Types of Legal Structure in New Zealand

Eco-Villages and cohousing communities are typically characterized by some sense of possession of clear title sellable on the open market combined with some means of co-ownership of other land and buildings.

Also owners of buildings in any proximity must have a means to manage effects such as nuisance, land uses, access, "support" of land, provision of services, and use of commons. It is about a commitment both to place and to people. Goodwill is an essential ingredient for any community ownership system.

That there are few innovative structures in NZ is no surprise. This article will briefly look at the different types of legal structures that can be used both during development and for final ownership.

Disclaimer: I'm no lawyer and these notes are very much in progress, so get your own advice.

It is possible to develop projects on nothing more the strength of a good partnership agreement. The main points to remember are that in the event of incurring any debts, all partners will be jointly and severally liable. You will probably want to include provisions to cross indemnify highly exposed members.

The strength of any agreement is that if it is enforceable by the court. In practice this may be a time consuming and expensive pursuit. In particular the burden of a partner defaulting on his/her obligations will fall on the others.

Also partnerships have an inherent lack of flexibility. All signatures will have to appear on land transactions and other major documentation. Any change of partners will require a completely new agreement, along with all these signatures again. If one partner is away or indisposed then this also creates a problem.

This may be a practical solution for smaller or more straightforward developments such as a lot development, where plots are offered for sale to members to build on themselves.

Trusts provide for persons (trustees) to control property for the benefit of others (beneficiaries). The trust itself can not own land, rather it is held in the trustee's names. Trustees have wide powers as set out in the trust deed and under the Trustee Act 1956. Flexible beneficiary status, but no membership.

Beneficiaries have very little control over the trustee's actions, only take legal action for breach of trust or seek to wind the trust up. Trusts are quite autocratic in their nature, in that usually existing trustees elect new trustees, so it is important to have good trustees. A trust is at its best where a small group of trusted individuals make decisions on behalf of group of more passive beneficiaries.

As with most entity types outcomes are very much related to the thoroughness and integrity of the documentation. Some trust deeds that were devised in the last few decades have left a lot to be desired, largely reflecting the ideals of the time. Problems were; an over developed sense of community ie: a lack of boundaries around personal and private property and the overuse-abuse of consensus as a governance process.

A trust with care could be used as a development entity, but if the goal is clear title then they have little place as a final ownership body.

Charitable Trust—
There are trusts of many different shades and then there are charitable trusts. These are held separately under the Charitable Trusts Act and have a set of very tight criteria ie: you must convince the Justice department that what you are doing is either religious, educative, alleviating poverty or "other charitable" thing. To be exempt from income tax you must be approved by the IRD. All of the above is now a very time consuming affair.

The advantage of using a charitable trust for development is that it can receive donations eg new building products etc. Other than that you will still be liable for tax on any profit the development makes.

Trusts of both kinds are still liable for gst.

The tax-exempt status only comes into its own where as an ongoing entity a trust is involved in trading activities. An example is where a "community" grows vegetables to sell and feeds and houses its members on the profit, and avoids all income tax. In addition for gst purposes outputs roughly equal inputs, so the net effect is nil gst. (This type of trust slips in under the educative criteria.) However restating: this type of operation is not really synonymous with the core of Eco-Village ownership but may play some part of an outreach - eco-tourism - running of courses - type of village enterprise.

This seems like as good a place as any to slip in a paragraph about gst. GST is rather hard to avoid—particularly cohousing projects or such developing new housing. All new houses attract the payment of gst at 12.5% whereas 'second hand houses' do not. However if you can show IRD that you are each building your own house then you pay gst on materials and services (as the end user) but do not pay on finance, or wages.

In regards raw land, if the vendor is gst registered you pay gst on it. If the vendor is not, then it is considered a second hand good in which case you only pay a part of it. As always dates when the gst is deemed payable sometimes create cash flow problems, also dependant on how you are registered.

In regards gst registration, the usual applies, when or if you turn over $30,000 you must register. In practice this will only occur come sale time of units. Also if you turn over more than $1M then you have to register on an invoice basis and file two-monthly returns.

