland St or Albert St. This microcosm of Auckland includes a wealthy retired hedge fund owner, major investment gurus, doctors, lawyers, journalists, CEOs, investors of all hues and ethnicities. There are also many offshore owners.

There are about 400 units ranging from residential apartments owned by all manner of investors and residents and a major serviced apartments business to commercial properties ranging from pizza houses, restaurants and other retailers.

Right now the Metropolis body corporate is in a good space. Major progress has been made on a remediation project which would have happened two years ago but for the coup. Values have risen. There are happy campers.

But we are just as vulnerable as any other body corporate in New Zealand to the risks I have identified.

- NZ Herald

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Head of Business for NZME

Fran O'Sullivan has written a weekly column for the Business Herald since its inception in April 1997. In her early journalistic career she was a political journalist in Wellington and subsequently an investigative journalist who broke many major business stories including the first articles that led to the Winebox Inquiry in both NBR and the Sydney Morning Herald. She has specific expertise in relation to China where she has been a frequent visitor since the late 1990s. She is a former Editor of the National Business Review; has twice been awarded Qantas Journalist of the Year and is a multiple winner of the Westpac Financial Journalism Supreme Award.

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