Capital Markets report: 'The Castle and the Kitchen' financial markets system

Thomas Gibbons is a specialist property and resource management lawyer and expert on the UTA.

COMMENT:

We have a strong architecture in place for the regulation of financial markets, with robust rules around disclosure, governance, and the mechanics of investment. The financial markets system acknowledges and regulates the many market participants — issuers, brokers, investors. The disclosure regime ensures that sunlight disinfects. The Financial Markets Authority provides strong and proactive oversight.

The system is a fortress, or perhaps a castle. Those involved can look through the sky from their respective positions and see dangers coming. We designed a system carefully with the needs of different parties in mind, and it works well. We trust the building, and we trust the architecture.

If financial markets regulation is like a castle, then unit titles regulation is more like a kitchen. A kitchen needs good wiring, good ventilation, and needs to be clean. A kitchen is more common than a castle, and we don't need to think too hard to picture a kitchen, because we pretty much all have one. Most of us spend a lot of time there, because it's a critical part of the home. And there lies part of the problem. We can all see the castle — it's public and prominent. But the kitchen is treated as private, and no one wants to have too strong a view on anyone else's kitchen.

There are many improvements that can be made to the average kitchen, and unit titles reform is like a kitchen renovation. Unfortunately, on this occasion, the surfaces are gleaming, the napkins are folded, and the table is set. Ostensibly, all is in place. But behind the scenes, the scullery hides the dirty dishes. And with unit titles, there are many dirty dishes that need more than sunlight to disinfect.

Behind the scenes, the scullery hides the dirty dishes. And with unit titles, there are many dirty dishes that need more than sunlight to disinfect.

It may strain the metaphor to call the Unit Titles (Strengthening Body Corporate Governance and Other Matters) Amendment Bill a mouthful, but it is. And the Bill achieves a lot of good, with changes to upfront disclosure, more guidance on the practices of body corporate committees and managers, clearer rules around conflicts of interest, and a few nods to the notion that a 2 unit development is very, very different from a "village" of 400 units or more.

That's what a big body corporate is — a small village. In Australia, bodies corporate are called the "fourth tier of government". In New Zealand, we can't seem to deal with the idea that a unit title development is a community. Any community will have disagreements within it. But any community also serves a greater good, one that exists beyond those disagreements.

There are four things unit titles law needs to do better on:

● First, there is a need for a regulator, or more accurately an overseer. When the Unit Titles Act 2010 was set up, MBIE was charged with oversight, but this role has largely been ignored. Many overseas jurisdictions have a role equivalent to a Commissioner of Unit Titles, helping ensure that bodies corporate are properly overseen by a well-funded government body. This is missing in New Zealand, which essentially relies on a large body of volunteers, coupled with professional managers. A more proactive overseer would ensure bodies corporate and committees could get the help and support they need — and also the accountability they need.

● Second, there is a need for better recognition of the need for good governance. Committees administer significant assets, with buildings often having values in the tens of millions, and with critical private infrastructure in place. More professional governance can be achieved both through education (and probably credentialing), but also through allowing body corporates the kind of governance that exists in large companies, with board members retiring by rotation to ensure both continuity and change. At the moment, committees are re-elected every year, sometimes sooner, and sometimes on specious promises. Robust governance is critical to these communities, and the legal frameworks need to allow for this.

● Third, there is a need for an infringement system. If someone breaches a body corporate rule, then the key avenue for recourse is an application to the Tenancy Tribunal. This process is cumbersome, slow, expensive, and impractical for spot breaches (for example, if someone breaches a no-smoking rule). Allowing a body corporate to act quickly when rules are breached, to issue infringement notices, and to fine owners, would help every body corporate do its business better. And of course, legal avenues for owners who felt they were treated unfairly could be improved as well.

● Fourth, there is a need for better disclosure, balanced against an acknowledgement that disclosure isn't everything. There is plenty of research showing that no matter how much paperwork you give to purchasers, they won't read it unless it's clear and direct. With financial markets, we carefully target basic disclosure towards what is needed, and try to avoid going too far. The same approach is needed with unit titles — disclose this far, and no further.

Too often, analysis of unit title issues gets hung up on the rights of the individual unit owners. The courts haven't helped: too often they talk of "fundamentals" as a sort of justification for recalcitrance.

Every community needs to recognise the rights of individuals as well as the interests of the greater good; however, a community that fails to recognise the greater good and the needs of the whole is scarcely a community at all.

But the balance between the good of the one and the good of the many is a false dichotomy. What is needed is a better degree of governance, oversight, and regulation at all levels. We need a regulator who can act proactively. We need committees who are set up to do their job properly. We need bodies corporate to have good remedies against bad owners. And we need everyone to be better and more directly informed.

Our unit title population isn't yet a team of five million, but it's approaching a village of one million. These owners, investors, occupiers, committee members, managers and others deserve a framework that is robust.

Their homes, workplaces, and investments should be both a house and a castle, not a kitchen hiding dirty secrets.

● Thomas Gibbons is a specialist property and resource management lawyer and expert on the UTA.