Townhouses comprise 60% of the new houses consented in Auckland but what is the best way for the owners’ shared amenity and obligation to be managed from a legal point of view?

Auckland’s Economic Quarterly, 2024 2nd Quarter, recently published by the Chief Economist, describes how from late 2020 townhouses overtook standalone dwellings and have remained in first place since.  In the year to July 2024 these account for 60% of new homes consented in Auckland.

The report explains the driver:

“This type of home allows for a more efficient use of land per dwelling than standalone houses and the sale prices tend to be lower as a result”.

Townhouses are by their nature often physically attached to one another. Typically, there is shared amenity – that might be simply a shared driveway and utility supply (power, water etc) or it might be that there is more extensive amenity shared including rubbish areas, bicycle storage sheds, carparking, landscaping, EV charging points, stormwater detention devices.

In addition, this type of property comes with shared obligation.  The simplest example might be the obligation to repair and maintain the shared driveway, utility system and amenities.  The resource consents for the development are another good example where obligations for property owners may be created and require management collectively.

Which residents’ association is best?

What is the best way for that to be managed from a legal point of view?  The answer will depend on several factors:

• The number of owners –the more owners may mean the more formal the residents’ association.
• The types of rights and obligations involved – for example “passive” assets that require little maintenance versus landscaping and gardens where weekly attendances are needed.
• The extent of the rights and obligations – for example, are there several shared amenities and accompanying obligations or simply one or two?

Arguably, the best legal structure is for the property to be developed under the Unit Titles Act 2010.  That creates a body corporate, and the Act sets out how common property including shared amenity, and shared utilities together with any other shared rights and obligations, are to be managed collectively. 

Ironically this is, from a legal point of view, the simplest structure to use.  A unit title development is not common for a townhouse or terraced development though.  This is usually because of concerns about marketability and the awful and high-profile disputes and problems that some of these developments faced as leaky buildings.

Putting unit titles to one side, a residents’ association that is an incorporated society under the Incorporated Societies Act 2022 usually represents the most formal structure, followed by an unincorporated society/residents’ committee, followed by the use of an instrument that regulates property sharing more generally such as an easement.  We sometimes also see a combination of these.

We also sometimes see this structure combined with a management overlay where, for example, a manager is appointed to look after the resident’s association.  Much like a body corporate management company would be appointed for a unit title development.

So, which resident’s association is best?  What are the pros and cons for a developer or the eventual property owner?

Incorporated Societies under the Incorporated Societies Act 2022

A resident’s association can be an incorporated society under the Incorporated Societies Act 2022.  This is usually evident in the name which must end in “Inc” or “Incorporated” or “Manatōpū” or a combination of these. Historically these have been viewed as a very flexible structure able to be operated simply.  The incorporated society could mostly be designed to fit the needs of the development with requirements that were not overly prescriptive.

The passing of the Incorporated Societies Act 2022 has changed that to a significant degree bringing incorporated societies largely in line with company law.  It remains to be seen, whether this will increase costs for members of incorporated societies.  The hope would be improved governance and management of an incorporated society. 

An incorporated society remains suitable for a residents’ association though, especially where there are say, 7-10 or more properties physically attached sharing common assets and bearing common obligations that require active management.

Incorporated societies are separate legal entities, which means they can own land or common property, lease, rent, buy, and sell property, borrow money and sign contracts in their own names.

This is important if common land is not vesting in Council, or a utility contract for common electricity needs to be signed, or a joint insurance policy taken out.  The property (premises, money, etc) is held by the society rather than its members.  No individual member can have a personal interest in any of an incorporated society’s assets. 

An incorporated society maintains a separate legal identity even when its membership changes so the position on sale and purchase of individual property is clear.  Also, members cannot be personally liable for the society’s debts or other obligations generally.

The 2022 Act requires a minimum of 10 persons for an incorporated society, so it is not generally suitable for smaller developments.  A company is treated as comprising 3 of these members. So the developer or management company may be a member to ensure sufficient numbers.

Where the developer or management company is a member, the constitution will usually limit the liability of these initial founding members so that they are not liable for levies following sale.  We also see some developers include protective clauses to allow them control until all properties are sold. 

The constitution is registered and will otherwise set out and explain how the society will be administered and governed, for example, by determining voting thresholds and meeting requirements.  That constitution can be changed by its members, usually through an ordinary resolution.  Such flexibility is useful, as over time it is possible that the needs of the residents’ association and its members will change.

Unless there is a land covenant in gross as part of the legal structure requiring owners of the properties to be members of the incorporated society, the society structure can break down over time, even with the formality.  Relying simply on property owners to contract over time on terms where new buyers must be members is not an effective structure.

Insurance is outside the scope of this article and a broker’s advice on insurance is important as the insurance market is not static.  Incorporated societies offer a legal entity that can place insurance in its name, which may become increasingly important where properties are attached.

Unincorporated Society/Residents’ Committee

An unincorporated society or residents’ committee does not have formal compliance requirements.  The owners can regulate themselves without reporting to any central entity or register. They can enforce their various rights and obligations against each other through the encumbrance or land covenant registered over their respective titles by the provisions written there.  Usually, those provisions describe how owners will make decisions, whether by annual meetings or via a committee that meets more regularly.

A significant disadvantage of this approach is the almost impossibility of making modifications after the fact. That would require unanimous consent of all owners (or a Court order). Another is that the developer will need to design and document all the mechanics of how the society works. Each purchaser will need to consider whether the bespoke requirements are adequate and suitable. This can be an advantage, as it provides flexibility, but also creates a disadvantage.

There is no minimum number of members for this type of residents’ association – therefore this can be a good solution for fewer properties.

The structure potentially relies on the owners of the properties managing and maintaining their residents’ association as the informality removes the checks and balances one might see for example with an incorporated society where an AGM and annual return is required.  A significant disadvantage is that there is no legal entity for anyone to contract with.  Some management companies won’t take this structure on unless underwritten wholly by one of the owners for this reason.

Easements and Land Covenants

There is a long history of using easements and land covenants to enable owners of property to share an amenity like a right of way or a drain.  It remains an option, including for a townhouse development.  Often these easements are also required by the resource consent, so we see these legal rights and obligations alongside our residents’ associations.  Often the residents’ association is also given the role of managing these collective rights and obligations.

It is, therefore, possible to not have a residents’ association or residents’ committee at all. In this case, each “asset” or “obligation” would be managed in accordance with, for example, an individual easement.  Broader property law will then dictate how decisions are to be made should work be required or costs are to be shared amongst owners.

As more intensive property development is required, this does not offer the best solution in my view – either for the developer or the eventual property owners.  There is a balance to be struck though. 

In creating communities, it is possible to go too far and for those who are purchasing townhouses, consideration of the shared assets, amenity and obligations, and how collectively owners will manage these is an important consideration. 

I wonder if we will see a return to favour of a unit title development in the future?  Ironically it may become viewed as a more simple and marketable solution.