Body Corporate Rule Limiting Unit Usage Struck Down by Tenancy Tribunal

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[2025] NZTT Manukau 9058005

TENANCY TRIBUNAL AT Manukau

APPLICANT: [redacted]

RESPONDENT: [redacted]

ORDER

1. The Tribunal declares Rule 2.5 as introduced on 10 March 2021, to be ultra vires the Unit Titles Act 2010, as it relates to restrictions of business types operating from the complex.

2. [NAME] must pay [NAME] the sum of $500.00, being the filing fee paid to commence this proceeding.

REASONS

1. The Tribunal must consider an application filed by a unit owner in a commercial unit titled complex. The respondent is [NAME]. The claim relates to amended [NAME] operational rules, which restrict the sort of businesses that can operate from the complex. The Unit Owner consider those to be unlawful. The unit owner is seeking a declaration and orders to that extent.

BACKGROUND

2. On 10 March 2021, [NAME] by ordinary resolution, approved a change of [NAME] operational rules, introducing a new rule 2.5, as follows:

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2.5. Designated Use of Unit

An Owner shall

(a) Not use or permit the Unit to be used for any purposes other than those uses designated as permitted activities under the relevant consent authority's plan or proposed plan and in particular shall not allow or permit the Unit to be used for any use that is expressly prohibited under the Rules.

(i) Prohibited Trade, Business, etc. - not at any time use, exercise or carry on or permit to be used, exercised or carried on in or about the Unit any noxious, noisy or offensive act, trade business, occupation or calling and shall not permit any activity at any time to become an annoyance, a nuisance or offensive as determined by [NAME] from time to time.

(ii) Prohibited Activities - not use or permit the Unit to be used for any activity which is:

a. listed in the Schedule to the Rules; or b. illegal or may be injurious to the reputation of the [NAME]; or c. uninsurable or which unreasonably increases any insurance premium payable by [NAME]; d. and which does not have the prior written consent of [NAME] provided that written consent shall not be unreasonably withheld or delayed for any activity which is permitted under the Local Authority District Plan or not be contrary to the and which is consistent with the image and purpose of the [NAME].

(b) Obtain the written consent of [NAME] to any proposed change of business use from that currently carried out in the Unit

(c) Not paint or decorate the exterior of the Unit All exterior decorating to be done by [NAME] at the owners expense

(d) Not use nor permit the use of a Unit for any purpose which may be illegal or injurious to the reputation of the [NAME] or of the Owners, which may interfere with the peaceful enjoyment of another Unit or the Common Property or which may interfere with the general management of the [NAME] or the Land.

3. Schedule A then set out the following prohibited uses:

SCHEDULE A

PROHIBITED USES

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1. Open yard hire premises.

2. Service garages.

3. Open yard industrial depots.

4. Industrial yards, including ancillary office, workshop and depot uses.

5. Concrete products manufacture.

6. Massage Parlours, Escort Agencies or any other business offering similar services.

7. Brothels.

8. Any business use that produces obnoxious or unpleasant fumes 9. Day or night educational courses to a large number of students 10. Such other prohibited uses as may be determined by [NAME] from time to time

4. [NAME] sought legal advice, following which his legal representative wrote to [NAME] expressing a view that rule 2.5 would be unlawful (not allowed within the RTA - ultra vires), and inconsistent with [NAME]’s ability to amend the rules in section 106 of the Unit Titles Act 2010 (UTA). Further, it was submitted the new rule would be a breach of a unit owner’s quiet enjoyment right for their unit. The representative states:

There is no rule allowing the prohibition of certain uses. [NAME] by attempting to prohibit certain unit uses is ultra vires and is in breach of a unit owner’s right to be free to use their unit for a use which complies with a resource consent or the unit plan. I am instructed that in the past units have been garages or had similar uses.

Section 79(1) of the UTA gives owners the right of quiet enjoyment:

An owner of a principal unit— (d) is entitled to have quiet enjoyment of his or her unit without interruption by other unit owners or occupiers, or [NAME] or its agents, except as authorised by this Act or the regulations:

The rule above attempts to restrict uses of a unit and giving [NAME] the power to determine whether a change of use may occur….

The above rule is ultra vires and is a breach of s79(1) of the UTA. I advise [NAME] that [NAME] has lost a potential sale due to the above illegal restrictive rule. As the rule is ultra vires it cannot be enforced by [NAME], however it is off putting to potential purchasers. [NAME] requires [NAME] to urgently seek legal advice and to remove the prohibitions on use and the requirement to obtain BC consent to approve a change in use. If [NAME] has not

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received a positive response within 10 working days of the date of this letter I am instructed to apply to the Tenancy Tribunal for a declaration that the rule is ultra vires and to seek full costs. If [NAME] loses any other sale as a result of the ultra vires rule it will seek recovery of losses as a result.

5. [NAME] declined to revise rule 2.5, and therefore the Unit

Owner has filed this application with the Tribunal.

