Avoiding Unit Title Disclosure Pitfalls

NB: This article represents the author’s opinions only and does not constitute legal advice. Accordingly, this article should not be relied upon as a substitute for legal advice by any person.

Introduction

Those intending to buy or sell unit title property may be aware that transactions involving these unique titles were previously governed by the Unit Titles Act 1972 (“old Act”). The old Act has now been repealed by the Unit Titles Act 2010 (“new Act”) and the Unit Title Regulations 2011 (“Regulations”) and this repeal presents significant practical implications for those dealing with unit title property.  As suggested by its heading, the scope of this article is limited to providing practical information for those selling or purchasing unit title property, in the hope that an informed client will be less likely to fall victim to the pitfalls posed by the strict requirements of the new disclosure regime.

The Need for Change

By the end of the twentieth century, it became increasingly apparent to lawmakers and practitioners alike that the old Act was failing to meet the demands of New Zealand’s modern unit title developments.  The old Act was inherently inflexible, afforded insufficient protection to consumers and left too much to be decided in the arena of the Courts.  The leaky building syndrome highlighted significant deficiencies in the old Act, resulting in litigation to decide who should bear the responsibility of extensive unit repairs.  The time was ripe for an overhaul of the old Act.

The new Act became law on 20 June 2011. It vests ownership of common property in the body corporate and makes the body corporate responsible for repairs to all common property and infrastructure relating to or serving more than one unit.  The new Act also provides dispute resolution avenues, strengthens the governance regime of the body corporate and creates a fairer basis for charging body corporate levies.  Of particular relevance to the scope of this article, the new Act also introduced a comprehensive disclosure regime.

The New Disclosure Regime

Subpart 14 of the new Act sets out the new disclosure regime.  This article focusses on the disclosure statements typically required when conveying a unit title property, more particularly being a pre-contract disclosure statement, a pre-settlement disclosure statement and an additional disclosure statement.  Importantly, one cannot contract out or limit the obligations under the new Act. The requirements of the new disclosure regime are mandatory.

Pre-Contract Disclosure Statement

Under the new Act a vendor (seller) or their agent must provide, at the vendor’s expense, a pre-contract disclosure statement to the purchaser before entering in to an agreement for sale and purchase. If you are selling a unit title property, expect to incur additional expenses passed down through your lawyer and your body corporate due to the new disclosure requirements.  Usually your lawyer only becomes aware of the existence of an executed agreement for sale and purchase after it has been signed. Additionally, some real estate agents are still coming to grips with the requirement of a pre-contract disclosure statement. Therefore, if you are selling a unit title property it is important that you liaise with your real estate agent, body corporate chairperson and your lawyer to ensure that a pre-contract disclosure statement is provided to the prospective purchaser before the agreement for sale and purchase is signed. A prudent vendor should check with their body corporate chairperson to ensure the accuracy of the disclosure statement, as the purchaser is able to completely rely on the information it contains.  If the statement is not provided within the prescribed timeframe the vendor be in breach of the agreement for sale and purchase and could be liable for damages if the purchaser was induced to enter in to the agreement by a pre-contract disclosure statement which was either incorrect or if not provided.

Conversely, if you are intending to purchase a unit title property, you should insist that the real estate agent provide you with a pre-settlement disclosure statement prior to signing the agreement for sale and purchase. You should give yourself ample time to consider its content, knowing that you can completely rely on its accuracy. You should refuse to sign an agreement for sale and purchase for a unit title property until you have received and reviewed the pre-contract disclosure statement to which you are entitled.  

The pre-contract disclosure must be in a particular form and contain certain information found in the Regulations, such as: details of the body corporate chairperson, insurance policy details, the amount of annual body corporate and any other levies, the period covered by those levies, body corporate accounts, body corporate’s intentions regarding maintenance over the coming year and whether the unit title development has been subject to any leaky home claims.  You should contact your Lawlink lawyer with any queries regarding the specific requirements and implications of the information contained in the pre-disclosure statement.

Pre-Settlement Disclosure Statement

Under the new Act a vendor or their agent must provide, at the vendor’s expense, a pre-settlement disclosure statement to the purchaser by no later than the fifth working day before settlement.  This statement must be accompanied by a certificate from the body corporate chairperson certifying the correctness of its content.  Under the standard agreement for sale and purchase, a vendor must also provide the purchaser with certificates for all insurance policies held by the body corporate within that same timeframe.  While no particular form is required for a pre-settlement disclosure statement, it must contain certain information set out in the Regulations, such as: confirmation that the body corporate levies have not changed since issuing the pre-contract disclosure statement, when and how levies are to be paid, certification that no legal proceedings have been brought against the body corporate, details of any changes made to the body corporate rules, and details of any unpaid levies, maintenance costs or metered charges (such as water).

Importantly, if you are selling a unit title property and a pre-settlement disclosure statement is not provided at least five working days before settlement, the purchaser may elect to defer settlement or cancel the contract altogether. Cancellation could have severe implications for a vendor as it would likely occur after the agreement for sale and purchase is unconditional at which time the deposit has usually already been paid by the purchaser.  If selling a unit title property, your lawyer will be liaising with the body corporate to ensure that this disclosure statement is required within the prescribed time frames, but you should remain cognisant of the importance of the these requirements being satisfied.

If you are purchasing a unit title property you should keep track of the time frame within which a pre-settlement disclosure statement must be issued and check that the statement includes the required content.  If your lawyer has not received this disclosure statement at least five days before settlement, you will be entitled to defer settlement or cancel the contract.  As with the pre-contract disclosure statement, you may completely rely on the information contained in the pre-settlement disclosure statement.

Additional Disclosure Statement

The new Act also introduced the provision of a third disclosure statement, called an additional disclosure statement.  There is no mandatory obligation on the vendor to provide an additional disclosure statement, however, if the purchaser requires this disclosure statement then the vendor must provide one.  Any request by the purchaser for an additional disclosure statement must be made by the earlier of the fifth working day after the date of the contract or the tenth working day before settlement date.  The vendor must provide this disclosure statement no later than the fifth working day after it was requested by the purchaser.  As with the pre-settlement disclosure statement, failure to issue the additional disclosure statement within this timeframe would give rise to the purchaser’s right to defer settlement or cancel the contract.

The additional disclosure statement need not be in any prescribed form however the new Act does require that the statement contain specific information, such as: body corporate accounts, debts, services, invoices and other body corporate financial details, specific insurance policy details, details of current service contracts and the long term maintenance plan and details of any motions presented to the body corporate and their status. This disclosure statement will usually be prepared by the body corporate but, unlike the pre-contract and pre-settlement disclosure statements, the additional disclosure statement is issued at the purchaser’s expense.  Additional disclosure statements can be quite costly, so in order to prevent a nasty surprise a prudent purchaser should ensure that they are aware of the cost of preparing an additional disclosure statement before requesting one.

Summary

If you are considering selling or purchasing a unit title property, you should consult your Lawlink lawyer prior to signing any agreement for sale and purchase.  This may at times prove difficult given the pressure often applied by the vendor’s agent to sign on the dotted line, however the potential consequences of not adhering to the strict disclosure requirements under the new Act could be very costly and stressful.  For further information please contact your Lawlink lawyer to utilise their up to date knowledge of the new Act and its implications. Legislation referred to throughout this article can be retrieved free of charge from the Government legislation website through the following link: http://www.legislation.govt.nz/default.aspx.