Conducting due diligence on a unit title is different to the due diligence that is carried out on other estates of property. This is because of the statutory disclosure obligations under the Unit Titles Act 2010 (Act) and the additional considerations that purchasers should be aware of when purchasing unit titles.
The Act sets out that proprietors of units are required to disclose certain information relating to their specific unit, the common property, and the body corporate. This information comes in the forms of:
- a pre-contract disclosure statement (section 146, Act);
- a pre-settlement disclosure statement (section 147, Act); and
- additional disclosure statement(s) (section 148, Act).
If you are wondering what happens after due diligence or are not satisfied with the standard pre-contract disclosure issued in connection with the unit you are looking to purchase, check out our article on pre-settlement disclosure and additional disclosure statements.
Pre-contract Disclosure Statement
A pre-contract disclosure statement outlines key information about the specific property you are purchasing, the wider building complex, and the body corporate. Section 146(1) of the Act requires every seller to provide a pre-contract disclosure statement to a potential purchaser before entering into a sale and purchase agreement for a unit title.
The pre-contract disclosure statement must be in a form and contain information that is prescribed under the Act (section 146(2)). The prescribed form is Form 18 in schedule 2 of the Unit Title Regulations 2011 (Regulations). The prescribed information is as follows (per regulation 33 of the Regulations):
- The amount levied by the body corporate under section 121 of the Act in respect of the unit being sold and for the period that levy covered.
- Any details of maintenance that the body corporate proposes to conduct on the unit title development in the year following the date of the pre-contract disclosure statement, and how the body corporate proposes to meet the cost of that maintenance.
- The balance of every fund or bank account held or operated by the body corporate at the date of the last financial statement.
- Whether or not the unit or the common property is, or has been, the subject of a claim under the Weathertight Homes Resolution Services Act 2006 (WHRS Act) or any other civil proceedings relating to water penetration of the buildings in the unit title development.
- An explanation of the:
(a) unit title property ownership;
(b) unit plans;
(c) ownership and utility interests;
(d) body corporate operational rules;
(e) the information required to be contained in a pre-settlement disclosure statement and in an additional disclosure statement;
(f) records of title and its easements and covenants; and
(g) the land information memorandum issued under section 44A of the Local Government Official Information and Meetings Act 1987.
- How to obtain further information about the matters referred in number 5 above.
- An estimate of the cost to provide an additional disclosure statement.
The Date of Disclosure
When obtaining a pre-contract statement, it is important to check the date that it was created. Pre-contract disclosure statements can cost between $250-350 plus GST to be prepared. Sometimes real estate agents and vendors may use a pre-contract disclosure statement that is outdated to avoid the cost of having a new one prepared for each potential purchaser. It is important as a purchaser that you receive a current pre-contract disclosure statement.
Knowing What to Look For
If you know what to look out for in the pre-contract disclosure statement, then it is more of check box review. It is a disclosure of certain aspects of the unit tile so, if you are happy with the contents, there should not be an issue proceeding.
Potential purchasers should check and consider the sum of levies they are to be paying as a member of that specific body corporate. These levies will be payable in addition to your local authority (and territorial authority) rates. Any upcoming additional and special levies will be included in the pre-contract disclosure statement and are also important to consider.
WHRS Act Claims
Claims under the WHRS Act are especially important. These claims relate to issues relating to water penetration in the unit title or wider complex because of poor-quality workmanship or development. Civil claims relating to water penetration that were not claimed under the WHRS Act are also required to be disclosed.
Naturally, the non-existence of a claim does not confirm that the building will not be subject to water penetration issues in the future. However, it acts as a decent indicator. More importantly, disclosure of any claims does not necessarily mean that you should not purchase the property. If a claim is disclosed, a potential purchaser should check:
- the nature of issue that was claimed;
- when and where in the wider complex the issue happened (it may be your unit title was unaffected); and
- if a settlement was achieved between the parties and if that settlement offer has been paid out.
The last point is important as there could be an outstanding settlement payment the owner of the particular unit is entitled to. It may be that the proceeds need to be divided between the new owner and current proprietor or assigned in full to the person who is entitled to receive the benefit of that settlement payment.
There are other unit title documents you should request when carrying out due diligence. These include:
- minutes from the body corporate Annual General Meeting (AGM) for the last three years;
- the long-term maintenance plan; and
- body corporate operational rules.
AGM minutes will disclose any recent updates and decisions made by the body corporate for whichever year for which they were recorded. This will include changes in levies and expected works to be carried out on the unit title development. It will also be the forum where any issues not contained in the pre-contract disclosure statement will be present.
Long-term Maintenance Plan
Section 116 of the Act sets out that each body corporate is to establish and maintain a long-term maintenance plan. The purpose of a long-term maintenance plan is to:
- identify future maintenance requirements unit title development and estimate the costs involved in carrying out that maintenance;
- support the establishment and management of the funds to carry out that maintenance;
- provide a basis for the sum to be levied by the body corporate; and
- provide ongoing guidance to the body corporate to assist it in making its annual maintenance decisions
This information indicates what maintenance the body corporate intends to conduct on the unit title development. This could include re-sewing the garden, fixing elevators, and reinforcing the structural aspects of the building.
A potential purchaser should check the plan to see if any significant work is being conducted that affects your property or how you intend to use your property. There is potential that the work to be completed might require additional funding by the body corporate. Ensuring that you are aware of extra levies to be paid will avoid any surprises in the future.
Every body corporate must have, at all times, body corporate operational rules (section 105(1), Act). These are important to consider, as they may affect your rights to, and intended use of, the property.
The Act sets out the following body corporate operational rules required at a minimum:
- An owner or occupier of a unit must not:
(a) damage or deface the common property;
(b) leave rubbish or recycling material on the common property;
(c) create noise likely to interfere with the use or enjoyment of the unit title development by other owners or occupiers;
(d) park on the common property unless the body corporate has designated it for car parking, or the body corporate consents; and
(e) interfere with the reasonable use or enjoyment of the common property by other owners or occupiers.
- An owner or occupier of a unit must dispose of rubbish hygienically and tidily.
You may consider these rules to be limiting as to how you intended to use the property. The operational rules usually contain further rules such as not making significant alterations to your property without prior consent, dispute resolution methods within the body corporate, and rules regarding the governance of the body corporate.
These are common examples of rules. However, the operational rules can contain more (or fewer) restrictions or limitations on how a buyer might want to use the property. You should check these to ensure that your intended purpose of use of the unit will not be limited by the operational rules.
Wider Due Diligence
Please note that these documents should be reviewed concurrently with other documents relevant to the transaction, such as the sale and purchase agreement, the Record of Title, and the LIM. Having a solicitor review these documents is recommended when conducting due diligence of any property in New Zealand.
It is important that you review or have these unit title documents explained to you. They contain key information that is required to be disclosed under the Act. Close review of these documents in the pre-contractual or conditional stage will ensure that you are not subject to any nasty surprises down the track.
Legal and Other Fees
Buyers and sellers of unit titles should be aware that, due to the additional documentation and disclosure involved, legal and other fees relating to a unit title conveyance will likely be higher than for other conveyancing transactions.
If you need help with due diligence on a unit title or require legal assistance for a potential unit title purchase, contact our expert property lawyers.