6. I convened a hearing on 24 February 2025 in the Manukau District Courthouse. In attendance was [NAME], the Unit Owner, and representing [NAME] was [NAME].

UNIT OWNERS POSITION

7. [NAME] explained that the premises are a complex of 10 commercial units.

8. When he put his unit on the market, it became apparent that the rules of [NAME] had changed. [NAME] considers that the rule would likely have put off other buyers, or it may put off future potential buyers.

9. The applicant is seeking a declaration on whether the rule is lawful, and

an order that [NAME] amend the rule.

BODY CORPORATES CASE

10. [NAME]’s position is that if the rules were not changed, then

there could be widespread and detrimental effect on other units if ‘undesirable’ businesses came into the complex.

11. The rules were amended at an AGM, and circulated in draft in advance of the meeting. [NAME] was not there and did not send in a proxy.

12. [NAME] believes it has complied with its legal obligations, and the change was in the best interests of the complex.

13. [NAME] consider what it has done to be the industry norm, and if the rules were overruled, then the floodgates would be open with other complexes.

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ANALYSIS

14.[NAME]’s position is that [NAME] has gone beyond its powers when introducing Rule 2.5.

15.A [NAME] can amend or introduce new rules under 106 of the UTA, which holds:

106 Amendments, revocations, and additions to [NAME] operational rules

(1) Any amendment or addition to [NAME] operational rules must relate to—

(a) the control, management, administration, use, or enjoyment of the principal units, future development units, accessory units, or common property; or

(b) the regulation of [NAME].

(2) No powers or duties may be conferred or imposed on [NAME] that are not incidental to the powers and duties conferred or imposed on [NAME] under this Act.

(3) …

(4) Any amendment or addition that is inconsistent with any provision of this Act or any other enactment or rule of law is invalid.

16.As will be discussed below, parliament has limited the extent to which a [NAME] can introduce rules, as a result of subsections 2 and 4

17.A [NAME] may act, only as empowered by the UTA and only to perform its duties or exercise its powers (see UTA sections 77 and 78).

18.A [NAME] in exercising a statutory power, it is also required to act reasonably in a public (administrative) law sense.1 Body corporates are only empowered to make rules that they are empowered by the Act to make and in implementing such rules, they are fettered by public law obligations. In [NAME] v [NAME] 366611 (2009) 10 NZCPR 917 at 40 the Court stated:

While it has been observed that [NAME] model is essentially democratic, it would be wrong to regard [NAME] as the equivalent to the authorised Parliament of the proprietors. It does not have unbridled power.

1 [NAME] “Administrative Law” [2006] NZLR Rev 74 at 99-100 and [NAME].

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19. It is also relevant to note that unit owners have a statutory right of quiet enjoyment2, which means they can do with their unit what they wish, providing it is lawful.

20. [COMPANY] v [NAME] 341073 (2008) 10 NZCPR 136 the High Court struck down as ultra vires [NAME] rules which interfere with a unit owner’s right to lease the unit. The rule that was in issue required unit owners to appoint [NAME]’s [NAME] manager as their exclusive leasing agent for leasing out the units. That is analogous to this situation before me, where [NAME] is seeking to limit what activities the unit owner can engage in, when those activities may be otherwise lawful.

21.The High Court held:

[55] The amended rules operate to prevent individual unit owners from leasing out their units themselves. They also prevent the unit owners from engaging any letting agency other than [NAME] to carry out that function.

[56] ….Individual unit holders should be entitled to choose their own tenants. At the very least, they should be entitled to choose the letting agency that is to be entrusted with that task.

22.The High Court considered this right as fundamental to the ownership of the unit, and further that:

[38] Section 37(6) prohibits [NAME] from amending its rules so as to prevent or restrict the devolution of units in any way. It is obviously designed to ensure that, although [NAME] may have the ability to manage and control the common property, its sphere of influence is extremely limited when it comes to individual units. The legislature was clearly of the view that it was important to preserve the ability of individual unit owners to deal with their units without restriction or interference by [NAME]. The section therefore prevents [NAME] from amending its rules so as to prevent or restrict the unit owners from transferring, leasing, mortgaging or otherwise dealing with their units.

23. In [NAME] v [NAME] 366611 [2011] 2 NZLR 837 the High Court reached the same conclusion and struck down an amended rule which required unit owners to lease the units on specified terms and conditions. The High Court noted a significant factor that counted against the validity of an amended rule which limited a unit owner’s right to lease was the fact that the UTA 1972 protected that right. As the Court stated at paragraph [86]3:

2 Section 79(d). 3 While this was a case under the prior Unit Titles Act, the outcome would remain under the current legislation.

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…r 2.1(g) plainly restricts the owners’ ability to lease their units in breach of s 37(6) which prohibits such a restriction. It is ultra vires.

24.Given those authorities, this [NAME] would similarly be unable to adopt an amended rule which purported to restrict a unit owner’s right to operate a business from their unit which would be otherwise lawful.

