Subdivisions That Involve Common Areas and Societies

mapCommon areas and the requirement to become a member of a society or a shareholder in a company have been popular means of managing residential subdivisions over the last decade. They necessitate compliance with the Securities Act 1978 although an exemption from full compliance has been established for these types of developments. Provided a developer follows the requirements of the exemption they will not be required to provide full disclosure information (including a prospectus) to the purchaser. Failure to comply with the act will render an agreement void.

A case earlier this year illustrated just how precise compliance with the exemption must be.

A developer in Mangawhai sold property that included common areas and an obligation to become a member of a society. At the time the agreement was signed, the society had not yet been incorporated. The rules were in a draft format and were provided to purchasers. From those draft rules the purchaser could see the society requirements and the form the society would take.

However, the exemption required that the rules must be supplied to the purchaser “before subscription”. Subscription occurs when the agreement for sale and purchase is signed.

The court determined that, in order to rely on the exemption, the documents required to be supplied to the purchaser must include the rules of a society that was actually incorporated not those of a society that was proposed to be incorporated under the act.

The consequence was that the requirements of the Securities Act exemption had not been complied with.

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