Is your body corporate feeling locked in to service contracts that seem difficult to leave? Do they know how, or even if they can cancel the agreement?
Generally, a review of the contract terms is all that is needed to understand if the contract can be brought to an end. Sometimes it is not so black and white, especially if the service contracts lack clarity around when and how they can be cancelled, assigned or disposed of.
Who can sign the service contracts?
For a service agreement to bind the body corporate it must be validly signed by a member of the body corporate with the authority and power to do so.
For a new building, the developer (the first owner) will sign the initial service contracts during their control period (when they own almost all the units). Most developers review and sign these contracts with good intentions, negotiating a minimal length of term to allow future unit owners the freedom to make any changes when the initial terms end.
Once the control period is over, the body corporate chairperson, or the body corporate committee will be responsible for signing any future service agreements. As a precautionary measure, the body corporate may consider restricting the committee’s delegated power to enter into any service agreements over a certain length of term, or dollar sum.
What if the contract seems unfair, unreasonable and harsh?
In 2012 the owners of an apartment building “The Sentinel” sought relief through the Courts under section 140 of the Unit Titles Act 2010, to challenge a service contract that had been entered into by the original owner (the developer) during the control period.
In Body Corporate 39611 v Sentinel Management Limited [2012 NZHC 1957; (2012) 13 NZCPR 418]; it was found that the original owner owed a fiduciary duty of care to the future unit owners, by not engaging in self-interested dealings that would cause disadvantage to, or detrimentally affect the interests and rights of all future unit owners, or to the business functions of the body corporate.
Sentinel Management Ltd’s agreement had been drafted to give them a range of powers allowing them to intrude on the rights of the body corporate, and any future owners, using an excessive length of term (3 x 10 year terms), exclusive letting rights, and inconsistent termination provisions between the parties.
The success of this case set a precedent for contractual fairness, and oppressive and harsh terms that affected the rights of unit owners , or the body corporate as a whole.
For bodies corporate there is some limited relief from harsh or unfair contracts. Section 140 of the Unit Titles Act 2010 gives owners an opportunity to seek a Court Order to terminate a contract on the basis of it being harsh and unconscionable[1], and/or claim compensation for loss or damages as a result of the original owners failure to comply with their obligations[2] of the Act – however this only applies to contracts signed into during the control period.
Ending a contract
Terminating a contract may simply require a review of the contract terms the parties have agreed to, for example, termination, performance, breach, no assignment, or renewal (holding over). If the reason to terminate is not set out in the terms, the body corporate may find it difficult to cancel.
In some cases, terminating the contract may be complicated or fractious, especially if the relationship between the parties has broken down and the body corporate wants to cancel before the end of the term. When terminating a contract, it would be wise for the body corporate to seek a legal view on how to approach the matter.
Note of caution
It cannot be stressed enough that the body corporate, its Chairperson or committee must be confident that they have the necessary resolution or delegation of powers, understand the terms of the contract and exercise their fiduciary duty of care properly before committing the body corporate to a contract that may prove difficult to exit out of.
If your body corporate feel they are tied to a contract they are unhappy with, and want to find out what they can do about it we would love to hear from you. Contact us at Everything Body Corporate
