Leaky Homes: Tisch v. Body Corporate 318596

Proposals which force owners in leaky apartments to pay over the odds for water damage to other owners’ apartments do not find favour with the Court of Appeal.

Collective solutions dealing with the cost of repairs to leaky apartments have reached the courts. A collective solution minimises cost and disruption. And work is completed to a uniform standard.

Most apartment buildings are governed by Unit Titles legislation. Apartment owners, like shareholders in a company, get to vote on rules governing operation of their building.

With multi-million dollar costs arising from the repair of a leaky apartment building, owners of individual apartments have been voting on proposals to collectively repair the damage. This enables all the repairs to individual apartments in the building to be done at the same time, by the same contractor. If the court gives approval to the proposal, the cost of the scheme can be imposed on apartment owners who vote against, and also imposed on subsequent purchasers of an affected apartment. Court approval also enables costs to be imposed retrospectively on individual owners who refused to pay up.

Disputes arise over how these costs should be allocated between differing apartment owners. Arguments also arise over who has legal responsibility to maintain specific parts of the building and who will benefit most from particular repairs.

The Unit Titles Act 2010 sees property entitlements in an apartment building divided between a common area (which all owners may use and all must share the cost of maintaining) and owner’s exclusive areas (which are the responsibility of an individual owner).

The court was asked to rule on a two million dollar proposal for repairs to a leaky beachside apartment building in the Bay of Plenty. The building has a “wedding cake” configuration with each floor set back from the floor below. This results in the balcony fronting each of the upper apartments acting as part of the roof for the apartment below. The body corporate rules for the building specify that each balcony is an owner’s exclusive area and each apartment owner is responsible for its maintenance and repair. Repair of the building roof is a collective responsibility.

Eight of the ten Bay of Plenty apartment owners voted in favour of the two million dollar proposal. Owners of the two ground floor apartments voted against. They objected to $498,000 for balcony repairs being allocated as a collective cost. Even with the balcony above acting as a roof for their apartment, balconies were the responsibility of each apartment, they said.

The court said it was important in this case that body corporate rules assigned balcony repair costs to the owner of each individual apartment. It was an unwarranted departure from these rules for a proposal to treat these individual obligations as a collective cost.

The apartment owners were told to rework their proposal

Tisch v. Body Corporate No. 318596 – Court of Appeal (29.08.11)

09.11.002

Tax avoidance: Penny & Hooper v. CIR

Artificially low salaries having the effect of diverting taxable income to other taxpayers on a lower marginal tax rate will be hit as tax avoidance following strong words from the Supreme Court. If the salary is not commercially realistic or not supported by any commercially legitimate reason it is open to attack as tax avoidance.

These comments followed an unsuccessful appeal by two Christchurch orthopaedic surgeons who made use of company structures owned by family trusts to divert income from their medical practice to other family members. At the time, the company marginal tax rate was well below the rate imposed on personal income earned by the surgeons.

The two surgeons worked as salaried employees of their companies. The salaries paid were well below market rates payable to orthopaedic surgeons in private practice.

This re-arrangement of their business affairs resulted in tax savings of some $65,000 over three years for one surgeon, and $103,000 for the other.

The Supreme Court did highlight commercial circumstances where a company’s payment of a lower than market salary could be seen as legitimate and not tax avoidance: In a one-person company where an annual salary amounted to the company’s annual profit; where a company was looking to expand and retained earnings were necessary to support proposed capital expenditure; and in circumstances where a company was facing a liquidity crisis and cash was needed to pay creditors.

Penny & Hooper v. CIR – Supreme Court (24.08.11)

11.11.001

Money laundering: Westpac v. MAP Associates

While banks might have legitimate concerns about liability for assisting money laundering, they are not entitled to block money transfers unless they are positive that fraud is involved. Suspicions alone are not enough and there were suspicions aplenty for Westpac in a US$49 million deal.

Westpac forced MAP & Associates, a Hamilton firm of chartered accountants, to sue if they wanted to have client funds unfrozen. The accountants were acting as escrow agents, holding some US$49 million as trustee pending sale of a Bolivian bank.

Westpac argued it was entitled to be suspicious. It had been warned of frauds emanating from Bolivia and said it was not clear who were the ultimate recipients of the US$49 million.

The court was told a Panamanian businessman approached MAP Associates in 2006 asking if they would act as escrow agents in a sale of the bank. The bank chairman held a power of attorney stating he had authority to act on behalf of the twenty or so shareholders looking to sell. New Zealand banking facilities were sought to clear the transaction because a Venezuelan purchaser was “not very fond of the USA”.

It was intended that MAP Associates would act as trustee, holding the purchase price paid by the purchaser while due diligence was undertaken. When the purchaser was satisfied, it would authorise MAP Associates to release funds to the vendor. MAP Associates set up a non-interest bearing bank account with Westpac for the short period it expected to be holding the funds in escrow. There was evidence of some US$600,000 payable in fees as part of the transaction.

Funds for the purchase, amounting to some US$49 million arrived in the Westpac account in December 2006 and stayed there for nearly 14 months. When Westpac was instructed to pay out the money in February 2008 it refused.

Westpac said the Financial Transactions Reporting Act required it to be satisfied about the bona fides of the transaction and the identity of the parties. The court was told that Westpac had made inquiries about the Panamanian intermediary negotiating the transaction and was suspicious of his claimed identity. Further it refused to release funds to numbered bank accounts without disclosure of the named owners. When the names were provided, one recipient who was to receive US$11.8 million did not seem to be a shareholder in the Bolivian bank being sold.

Westpac refused to act on instructions delivered by MAP Associates. These instructions had come from overseas in a sealed envelope, held sealed by Westpac until told to open the envelope and pay out the money as the letter instructed.

The Supreme Court ruled that banks are under a strict obligation to carry out client instructions. They can refuse to act if there is fraud or a breach of trust involved. It is not enough that there are mere suspicions of fraud or a breach of trust. Here, Westpac had no proof of actual fraud and was obliged to release the funds as instructed.

Westpac v. MAP Associates – Supreme Court (16.08.11) & Court of Appeal (6.09.10)

11.11.002