The Court of Appeal upheld a High Court decision to decline a property developer’s application for summary judgment that it was the “Controlling Member” of a residents’ society, formed for the purpose of a development. The Court upheld a summary judgment that the “Controlling Member” position had been disestablished when the developer had sold all its land in the development.
Property development company Mangawhai Developments Ltd (“MDL”) was incorporated in 2005 alongside the Lake View Estate Residents Society Inc. (“Society”) for the purpose of developing and managing the Lakes View Estate (“Estate”). The Society’s responsibilities were the management of the Estate’s development and community facilities, with each residential property bound by a covenant to the Society. The Society’s rules had a position of “Controlling Member”, held by MDL as the developer. The “Controlling Member” was required to be present for the Society’s general meetings be quorate, at which it had a controlling vote. The Society’s rules (“Rules”) provided that MDL had the position of “Controlling Member” until the development was complete.
In 2009, MDL went into receivership. Shortly before this MDL had sold its remaining undeveloped land (“Land”), which was on-sold to a couple, the Ruitermans, and financiers Vermont Street Partners Ltd (“New Owners”). In 2017, the New Owners attempted to subdivide the Land and tried to claim the “Controlling Member” status for themselves. They got into a dispute with the existing residents, which was not settled until 2021. In 2019, during this dispute the Society resolved at a general meeting to remove the “Controlling Member” status from the Rules. MDL remained in receivership during this time, and its receiver did not attend the meeting which proceeded nonetheless.
In 2022, with the support of a few residents opposed to the New Owner’s development, MDL came out of receivership and attempted to assert its status as “Controlling Member”. MDL stated that as neither MDL nor its receiver had been present at the Society’s general meeting that removed the “Controlling Member” from the Rules, the meetings were not quorate and the rule changes were invalid. The New Owners rejected this claim, and the dispute went to litigation.
The High Court declined an application from MDL for summary judgment that it retained its status as “Controlling Member”. It gave summary judgment in favour of the New Owners that after MDL sold off the last of its land in the Estate, its role in the development was over, so the whole premise for the “Controlling Member” had fallen away and MDL no longer had that status. The Court also declined an application for summary judgment from the New Owners that MDL was estopped (precluded) from asserting “Controlling Member” status and that MDL’s action was an abuse of process.
MDL appealed against the High Court’s declaration that it was no longer the controlling member.
Clause 4.3 of the Rules stated that the “Developer” would be the “Controlling Member” of the Society until development of the Estate was completed. After this, they would be deemed to have resigned from the position, which would also be disestablished. “Developer” was specifically defined as MDL.
The Court of Appeal held that this prevented anyone but MDL from holding the position of “Controlling Member” as there was no provision for assignment or succession. This precluded the New Owners from taking on the “Controlling Member” status. Had MDL been contracted by a third party to develop the land, or was purchased outright, this position may have been maintained, but instead the Land was simply sold.
The Court of Appeal agreed with the High Court that the sale of the Land meant that MDL had lost the position of “Controlling Member”. Without any land to develop, MDL could no longer proceed as the developer, so for MDL the development was complete. Under the Rules this deemed MDL as having resigned from the position of “Controlling Member”.
The Court also dismissed the New Owner’s appeal against the declined application for summary judgment that MDL was estopped from asserting “Controlling Member” status due to MDL’s silence on its status during its receivership. There was no identified duty for MDL’s director to speak; there was no clear ascertainable loss to the New Owners. It was also not clear whether their reliance on this silence was reasonable, as the New Owners never attempted to contact MDL’s director about the “Controlling Member” status until several years after they had purchased the land. The Court also dismissed their appeal against the declined application to strike out proceedings on the grounds of an abuse of process. The Court held that MDL was entitled to have the matter of its status determined at trial.
The Court of Appeal dismissed MDL’s appeal, upholding the High Court’s summary judgment that MDL was no longer the “Controlling Member” of the Society. The New Owners would not require MDL’s permission to undertake any development, but would still be subject to the Rules of the Society, under the control of the residents.
This case underscores how important it is for incorporated societies to have a well-drafted constitution, and for their members to pay close attention to its provisions as decisions are made and events unfold. The effort to keep on top of a society’s rules may seem burdensome, but can save a lot of time and money should disputes later arise.
This case was determined under the Incorporated Societies Act 1908. The new Incorporated Societies Act 2022 is more prescriptive in its requirements for society constitutions and is intended to provide for more democratic governance of societies. The courts also have more extensive powers to alter society constitutions if their provisions are oppressive, or it is otherwise just and equitable to do so.
For further information on this or similar cases contact Director, Brigitte Morten.
