What is putting you off buying an apartment? It is time for the Labour Government to deliver on its election promise to reform the body corporate system

During its election campaign, the Labour Government promised to review and reform the body corporate system. Now that it has secured re-election, how might the new Government tackle this major obstacle to medium- and high-density housing development?

In fact, a wide range of properties use the body corporate system for property management, including many shops, office buildings and factories. In residential property, however, apartments are usually the first thing that comes to mind. Put simply, every apartment owner is a member of the building’s body corporate (Body Corporate). The entire building, including communal areas within the complex, is jointly owned by all members of the Body Corporate collectively.

Many homebuyers would rather buy a more expensive standalone house, even if its location or condition is less than ideal, than a better-located apartment offering better value. One important reason is the headache of the body corporate system.

So what problems can this system create?

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Abuse of proxy voting harms owners’ interests

Andrew Murray, owner of apartment sales agency Apartment Specialists, has no shortage of complaints about the current body corporate system.

In his view, giving every owner in a multi-unit property a vote on body corporate decisions appears highly democratic and fair. However, many owners are investors rather than residents. Landlords who do not attend owners’ meetings often abstain or exercise their rights by appointing someone to vote on their behalf. This gives proxy holders considerable freedom to vote as they wish, sometimes even making decisions that harm the interests of the owners who entrusted them with their votes.

Murray cited serviced apartments run by hotel groups as an example. Hotels often obtain proxies from most owners, giving them complete control of meetings, and then vote in favour of alterations that benefit only the hotel. In another case, a hotel used proxy votes to reject an owner’s proposal to divide a large unit into two smaller ones. Had the proposal been approved, the apartment’s value would have doubled, rising from the original investment of NZ$240,000 to NZ$500,000.

Buyers denied information, deliberately or otherwise

Murray identified another flaw in the current body corporate system: much of the information relating to a body corporate in a property purchase agreement is not disclosed, and some is even concealed. Committee meeting minutes, for example, are often not proactively provided to buyers. Problems with a building that are still being investigated are also generally not disclosed until the investigation has reached a conclusion. “Owners [must] be completely open about any potential problems they know of. But you can imagine that an owner living in Australia might genuinely know nothing about any problems when selling their apartment.”

Murray said the accompanying contractual documents are generally lengthy and tedious, with large amounts of repetitive information that can leave buyers overwhelmed. They also omit much crucial information, such as details of insurance terms, contracts signed in the body corporate’s name, or the building’s long-term maintenance plan.

Although much of the undisclosed information can be included separately in an additional disclosure statement accompanying the purchase agreement, buyers are entitled to request it from the seller and confirm the transaction after signing a settlement agreement. However, unless agreed beforehand, buyers cannot actually cancel the purchase agreement if the additional statement contains something they dislike.

 

Effects on sale prices and time on the market

body corporate arrangements also cause property developers considerable headaches.

Williams Corporation, which specialises in townhouse development, ultimately chose to establish a separate legal structure in advance, charging individual titles and creating a compulsory owners’ management arrangement to replace a unit-title-based body corporate。This makes the homes easier to sell.

“Once homes are listed, market research shows that properties with a body corporate sell for significantly less than those with individual titles, and take considerably more days to sell on average,” explained the company’s managing director, Matthew Horncastle.

 

Legal problems from simply extending individual ownership concepts

Others believe the body corporate system has more serious legislative flaws. They argue that these arise because the Government and administrators have simply applied the traditional concept of individual freehold ownership to collective ownership of housing.

In a paper published in 2017 in the Otago Law Review （Otago Law Review）, Ben France-Hudson noted that legislators often treat unit-title apartment buildings as vertically subdivided private residential land, even though the two are not comparable.

Buying a unit title is akin to buying a shared stake in the building. “Unit-title owners have far fewer rights than owners of individually titled properties. They may be able to do as they please within their own unit, … but beyond that, they must address other issues through a democratic decision-making process.” Ben France-Hudson therefore argued: “Unit-title owners should be regarded as members of a community of owners, rather than individuals who happen to live in this collective setting.” Resolving the many problems of this kind requires more than a new set of open and transparent rules for owners to accept. Owners also need to understand their respective responsibilities, and proactive intervention may be needed to help bodies corporate reduce and resolve disputes.

 

Unable to meet the management needs of high-rise apartments

body corporate arrangements are based on the Unit Titles Act, first enacted in 1972, although it was amended 10 years ago. Yet between 2010 and 2017 alone, the share of new housing in multi-unit buildings in Auckland rose from 15% to 40%. That proportion can be expected to rise further. Outdated legislation designed for townhouses and small apartment buildings clearly cannot meet the needs of high-rise buildings containing a hundred or even several hundred units.

The need for another revision has become urgent. “It has to be revised. People have already assessed it from a research perspective. We need to make this legislation work,” Matthew Horncastle said.

 

Should reform start with National’s proposal?

So what does the Government intend to do?

During the election campaign, Labour said it would review the entire body corporate system during this parliamentary term. The options ahead may be a comprehensive, wide-ranging review or new legislation based on an existing proposal from a National MP.

Several years ago, former National MP Nikki Kaye put forward a bill to amend the Unit Titles Act. However, then Housing Minister Phil Twyford said the Government would not support it. Twyford wanted a more thorough assessment and review of the Act.

During this election campaign, however, when reform of the Unit Titles Act returned to the agenda, then Finance Minister and now Deputy Prime Minister Grant Robertson publicly supported Kaye’s proposal at a meeting in August. He also believed a comprehensive review of the Act was needed first.

 “As often happens in situations like this, there is a dilemma between wanting to take decisive legislative action that genuinely solves the problem, and trying to understand and assess the whole issue comprehensively, which inevitably takes longer,” Robertson said at the time, explaining why body corporate reform remained unresolved.

Now that the new Government is in place, National’s new housing spokesperson Nicola Willis is urging it to move faster and accept National’s proposal as soon as possible. “What I do not want to see is years of delay, because we have already established a working group and undertaken a review, and we already have a basic framework covering the relevant areas,” Willis said.

Real Estate Institute of New Zealand chief executive Bindi Norwell, however, believes that haste can be counterproductive, and that getting the amendments right matters far more than speed alone. The Government has yet to decide who will lead the reforms, or whether to support National’s proposal at its second reading in Parliament. Housing Minister Megan Woods said in a statement, however, that the Government remained committed to reviewing the Unit Titles Act. “Further work is needed to determine what needs reform and how to proceed.”

For industry participants whose interests are directly affected, Murray’s view may reflect a broader consensus: whichever approach the Government chooses, reform must continue to develop as society changes. A review requirement should therefore be written into law to ensure an automatic review and revision every ten years.