Incorporated Society—
Incorporated Society Act 1908. Incorporated Societies are essentially designed for non-profit clubs and societies. They have membership, which incurs a membership fee. Members can not profit from activities, any profits must be either given to a cause or fed back into the society. Charitable status is also possible.

A very large membership fee may provide the mechanism for members in invest in order to buy land, however it is unlikely banks will view this system as favourably as either a trust or a company.

An incorporated society has been used successfully to hold common property, a covenant on unit owners' titles requiring membership etc. This seeks to avoid some of the overly restrictive principles of Bodies Corporate.

Ltd Liability Company—
A company is a separate legal entity having all the powers of a natural person, and is used for the taking of business risks. It can hold land in own right, with no requirement to change title with a change of directors or shareholders. It must have 1 or more of each of shares, directors, and shareholders.

The whole companies regime in NZ has recently undergone a significant overhaul, and all companies must now exist under the new Companies Act 1993. All companies were required to reregister under this act. This act has brought our company much more in line with the American corporation. This new act much more clearly defines the roles of directors and shareholders, and provides better protection from management abuse. Directors have increased responsibilities. They can for instance be prosecuted for reckless trading for paying a dividend, while the company does not meet the 'solvency test'.

It is also a much more flexible act than the old 1955 act, providing for all manner of company types and sizes under the one scenario. The old Articles of Association has been replaced by an optional constitution. Without a constitution, a default scenario is provided for in the act. However a custom made constitution has enormous scope to define rights and responsibilities. A constitution once in place may only be changed by a minimum 75 percent (or such higher as stated) resolution of shareholders.

The liability of shareholders usually only extends to that amount of shareholding paid or unpaid, however the constitution can provide otherwise.
Also companies generally operate under a much stricter regime with regard limited liability. Banks have been burned by the abuse of so called limited liability companies and now require personal guarantees from directors, for major loans.

It is possible to have different classes of shares with different rights, and the company may now own its own shares.

For EV applications a company can provide a convenient entity to develop land. They are simple to set up, and provide for individual members to come and go with out much paper work. They are however generally assumed to be in the profit making business, and are scrutinised as such. Also stamp duty is payable at 1-2% on transfers of shares, in the event of a member needing to get out.

How can a company can be set up to accommodate a consensus model of management? Well, directors are assumed to have control of day to day management, with the shareholders having the say for more fundamental or constitutional matters. Shareholders do have strong rights against directors—shareholders may appoint, remove or bring action against directors.

However it is likely that any EV development is a spare-time labour of love, and as such runs on volunteer passion and energy, whose contribution and say is sought to be valued equally (along with any risk and return). One possibility is to have all shareholders as directors, or alternatively to have 'paper' directors as provided under a unique constitution. A separate shareholders agreement may also need to be entered into lay out certain rights.

Disadvantages of companies are their considerable administrative requirements, the separate and onerous nature of directors' duties and the difficulty of issuing new shares should the development grow beyond initial expectations.

Freehold / Fee simple
In this country we have the 'Torrens' land registration system, which means that it is based upon registration of titles, not deeds. Deeds based systems are in place in most other parts of the world esp. the US. The Torrens system provides purchasers with a state guaranteed title, including 'parcels' ie. clear surveyed boundaries.

Also here we do not technically enjoy ultimate ownership of land, but a tenure or 'estate' in land. (Again cf the US where the actual land is owned.) This is a leftover from the old feudal principle that all land titles are owned by the crown (originally the feudal lords). Nevertheless, and regardless of any change on this point, we can only expect a continued lessening of private property rights as we have come to know them under the common law. Real property is not like personal property, in that it is controlled by a raft of covenants, planning rules, statute and common law. Absolute ownership, in an 'environmental' age just does not exist.

With separate dwellings and planning approval to subdivide into a number of separate sections, the creation of separate titles gives the strongest sense of clear and individual title. This is particularly beneficial if households want to be able to have the autonomy to for instance make extensions /additions to houses without changes to the title, and without the consent of neighbours. This last is a particular challenge with other title types. Of course, with standard subdivision, attention must be given to access and service corridors ie roading.

