If you are renovating an apartment building, who do you contract with?

Believe it or not, deciding who to insert as your client or customer in your building contract is not always straightforward. And it does matter, for the following reasons.

There are three main characteristics that you want in a customer; One is that they have the funds to pay you; The second is that they have the right to allow you onto the land and make changes to it; The third is that they actually exist (in the sense of being a legal entity that is recognised by the law).

The party that wants to engage your services is not always the owner of the land. I have seen situations where a son has wanted to hire the builder to get repairs done on his elderly mother’s unit. Or the commercial tenant who has been authorised by the landlord to make structural changes to the leased premises. Or the insurer of an earthquake-damaged Christchurch property who is putting up most of the money but wants to call all the shots so the builder doesn’t cut corners and the project doesn’t go over budget.

In those circumstances you might be tempted to contract with the party who first approached you, simply because they are more capable of making the decisions, or they are the most motivated to get the job done, or they are the source of the money that you are going to get paid with. And you can contract with them if you like, but it is messy.

That is because they don’t own the land, so they don’t have the ultimate decision-making power over whether you can access the property in the first place and what you can build there. That power usually lies with the owner, so at the very least you need the owner’s written confirmation that the son, the tenant, or the insurance company has their unconditional, irrevocable and unlimited permission to authorise you to go and build whatever they want. Otherwise you run the risk that the owner takes a dislike to what you are doing, and stops you in your tracks. It’s much simpler to always contract with the owner, and then get them to appoint the interested party as their project manager or underwriter of the project, if necessary.

It is also important that you contract with a party that actually exists in the legal sense. That is because you can’t sue a fictitious character. Most partnerships and most trusts are fictitious in the sense that the law doesn’t recognise them as separate legal entities. If you contract with a partnership such as a law firm then you must contract with all of the partners, and if you contract with a family trust then you must contract with all of the trustees. On the other hand, you can contract with a company, incorporated society, limited partnership, registered charitable trust, or for that matter a sole trader, because those are separate legal entities that the law recognises.

Contracting with multiple owners

The situation gets more complicated when you are working on a building that has multiple owners, such as a block of flats or an apartment building. Who do you contract with then? That depends on what type of title the various owners have. There are four main forms of title or land ownership in New Zealand. They are fee simple (commonly known as freehold), leasehold, cross-lease, and unit (or strata) title. The first two are relatively well-known but it is the last two that require some further explanation.

Cross-lease titles were originally formed as a way of getting around tough subdivision laws, but they don’t get around them any more so they are becoming less common. Say there are three semi-detached units on a block of land, which share a common driveway. All the unit owners own the block of land jointly (whether it be freehold or leasehold). Then as owners of that land they all lease Unit A to the owner of Unit A, Unit B to the owner of Unit B, and Unit C to the owner of Unit C.

Their leases give them the exclusive right to occupy their own unit, which is carefully defined on a registered plan. The rest of the block not covered by the leases is called common property. If the individual unit owners ever want to change the dimensions of their units they need the permission of their co-owners to do so. Technically if you are doing any building work that intrudes onto the common property then you ought to be contracting with all the unit owners as a group, although that tends not to happen in practice.

Unit titles

Cross-lease titles are a bit cumbersome for larger multi-owned developments such as commercial buildings, apartments and retirement villages, so unit titles were developed to cater for them. With unit titles you get exclusive possession of a principal unit (apartment or house) and various accessory units (carparks, a storage spaces, etc.). The rest of the land is known as common property and is owned and managed by a body corporate, which is a separate legal entity like a company. All the unit owners are members of the body corporate and it is run on democratic principles.

The interesting thing about the common property is that it varies from development to development, and its boundaries are defined on the unit plan that is registered when the titles are first issued. Typically the common property covers not only the grounds and outdoor facilities, the foyers, lifts, corridors and ventilation spaces between floors and walls, but also the exterior envelope of the building. The middle of the exterior wall is commonly the dividing line between the common property and a unit owner’s exclusive area.

What that means is that if you are going to work on the exterior of a unit title development, then (depending on where the boundaries of the common property are) you usually need to be contracting with the body corporate. However if your work is also going to intrude into the private space of individual unit owners, then you need to contract with them as well.

That is a very common scenario in leaky building remediations, and occasionally they come unstuck because one or more owners won’t cooperate. In that case what generally happens is that the body corporate applies to the High Court for an order under section 74 of the Unit Titles Act 2010 that requires all the owners to contribute to the cost of having one repair job done by the one contractor.

by Geoff Hardy
Commercial Lawyer