25.Again returning to section 106(2) and (4), those provisions provide that no powers or duties may be conferred or imposed on [NAME] that are not incidental to the powers and duties conferred or imposed on [NAME] under this Act.

26.Section 84(1) UTA sets out the full extent of the powers and duties of [NAME] as follows:

(a) sections 40 to 42 (which relate to the assignment and reassessment of ownership interests and utility interests):

(b) section 81 (which permits [NAME] to act as an agent for the unit owners who lease or licence their principal unit and are absent for the purpose of enforcing [NAME] operational rules):

(c) section 85 (which requires [NAME] to keep and maintain a register of all the owners of principal units and accessory units on the plan):

(d) section 86 (which relates to [NAME]’s power to sign documents on behalf of the owner):

(e) section 87 (which requires the payment of ground rental to a lessor): (f) section 90 (which relates to the calling of general meetings): (g) section 105(4) (which requires [NAME] to comply with

[NAME] operational rules): (h) section 108 (which is the general power of delegation): (i) sections 115 and 117 to 120 (which relate to the establishment

and maintenance of the funds): (j) section 116 (which requires [NAME] to establish and

maintain a long- term maintenance plan): (k) section 121 (which relates to the raising of amounts for each fund

and the imposition of levies on the unit owners to establish and maintain each fund):

(l) sections 130 and 131 (which relate to the spending, borrowing, and investing of money and the distribution of surplus money and property):

(m) section 132 (which relates to the keeping of accounting records and submission of its yearly financial statements to an independent auditor):

(n) section 135 (which relates to insurance of the buildings and other improvements on the land):

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(o) section 136(4) (which relates to the application of insurance moneys in or towards reinstatement of the development):

(p) section 138 (which relates to repair and maintenance of the common property, assets designed for use in connection with the common property, infrastructure, and [NAME] elements and access for those purposes):

(q) section 206 (which relates to the provision of records and documents on request from a unit owner):

(r) any other provisions of this Act, any other Act, or the regulations that confer powers or duties on [NAME] and subject to any limitations to those powers and duties in this Act, any other Act, or the regulations.

27. I am unable to find anywhere in the UTA or the regulations that confer power on [NAME] to restrict an owner’s use of their premises. While s106(1)(a) refers to a change of rules around the “use” of the principal unit, importantly that is then qualified to limit any rule setting to matters that [NAME] had the power to manage already (subsections 2 and 4).

28. I note here the Court of Appeal decision of [COMPANY] v [NAME] 345866 (2016) 18 NZCPR 56 (again under the 1972 legislation), the Court noted at [38]:

An amended rule must (1) fall within the ambit of the first paragraph of s 37(5) and (2) not fall foul of the proviso in the second paragraph. The word “incidental” in the proviso means “naturally attached to, or arising from, or naturally appertaining to any of the duties and powers set out in the Act”. An amended rule which appreciably expands powers and duties (that is, beyond those set out in the 1972 Act and its default rules) will not be incidental to the performance of [NAME]’s (existing) powers and duties. Common sense in construing the degree of incidentalism has been encouraged by this Court in previous decisions.

29.Given I cannot see any authority that [NAME] would have to limit or restrict the use of premises for certain business types, then that limitation could not be the subject of any rule.

30.Ultimately I conclude that [NAME] could not adopt the amended rule because it creates a completely new power which [NAME] did not previously have, nor one which the UTA provides for. Because the new power to control what businesses operate from the premises is not incidental to any existing power or duty, it therefore contravenes section 106(2) UTA and is therefore ultra vires the power of [NAME].

31.The result must be that I declare that the rule 2.5 is ultra vires the UTA, and must be unenforceable.

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32. I note here that there are some rules in rule 2.5 that would be lawful, such as prohibiting any activity that is illegal, or breaches the complex insurance policy. Those matters fall within the UTA, so could be the subject of rules. However is it not the role of the Tribunal to rewrite rules where there are defects in them, that is the role of [NAME]. It is manifest that [NAME] will now need to revisit the rules, and rule 2.5 will require redrafting.

FILING FEE

33.Because the applicant has been wholly successful in their application, I

must award the filing paid to commence the proceeding in the Tribunal, which is $500.00.

[NAME] 26 February 2025

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Please read carefully:

SHOULD YOU REQUIRE ANY HELP OR INFORMATION REGARDING THIS [COMPANY] [PHONE].

MEHEMA HE PĀTAI TĀU E PĀ ANA KI TENEI TAKE, PĀTAI ATU KI TE [COMPANY] [PHONE].

AFAI E TE MANA’OMIA SE FESOASOANI E UIGA I LENEI MATAUPU FA’AMOLEMOLE IA FA’AFESO’OTAI’I LOA LE OFISA O LE [COMPANY] [PHONE].

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http://www.justice.govt.nz/fines/civil-debt

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