Community considerations can be given effect through either positive or restrictive covenants upon the certificate of title. Also in addition to owning a separate house and section it is possible for households to be required to co-own a separate and identified parcel of land in addition, for the purpose of common space. While possible, it may be more difficult this way (but more flexible?) to empower an entity to manage the common space.

Tenants in Common—
Real property may be co-owned by any number of parties either in equal or unequal proportions. In theory they own an 'undivided' share of the land and buildings. This makes TIC a possible vehicle to co-own land for EV development ownership, pending creation of individual titles. Something of a partnership is in effect though created.

Planning rules (albeit arcane) usually prevent the building of more than one building on any one piece of land, so this method will not be suitable—except in rare exceptions—for final ownership (although cross leases are an extension of the TIC principle). But it can be argued that the nature of Eco-Village requires both a clearer delineation of whose is whose, both for emotional comfort, and being able to raise finance simply. Having said that the concept of a mortgage co-operative still exists and may be one of the few means of involving people of quite differing economic means.

With TIC, upon the death of one owner his/her share passes to his/her heirs as stated in his/her will, not to the other parties as cf joint tennants. Joint tennants pass between upon death and only allow ownership in equal shares. In the event of a mortgage over the land, parties are probably jointly and severally liable for any debts, much like a partnership.

Each owner can sell their holding independantly and does not require the others permission. In certain circumstances one party can through the court force the others to sell the whole property.

Cross Leases—
Cross leases evolved back in 1958. They were literally invented by lawyers to get around some of the subdivision requirements of the time. Such 'restrictions' were minimum site sizes, and the payment of reserve contributions and the like. At the time the lease of a building was not deemed a subdivision. With the advent of the Resource Management Act 1991, cross-leases were largely brought into line with fee simple subdivisions. What remains is a complex vestige riddled with grey areas that seems to have stuck.

The title comprises two separate interests. First is an estate as to the undivided but share in the fee simple of the head title—that is tenants in common in equal shares, except each owner gets a separate CT. Second the title is also issued for an estate in leasehold in the cross lease flat—that is a lease on the building only. Both interests are dubiously registered on the one title—some times known as composite title.

Restrictive covenants on the titles create restricted user areas—gardens etc associated with each flat. This scenario works pretty well… until someone wants to change something. Generally it is considered that parties must both get the other parties permission to make alterations and improvements and have the changes registered on the titles.

In addition there are quite a variety of lease wordings in use. Other grey areas exist where in some instances the legal rights and obligations between the two title interests conflict. Fencing, insurance and easements are particularly curly problems. A wide variety of covenants are being used to try to clarify grey areas, so in effect there is no such thing as a standard cross lease.

The flat plan deposited with the registrar shows the buildings, restricted user areas (gardens) and any common areas such as drives. Cross leases are generally only used for buildings with one or two levels, although some early attempts were made at strata cross-leases. These flat plans do not have to be surveyed which makes it cheaper and quicker but they thus do not come with a state guaranteed title.

Because of the bewildering complexity and volume of paper work, cross leases should only be used for small numbers of units. The strictly equal ownership of the site is not very equitable for houses of different sizes, and the lack of a body to democratically regulate relationships between flat owners and manage common areas is a major absence.

Even though cross leases still have certain advantages under some district plans, they are IMO outdated—having been superseded by unit title—and best avoided.

Flat Owning Companies—
As a vehicle for multi-unit residential developments (usually higher density urban) FOCs have been around the longest of all, since 1900 or so. They were in essence a (somewhat uneasy) modification of a standard limited liability company and were popular historically due to the absence of alternatives.

Basically, the company, which owns the whole of the land and buildings, sells shares in identified and inseparable blocks and issues a 'license to occupy' (LTO) individual units. Rights and obligations are spelled out in the Articles of association—now Constitution (CC)—and an occupation agreement. Flat owners' rights are more those of a contractual nature, than those associated with real property.

