The Court of Appeal has found that receivers can be personally liable for body corporate levies accrued during a receivership.
The judgment is based on a broader interpretation of the relevant provisions in the Receiverships Act 1993 than applied by the High Court in Body Corporate 162791 v Gilbert, and reverses that decision.1
Receivers should be wary of the broad reach of section 32(5) of the Receiverships Act, which creates personal liability for rent and other payments due under agreements relating to the use, possession or occupation of property in receivership.
The body corporate was chasing John Gilbert, the receiver of QSM Trustee Limited (also in liquidation), for payment of outstanding body corporate levies, along with interest and costs, for the five units owned by QSM in the Mid City complex in central Auckland.
The Court of Appeal was presented with two issues:
- whether Mr Gilbert was personally liable under s 32(5) of the Receiverships Act 1993 (the Act) to pay the body corporate fees and, if so
- whether his liability should be limited or excused under s 32(7) of the Act?
Liability for body corporate fees
The section makes receivers liable for rent and other payments that accrue under pre-receivership leases or rental contracts.
Section 32(5) of the Act provides that a receiver is personally liable for “rent and any other payments becoming due under an agreement” subsisting at receivership “relating to the use, possession, or occupation by the grantor of property in receivership.” The purpose of these provisions, the Court noted, is to ensure that receivers do not obtain benefits for the debtor company or the secured creditor without paying for them.
Due under an “agreement”?
At the High Court, Associate Judge Abbott considered that the word “agreement” could be defined as “a negotiated and typically legally binding arrangement.”2 He did not consider that body corporate levies, payable under the Unit Titles Act 2010, fell within the statutory definition.
While acknowledging that the wording of the statute is “rather awkward”, the Court of Appeal rejected the High Court’s “narrow and legalistic construction” of “agreement”,3 saying that the ordinary meaning of the word, as well as the drafting of s 32, indicated that it was intended to be of “wide import”.
In any event, on the facts of the case, the Court noted that a legally binding agreement existed between QSM and the other unit owners at the property that created a debt in favour of the body corporate.4 When a person buys a unit in a unit title development, he or she implicitly agrees to accept the obligations imposed on unit owners by the Unit Titles Act, including the obligation to pay body corporate levies.
Relating to the use, possession or occupation of the property?
The High Court’s interpretation of this aspect of the section was to limit it to third party agreements which related to the use, possession or occupation of a third party’s property.5 While the Court of Appeal noted that normally, rental and other payments would fall within the parameters of the High Court’s definition, the section did not require this narrow interpretation, and it could see no reason to confine it that way.6
After reversing Associate Judge Abbott’s narrow interpretation of the wording of the section, the Court of Appeal ultimately held that Mr Gilbert was personally liable for the body corporate levies payable. Mr Gilbert’s liability was for levies accrued in the period beginning 14 days following the commencement of receivership to the date of judgment (with interest additional).
Receiver not saved by s 32(7)
Although Mr Gilbert had not applied for relief under s 32(7), the Court considered the point, and found that he would not have had an arguable case.
As QSM was in a broader dispute with the body corporate outside these proceedings, and had a claim that exceeded the unpaid levies, Mr Gilbert argued for set off. The Court of Appeal rejected this argument on the basis that, as Mr Gilbert was personally liable for the levies, there could be no set off at common law. Also, the parties lacked mutuality as Mr Gilbert was at one remove from the body corporate.7
Ultimately, no factors were disclosed that could lead the Court to exercise its discretion to limit or excuse Mr Gilbert’s liability under s 32(7). The obligation to pay the levies was “clearly due” and Mr Gilbert had been aware of that obligation from the outset.8
The Court also specifically mentioned the liability of new unit owners for outstanding levies incurred by previous owners under the Unit Titles Act 2010. Any unpaid levies become recoverable as due debts to the body corporate.9
Chapman Tripp comments
It is unclear just how far s 32(5) extends. However, the Court of Appeal’s decision does not change the position that costs arising from outstanding local body rates and body corporate levies do not rank ahead of money secured under a registered mortgage, and so do not need to be cleared before a property is sold.
But, given that the purchaser will inherit these liabilities, the usual practice of mortgagees and receivers clearing such arrears on settlement is likely to continue (or that such arrears will be factored into the price obtained).
A copy of the judgment is available here.