Receivers personally liable for Body Corporate levies

Tuesday 26 May 2015

Authors: Murray Tingey and Liam McNeely

​​​​In Body Corporate 162791 v Gilbert [2015] NZCA 185, the Court of Appeal overturned the High Court and held that receivers are personally liable under s 32(5) of the Receiverships Act 1993 (the Act) for body corporate levies under the Unit Titles Act 2010. This means that receivers will have to make provision to pay body corporate fees, unless they vacate possession within 14 days of their appointment. In addition, the Court of Appeal also commented that a mortgagee in possession is liable for body corporate levies.

The facts

Body Corporate 162791 (the Body Corporate) was established under the Unit Titles Act for a unit title development at Mid City in Auckland. The 239 Queen Street Trust was formed to acquire the units in that development. 239 Queen Street Trustees Ltd (239QSTL) was incorporated and became the first trustee of the trust. After non-payment of body corporate levies, the Body Corporate applied to put 239QSTL into liquidation. A further company known as QSM Trustee Ltd (QSMTL) was incorporated and became trustee in the place of 239QSTL. The Body Corporate applied to have QSMTL put into liquidation for its failure to pay levies. Mr Gilbert was appointed receiver of QSMTL, after which QSMTL was placed in liquidation.

The proceedings

The Body Corporate applied for summary judgment against Mr Gilbert, contending that he is liable for all levies falling due 14 days after his appointment until either the receiver’s appointment ends or QSMTL ceases to have use, possession or occupation of the units. The Body Corporate relied on s 32(5) of the Act, which provides:

Subject to subsection (7) of this section, a receiver is personally liable, to the extent specified in subsection (6) of this section, for rent and any other payments becoming due under an agreement subsisting at the date of the appointment of the receiver relating to the use, possession, or occupation by the grantor of property in receivership.

The High Court held that s 32(5) did not make Mr Gilbert as receiver personally liable for the body corporate levies.

Court of Appeal

The Court of Appeal overturned the High Court’s decision. It disagreed with the High Court’s view that body corporate levies are not payable under an “agreement” and are not in relation to the “use, possession or occupation” of the property in receivership. The Court of Appeal also held that Mr Gilbert did not have a defence under s 32(7).

Levies are payments due under an “agreement”

The Court of Appeal held that levies are payments due under an agreement, because:

  • The word “agreement” should not receive a “narrow and legalistic” construction and its meaning extends to a “mutual understanding, or arrangement entered into between parties as to a course of action”.

  • There is, as a matter of law, a legally binding contract between QSMTL and the other unit owners in the Mid City complex for the payment of levies, which creates a debt in favour of the Body Corporate.

  • The rules of an incorporated society constitute a contract between the society’s members and, by analogy, so do the body corporate rules, which constitute a contract between the purchaser and the other unit holders. The Body Corporate rules in this case impart obligations to comply with the Unit Titles Act, which includes an obligation on unit owners to pay body corporate levies.

Levies relate to the use, possession of occupation by QSMTL of the units

The Court of Appeal held that levies relate to the use, possession or occupation by QSMTL of the units. The Court of Appeal considered that if Mr Gilbert, as receiver of QSMTL, was not personally liable, then:

  • QSMTL will be enjoying, without payment, a variety of services required to be provided by the body corporate; and

  • Mr Gilbert could elect to remain in the property indefinitely, deriving whatever income is being obtained from it, and repay the secured creditors at the expense of the other unit owners.

The Court of Appeal also commented that if the operational rules of a body corporate provide that the unit holder must pay body corporate levies, then there will be an obligation on a mortgagee in possession to pay levies.

The Court of Appeal rejected Mr Gilbert’s argument that he had no ability to avoid personal liability. This was because:

  • He had the 14 day grace period to sell, or at least endeavour to sell, the units;

  • He could have retired as receiver; and

  • He is entitled to an indemnity out of the property in receivership in respect of his personal liability.

The Court of Appeal also held that Mr Gilbert was liable to pay interest on the outstanding levies.

Defence under s 32(7)

Section 32(7) provides that, on the application of a receiver, the Court has discretion to limit or excuse altogether the liability of a receiver under s 32.

Mr Gilbert argued that s 32(7) applied because QSMTL had a dispute with the Body Corporate in relation to other matters, which gave QSMTL a claim against the body corporate in excess of the amount of unpaid levies.

The Court of Appeal rejected this argument for a number of reasons. Fundamentally, it held that Mr Gilbert was personally liable for the levies and that this precluded any suggestion that his liability should be limited by the fact that he is, in law, the agent of QSMTL. This meant that Mr Gilbert was not entitled at common law to set off his personal liability against any damages payable by the body corporate to QSMTL. The Court of Appeal also rejected a claim for equitable set off, on the basis that there was an insufficient nexus between any claim which Mr Gilbert says QSMTL may be able to make against the Body Corporate, and the Body Corporate’s claim for levies.

Comment

The Court of Appeal’s decision is an important one for receivers, as it is a complete change in the law from the High Court’s decision, issued just over a year ago. It makes it clear that receivers will be liable for body corporate levies, and need to act as quickly as possible during the 14 day grace period to sell units or reach a commercial agreement with the body corporate.

Parties seeking to enforce security over property under the Unit Titles Act will need to form a view as to whether they are prepared to pay body corporate fees before appointing a receiver or taking possession. Receivers may also require an indemnity and available funds to pay body corporate fees from their appointer prior to accepting appointment.

It is not yet known whether Mr Gilbert will seek leave to appeal to the Supreme Court.


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

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