Prior to 1964 a flat owner's only title was their share certificate, which could not be borrowed against. This was got around by the company itself mortgaging the land and on-loaning to the flat owner. Later it became possible to have a CT issuable in respect of the LTO, which was encumberable , ie one could then get a mortgage against. Nonetheless this CT did not and still does not constitute a state guaranteed 'indefeasable' title.

This lower form of security means that banks are more reluctant to lend on them (both for construction and long term flat owner funding). From the banks point of view the less secure the deal, the less they will lend and more rigorously additional security will be required such as guarantees. In practice this lack of clear title is also reflected in the way FOCs are run.

The emphasis of FOCs is on the corporate aspect of communal living, that is, the rights of the community are stronger than the rights of the individual. FOCs are able to, in the event of a breech of Company rules or failure to pay levies, require a flat owner to forfeit their shares and LTO. Similarly the company has the right to veto and select new purchasers.

Thus the company has quite strong powers to control members and overall 'community harmony'. Obviously this protects against a defaulting or otherwise destructive member, but would naturally tend to make Flat owners and mortgagees a little uneasy, or insecure in their tenure.

As of 1993 FOCs are enacted under the Land Transfer Act 1952 / LTAmAct 1993. Subject to the CC, directors can have wide powers, for instance they have the right to inspect units. The company may do anything the flat-owner has agreed to do and pass on costs. Can make supplement bylaws or regulations.

Having said all this, I see little reason, by virtue of the flexibility of the new companies regime that a management scenario equivalent to unit title could not be created. This flexibility should be advantageous to communities, but could also be a problem if rules are not well thought through. For instance a 75% majority is standard to make changes to the CC. If this is so, little power exists in the hands of minority shareholders, especially minorities who are more adversely affected by the decision. Conversely with the use of higher percentages it is possible to entrench certain provisions into the CC.

There is another potential problem with the lack of separateness of flat-owners funds. One's right to occupy is dependent on the company's solvency in general and the solvency of co owners. Mortgagee's security is tied up in co-owners solvency. Any mortgagee has first right over the land even over a shareholder that has paid cash.

Also despite issuance of CTs to shareholders, company funding to flat owners still happens. This provides flexibility, but places the company at some risk. If some share owners default on loan repayments, the others will have to foot the bill to prevent forcing the company into liquidation / mortgagee sale of the property.

There are however tax advantages to the use of FOCs. The shares/LTOs do not incur GST, instead the company will have to pay GST on construction expenses and pass these costs onto flat owners. However to the degree that some outgoings are GST exempt (such as finance), this will result in a cheaper sale price.

Also usually the IRD watches out for companies selling products to shareholders cheaply, which they deem as a taxable benefit. To the degree that projects avoid developers margins and input their own energy into the development, it may happen that the sale price is assessed to be below 'deemed market value'. This is known as a 'related parties' transaction. For a usual company this means that, unless there are a good number of more 'arms length' sales to help prove, in effect, the market price, shareholders will have to pay income tax on the difference. Income tax would also be payable if the company itself made a profit.

FOCs however, and contradictory to the 'for profit' role of companies in general, are seen as specifically not being for profit, but to facilitate the shared ownership of land and buildings. The use of FOC property is not deemed to be a dividend for tax purposes.

A FOC would be liable for tax on any rent (less expenses) it receives, but not on levies. Stamp duty is normally incurred on the transfer of company shares at 1-2%, however FOC shares only incur 0-0.4%.

Unit Title—
Prior to unit titles, a little used provision did already exist for strata titles under the Land Transfer Act, but was very cumbersome conveyancing wise. Unit titles are now enacted under the Unit Titles Act 1972. Amendments occurred in 79, 80, and 81. UTs are unique in that they are unknown and unhindered by common law. They are totally statutory driven.

UT provides a stratum estate in the fee simple to a defined 'space' bounded by dimensions of height, length and breadth, a part of a larger 'head' title. But like cross lease it is also buildings based rather than land based. UTs can function in two dimensions, as in a standard subdivision, as well as in strata or airspace situations.

The whole idea with UTs is to give a recognised method of owning separate units while also co-owning shared or common space. The title is highly recognised by lenders as security, and despite problems and slow early take-up, are now the dominant form used for apartments and office complexes.

