Buying Into a Residents’ Society – Due Diligence Essentials

When purchasing a property, buyers often focus on the title, LIM report, building inspection and finance arrangements. However, in many modern subdivisions there is another layer of ownership and responsibility that can be just as important: the residents’ society.

Residents’ societies have become increasingly common in New Zealand subdivisions, particularly for townhouse developments.

Developers commonly use residents’ societies for practical and legitimate reasons. They may be required to satisfy council or resource consent requirements. They also provide a structure for managing shared infrastructure, landscaping and communal areas or facilities, and offer an alternative to body corporate structures in developments that do not sit comfortably within a unit title model.

Membership is usually tied to ownership of a lot within the development and continues for as long as the property is owned.

Before committing to a purchase, it is worth understanding how the residents’ society operates and what responsibilities come with membership.

Not All Residents’ Societies Are the Same

Many purchasers assume residents’ societies operate much like a body corporate. In reality, they are governed by their constitution, land covenants, encumbrances and related documents. Incorporated societies legislation may also apply to some residents’ societies. As a result, the rights, responsibilities and costs can vary significantly from one development to another.

The quality of the governance arrangements often depends on how well the documents have been drafted. What works well in one development may create practical difficulties in another.

Questions Every Purchaser Should Ask

1. What Communal Assets Am I Responsible For?

One of the first questions a purchaser should ask is what assets the society owns or manages.

Some societies may be responsible for little more than a landscaped entranceway. Others may own or maintain substantial infrastructure such as roads, drainage systems, lighting, access lots or recreational facilities.

Understanding what is owned by the society, and what maintenance obligations exist, is critical to understanding the true cost of ownership.

2. How Much Will I Be Required to Contribute?

Most residents’ societies collect levies to fund maintenance, administration and future capital expenditure.

Not all societies allocate levies equally. Some constitutions contain different levy arrangements for different categories of owners or properties.

Purchasers should understand:

• •how levies are calculated;
• whether all owners contribute equally;
• what current levies are;
• whether there are any planned increases;
• whether there is a long-term maintenance fund;
• whether major expenditure is anticipated in the future; and
• whether owners are keeping up with levy payments.

A society that has not set aside enough for future maintenance may simply be pushing costs onto future owners. Unpaid levies can also place financial pressure on other members.

3. Is There a Professional Manager?

One issue that is often overlooked is who is actually responsible for the day-to-day operation of the society. A poorly run society can be a major source of frustration.

Some residents’ societies engage a professional manager to arrange maintenance, collect levies, organise meetings, maintain records and generally ensure that the society operates effectively. Others rely entirely on volunteer owners. The existence of a professional manager and the operation of the committee are important matters to consider.

Owner-run societies can work well, but they can struggle if there are insufficient owners willing to organise maintenance, enforce rules, collect levies or manage disputes. Deferred maintenance and poor administration can become significant issues over time.

Purchasers should also consider the term and flexibility of any professional management arrangements. Long-term management agreements can provide continuity and stability during the development and early ownership phases, particularly while shared infrastructure is being established and responsibility is transitioning to owners. At the same time, if service levels decline, fees increase or concerns arise regarding independence, owners may want to understand what ability exists to review or appoint a different manager. Understanding the terms of any management agreement is therefore important.

4. Is the Developer Still in Control?

In developments that are still being completed, it is not uncommon for a developer to retain certain rights while construction and sales continue. These are often referred to as “developer control” or “controlling member” provisions.

These arrangements often exist for legitimate reasons. In a staged development, the developer may need to complete future stages, maintain design and operational standards across the development, coordinate shared infrastructure, and ensure ongoing compliance with resource consent requirements while the development is still being delivered.

A purchaser should understand:

• whether the developer retains special voting rights;
• whether the developer can override decisions of members or the committee;
• whether the developer can appoint committee members or managers;
• when any special rights expire; and
• whether the developer’s interests remain aligned with those of existing owners.

Such provisions are not necessarily problematic in a staged development, but purchasers should understand who controls the society, why those rights exist and how decisions are made before committing to the purchase.

5. Incorporated or Unincorporated?

Not all residents’ societies are structured in the same way.

Some are incorporated societies with a formal legal structure. Others rely on private governance arrangements contained in land covenants, encumbrances, easements or contractual agreements between owners.

Both structures are commonly used in subdivisions and can work well where the governance documents are clear and suited to the particular development.

For unincorporated arrangements, the underlying documents are especially important because there is no dedicated legislative framework sitting behind the arrangement. The governance documents therefore need to set out clearly how decisions are made, how obligations are enforced and how the structure will operate over time.

They also need to be sufficiently future-proofed. What appears to work when a subdivision is first established may need to operate in different circumstances 10 or 20 years later. If the society’s constitutional documents require changes in the future, purchasers should understand how amendments can be made and what level of owner approval is required.

6. Is the Society Financially Healthy and Functioning Well?

Purchasers should look beyond the legal documents and seek to understand how the society operates in practice.

Questions worth asking include:

• Is there a functioning committee?
• Are levies being collected and paid on time?
• Are adequate funds being set aside for future maintenance and renewal?
• Are there any ongoing disputes between members?
• Is there a long-term maintenance or asset management plan?

Meeting minutes, budgets and maintenance plans can often provide more insight into the health of a society than the title documents alone.

7. What Happens if the Society Is Wound Up?

Although winding up a residents’ society may be unlikely in most developments, it is still worth understanding the position where a society owns land or communal infrastructure.

Many purchasers assume that those assets will automatically pass to the owners if the society is ever wound up. However, for an incorporated society, that position is influenced by legislation. At present, that legislation is problematic and may require distribution of the society’s assets to another not-for-profit entity.

This is unlikely to be a day-to-day issue for most purchasers, but it is one of the matters that can be relevant to understanding what happens to society-owned land and assets if the structure were ever brought to an end.

Documents to Request Before Buying

Before purchasing a property that is subject to a residents’ society, purchasers should consider obtaining:

• the society constitution and rules;
• all relevant land covenants, encumbrances and consent notices;
• the relevant resource consent conditions affecting the development;
• current levy information and recent financial accounts;
• maintenance plans, asset management plans and budgets;
• minutes of recent committee and member meetings;
• any management agreement with a professional manager; and
• confirmation of any levies or other amounts outstanding against the property.

These documents often provide a much clearer picture of the practical operation of the development than the title itself.

Final Takeaway

A residents’ society is not simply an administrative formality. It determines how communal assets are maintained, how decisions are made, what costs owners must contribute towards and what obligations continue long after settlement.

Understanding the residents’ society is just as important as understanding the title itself.

Talk to Us

If you are considering purchasing a property in a development with a residents’ society and are asking, “What am I actually signing up to?”, we can help you understand the governance arrangements, ongoing obligations and potential risks before you commit to the purchase.

A clear understanding of the residents’ society before you go unconditional can help avoid unexpected costs, disputes and surprises after settlement.