Richard Maiden and Rebecca Ward look at the effects of the Unit Titles Act 2010 as the six-month deadline approaches.
Original article found at NZLawyer magazine, issue 173, 18 November 2011
The Unit Titles Act 2010 (Act) came into force on 20 June 2011, and since then bodies corporate have largely been concerned with the immediate changes required in relation to governance and management under the new Act, including mandatory changes to body corporate rules. The Act requires that all bodies corporate hold an AGM within six months of the new Act coming into force, and as this deadline looms, they are faced with a number of additional operational considerations including the establishment of a long-term maintenance plan and whether or not they will adopt long-term maintenance, capital, and optional contingency funds, all of which are likely to have an enormous impact on the ongoing physical and financial management of their properties.
The Maintenance Plans
There is now a compulsory requirement to draft and maintain a long-term maintenance plan for the common property, outlining capital works required to maintain that property over a minimum 10-year period. Under the new Act, the definition of common property for which the body corporate is responsible has increased to include all building elements and infrastructure including the roof, balconies, decks, cladding systems, retaining walls, gutters, pipes, wiring in common ducts, and lifts – and while this is not an exhaustive list, it provides good insight into the extent of the body corporate’s responsibility for the maintenance and upkeep of the building. Although the essential components of the long-term maintenance plan are set out in regulation 30, the requirements are very broad, and very little direction is given in respect of the required form and content of the document, or in fact who is qualified to prepare it.
To complement the long-term maintenance plan, there is also a provision to set aside money as a long-term maintenance fund – or what is often referred to as a sinking fund – into which money is paid on a regular basis by body corporate levy to provide for the maintenance requirements set out in the maintenance plan. The fund, unlike the plan, is not compulsory, although to not have a fund seems to completely negate the purpose of the plan, which aims to more efficiently plan and predict maintenance works required and the expenditure needed to fulfil the plan without having to resort to one-off, lump-sum, unplanned payments as and when issues arise.
Long-term maintenance planning is commonplace internationally, and the concept of ‘reserve planning’ and its complementary ‘reserve fund’ is well-developed in North America. ‘Associations’ – the equivalent of New Zealand’s body corporate – are required to adhere to strict requirements in respect of form and content, and long-term maintenance planning and funding models are prescribed by law. Physical and financial analysis is therefore of paramount importance and there are serious consequences for non-compliance. Looking at the North American reserve planning systems provides some valuable insight into the way effective maintenance planning is implemented, and although it is a very new concept in New Zealand, it is an indication of how we should look to protect what is often our greatest financial investment and asset – especially in light of the losses that have been suffered through deregulation of the building industry and the leaky building epidemic.
Before a long-term maintenance plan can be put in place, it is essential that the current condition of the property is established. This requires an assessment of every building element, the materials used, their life expectancy, and current condition, as it is impossible to accurately forecast future capital expenditure without doing so. The condition survey will provide a starting point – day 0 – for the long-term maintenance plan, and will similarly assess the financial reserves held by the body corporate for the purposes of determining contributions to the long-term maintenance fund.
Meeting the Provisions of the Act
In light of the leaky building epidemic, there will undoubtedly be some concerns for bodies corporate as they are required to meet the provisions of the new Act. There are still many buildings that undoubtedly suffer from water ingress (by virtue of the construction methods and materials used), but until now, unit owners have been able to adopt a ‘head-in-the-sand’ approach and ignore what is obvious – and what will undoubtedly become an incredibly long costly process of investigation, remediation, and potentially legal action should they choose to address it. Of course, by virtue of the drafting in the new Act, it may be possible to continue ignoring the problem. There is no requirement that a long-term maintenance plan should be drafted by a registered or chartered building surveyor. As no building surveyor or professional is going to be able to go on to the property for the purpose of developing a long-term maintenance plan without identifying the obvious issues, unfortunately, bodies corporate will start to look at other options. There are already a number of companies popping up offering quick and cheap maintenance plans which satisfy the minimum requirements of the Act, and it is inevitable that some bodies corporate will resort to the amateur approach. There will be those who see a fast buck to be made in this situation; a simple solution in order to placate the perceived requirements of a client who sees the Act as another piece of legislation to be skirted around rather than being approached head on.
There is certainly, at this stage, a sense that the minimum to comply with the statutory requirements is adequate. However, ultimately, it is not, and money spent now will return future benefits with interest. Add to that the impact of the tight financial times – once again, it is not hard to see why the easy option may be preferred, but to do only the bare minimum as far as maintenance schedules and funding are concerned will, as time goes on, increase the expense both in building remediation and professional fees. The age-old problems will continue to arise whereby members of a body corporate simply cannot afford the cost of remedial or maintenance work, particularly where that work is required to be carried out in the short-term future. Sadly, past experience has shown that the property industry has opted for the cheap option and this has, in our view, been a major contributor to the crisis surrounding ‘leaky buildings’. Have we not learnt from prior experience and mistakes?
It is therefore arguable that the only people suitably experienced and qualified to provide a proper assessment of long-term maintenance requirements are registered or chartered building surveyors working with registered or chartered quantity surveyors who can establish costs. Surveyors are trained to properly assess a building and its components. They are qualified to prepare a long-term maintenance plan, prefaced by a comprehensive condition survey broken down into the individual elements of the building through a detailed understanding of building and construction, and they work alongside quantity surveyors who can accurately assess expenditure for the complementary long-term maintenance fund. A long-term maintenance plan prepared in this manner will be comprehensive and complete, and will be easy to review every three years (at minimum) as required by the Act.
A Living Document
Ideally, a maintenance plan will be a live working document which will enable bodies corporate to – within the framework and recommendations of the plan – adjust it to best suit their needs. Long-term maintenance plans should, following the lead of other similar jurisdictions and the increasingly available technology, be easy to use, manage, and update, although quite obviously even if a proper plan is put in place, it does not ensure compliance. Compliance will have to be a self-regulating mechanism.
Notwithstanding the risks involved, there are going to be many inadequate maintenance plans and funds established both now and in the future until the true impact of substandard planning and inadequate assessment of a building, its elements, construction, and condition is realised. Consider a plan which inaccurately assesses that $30,000 a year should be put aside to maintain the roof, which subsequently in two years’ time in fact requires replacement at a cost of $300,000. Unfortunately, this type of scenario is going to occur, and it is not only going to catch out the amateurs looking to make a quick buck, but also trained professionals, if a proper assessment and condition survey has not been completed.
A well-maintained building will always provide value to the members of the body corporate. Complying with the Act and producing a maintenance schedule as required, recording both past and predicted future maintenance, will be something that purchasers and their legal representatives will be asking for, and a body corporate which has inadequate information will be exposed to the market. Not enough time and money invested in good planning now will inevitably result in large amounts of time and money invested in the future, when the impact of the new Unit Titles Act 2010 and inadequate planning is truly realised.
Original article found at NZLawyer magazine, issue 173, 18 November 2011