Individual titles are issued upon the deposition of a 'unit plan' with the DLR. It clearly shows the location and airspace dimensions of each separate (principle) unit, any accessory units (e.g. car park, shed) and common property ie, that spaces not comprised in any unit.

Common property is co-owned in undivided shares proportional to the initial value of one's principle unit. This is one of the quite inflexible parts of the act. It follows the concept of relative value meeting relative contribution to expenses that is familiar in rating law.

In terms of management, all owners of units automatically become the body corporate (BC). (It is in fact the BC that owns the whole development.) The BC administers common areas and such other common expenses such as fire insurance, as well as inter-owner relationships. A body corporate has a separate legal and financial life of its own, ie separate from unit owners. It can sue or be sued, employ, lease, borrow, invest etc. With more than 3 owners a BC committee is elected.

The basis of UT is that it is focused on the rights of individuals. Unanimous (100%) voting is required in quite a few instances of body corporate affairs and thus individuals' rights are protected and minorities have huge power.

An important concept is Unit Entitlement. This is a figure based on the value of ones unit (say 1/1000s) in relation to the value of all other units and is determined and recorded on the unit plan by a registered valuer.

A unit owner's UE determines a number of important things. First his/her share of BC votes. Second, liability for BC levies and a number of other rights and liabilities. In terms of levies there is a very limited exception where it can be proved that some unit owners benefit "substantially more" than other owners. Various covenants on unit CTs are being tried in order to get around UE constraints.

The creation of BC rules are reasonably flexible, so long as freedom to buy and sell is not compromised and unit owner's rights under the act are not diminished. In this regard retirement homes sometimes have a rule that unit owners must be over 65, which is in fact unlawful and unenforceable. Once in place, the BC rules can only be changed if all unit owners agree. (The act does sometimes provide for a judicial ruling if a substantial majority concur.)

BC rules are binding on owners and all other occupants, including tenants.

A long-term maintenance reserve is provided for, but not required. Responsibility for exterior maintenance of buildings depends on both the location of unit boundaries in relation to building boundaries and the BC rules.

The main difficulties arise with UTs when alterations and/or extensions beyond a unit envelope are contemplated, or if during a staged development changes are needed. In these cases all unit owners must agree, which can be a real problem to developers but not really so hard with a consensus culture!

Title can not be issued until all buildings are sufficiently completed so as to be able to determine unit boundaries and after council has issued its s224(c) certificate of compliance stating that the building complies with RMA and the Building Act. In effect title will not be available till after completion of units, possibly after possession. However in terms of releasing mortgage money banks have got used to delays in titles appearing.

One of the other problems with UT is that BCs have few teeth to deal with a defaulting unit owner. They can sue a unit owner for arrears of levies, but this is usually not an economic practicality. Such default will greatly inconvenience the other unit owners, who must pay instead. The only real right the BC has is to charge interest (10%) on such money.

Other breeches of BC rules are adequately enforceable by the court, along with the payment of damages.

Unfortunately, by creating a UT development you will be seen tax wise as being in the business of development and thus be open to the fullest extent of taxation. This seems pretty much unavoidable unless you can show that each household is building their own house.

This can be either literally, or by going about the development in one contract but with all individuals' units clearly identified at the outset and in which construction is more or less 'at cost', to each separate unit owner. This is a very tangly scenario but has been used and reportedly works, (give or take some pretty creative and voluminous paper work.)

O'Regan,  Thomas (1994), Cross leases and Unit Titles-Problems and Solutions, NZLS
Elias, Goddard (1994), Company Law- Getting Started, NZLS
Chapman-Smith (1991), Comparison between Unit Title, Cross lease, Company title, NZLG p31
Cameron, Dorrington (1998), Subdivisions from Go to Whoa, NZLS
Dunlop (1989), The Advantage sof Unit Title Ownership, NZ Property, Feb ,p17
Unit Title Act 1972, Reprinted Act 1993, Vol 24
Land Transfer Amendment Act 1993, No124

AUTHOR: Peter Scott, WENCP 5 Dec 1998

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