Structuring your Development and Considerations for Buyers in New Subdivisions

The relationships between neighbours in a subdivision and the rules, regulations and the way these are enforced have evolved significantly from handshakes and agreements over the fence.

In the last few decades, in order to protect the value of each property, developers have become increasingly concerned with not only managing the look and feel of their subdivision, but also prescribing the rights and obligations of property owners within those developments.

There are a number of ways that developers can do this; the arrangements vary depending on a number of factors ­– each coming with its own pros and cons for prospective owners.

Residents’ societies

These are becoming increasingly popular in larger scale developments. Residents’ societies are usually incorporated societies; their structure and requirements are governed by the Incorporated Societies Act 2022. Membership to these societies is often mandatory by virtue of a land covenant registered on the record of title to each property in the development. The society’s rules can be found on the Incorporated Societies Register.

Residents’ societies are usually responsible for the maintenance of any shared property within the development such as communal greenspaces or perhaps a tennis court. Each property owner is required to pay an annual levy for the maintenance of these areas.

A benefit of a residents’ society is that generally it will enforce the rules that individual property owners within that development must adhere to. In that way, as an individual property owner you won’t have to seek your own legal advice and incur cost if, say, your neighbour refuses to trim their hedge. However, a dispute with the residents’ society itself would require you to seek your own legal advice.

Due to residents’ societies falling within a statutory framework not designed specifically for them, there are a number of inflexibilities that means they may not always be the most desirable option when setting up a governance structure in a development.

One problem is that the minimum membership for an incorporated society is 10 members. Therefore a development comprising fewer than 10 properties/members cannot be an incorporated society. There are some exceptions to that membership requirement whereby a body corporate comprises three ordinary members. In that instance a residents’ society may work for smaller developments.

Failing that exception, however, the developer will most often need to choose between a unit title or another mechanism to provide for governance between the property owners.

Further, when the residents’ society is wound up, any surplus assets held cannot be distributed to members of the residents’ society, instead they must be advanced to a nominated not-for-profit entity. This is very problematic as those assets will be critical to the development.

Unit title developments

Unit title developments exist within their own statutory framework - the Unit Titles Act 2010. They are usually administered by a body corporate which is responsible for collecting levies from the property owners, maintaining common buildings and assets, and administering the body corporate rules.

The body corporate manages the maintenance of the shared facilities – and in some instances the units themselves – in a similar way to a residents’ society. The body corporate will have an ability to issue levies to contribute to a maintenance fund.

The benefit of buying a unit title property is that the legislation prescribes minimum disclosure requirements before you enter into a contract for sale of a unit title property and before settlement.

This transparency can appeal to a buyer who would otherwise need to rely on their own due diligence in reviewing a residents’ society rules to ascertain any additional financial contributions they may have to make.

Land covenants

Property developers may use land covenants where there is little desire for a formal separate governance or management entity to administer the rules. The developer can simply prescribe requirements and obligations on the property owners through a land covenant registered on each record of title. These are enforceable by the owners of benefitted land, and often the developer.

A land covenant can be a cost-effective way to impose some obligations on the property owners, but without requiring annual levies or fees to be paid.

This can, however, become complicated when adjoining properties need joint insurance policies to be held by the property owners over their adjoining properties. Having to explain to a prospective purchaser that they must work out insurance arrangements between themselves and the other owners can be off-putting for a buyer.

As a consequence of this, a unit title structure, particularly where homes are adjoining, is probably a better structure for a developer to use.

Get advice early on

If you are considering doing any development work you should talk with us about the best structure for your purposes and whether any covenants should be registered on the titles. 

If you are buying a property within a development bound by one or a combination of these structures, we can advise about what rules and obligations you may be bound by before signing on the dotted line.

DISCLAIMER: All the information published is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this article. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in this newsletter may be reproduced with prior approval from the editor and credit given to the source. Copyright, NZ LAW Limited, 2019. Editor: Adrienne Olsen. E-mail: adrienne@adroite.co.nz. Ph: 029 286 3650 or 04 496 5513.