Residents’ Associations and the Challenging Impacts of the Incorporated Societies Act 2022
Many residents’ associations are established as incorporated societies, which means that they are subject to the compulsory requirement to re-register under the new Incorporated Societies Act 2022 (“the new Act”).
There are significant practical challenges for residents’ associations navigating the new Act because the legislation is an uncomfortable fit with the way residents’ associations operate. There is a real tension between incorporated society law and property law, but these entity types are often required by developers or councils as part of property developments and so must be set up this way.
- Requirement to re-register
The requirement to re-register applies to all existing incorporated societies (not just residents’ associations), which have two and a half years from 5 October 2023 through until 5 April 2026 to complete re-registration.
To re-register, a society must update its constitution to meet the new Act’s requirements and then apply for re-registration through the Registrar of Incorporated Societies (Companies Office). Few, if any, societies will be able to re-register without making changes to their existing constitutions/rules. Our FAQs page has more information about what a compliant constitution will need to include.
Incorporated societies which have not re-registered by 5 April 2026 will cease to exist, at which point they will become an unincorporated group of individuals. There will be no separate legal entity any longer, and the individuals involved (formerly the members) may take on personal liability for the former society’s activities and commitments. Ceasing to exist will be problematic for incorporated societies like residents’ associations with contractual obligations, assets, property, and/or employees.
- Minimum of 10 members
The new Act requires societies to have at least 10 members to re-register, and they must maintain 10 members at all times. The Registrar has the power to issue a society with fewer than 10 members notice to increase its membership or it will be liquidated.
Some residents’ associations are unable to meet this minimum membership requirement, for example where there are fewer than 10 properties within the development. Although body corporates count as three members, even then some residents’ associations will not have 10 members which means they cannot give the confirmations required to submit their re-registration application.
Residents’ associations that find themselves in this position will need to carefully consider if and how membership numbers can be increased (e.g. by implementing additional categories of member such as occupiers as well as owners). Some may have to consider alternative legal structures, although there is no ideal alternative.
- “Controlling Member”
Traditionally, property developers have taken the role of “Controlling Member” or “Principal Member” in a residents’ association while the development work is ongoing and are generally phased out of that role when the development period comes to an end. As a controlling or principal member, the developer retains rights and controls to ensure the development operates as they want it to.
However, the new Act does not allow for a controlling or principal member to operate in the way that many residents’ associations have been used to. The new Act introduces an expanded definition of who will be a society’s “officers”. Officers now include not only the committee members but any other natural person who is in a position that allows them to exercise significant influence over the management or administration of the society.
This expanded definition will capture controlling or principal members because of the degree of control they exert over the way a residents’ association runs. The controlling or principal member will therefore be deemed to be an officer of the residents’ association, with all the officer duties and obligations that result. Developers are likely to be reluctant to take on officer duties but will face challenges retaining the rights and controls they have been used to otherwise.
Additionally, a residents’ association will need to have a committees of at least three officers, all of whom must be natural persons and a majority of which must be members or representatives of bodies corporate that are members. Development companies themselves will not be able to be officers, although they can appoint representatives as officers if the constitution provides for that.
- Distribution of surplus assets at wind up
Under the previous incorporated societies legislation (the Incorporated Societies Act 1908), when a society wound up its surplus assets could be distributed to members. Doing so was considered an exception to the general rule against members obtaining a private pecuniary profit from their membership.
Now under the new Act, when a society winds up its surplus assets must be distributed to a not-for-profit entity – that is an incorporated society, charitable entity, or other society/institution/association/organisation/trust that is not carried on for individual private benefit and whose funds are applied entirely or mainly for benevolent, philanthropic, cultural, charitable, sporting, or public purposes in New Zealand.
This is a significant change for residents’ associations, which generally intend to either distribute surplus assets to their members on winding up or must comply with specific property law stipulations applying to the assets they hold (such as stormwater facilities).
Most, if not all, residents’ associations will have no connection to a not-for-profit entity and there will be no logical not-for-profit entity for them to nominate. Further, distribution of surplus assets in that manner is likely to be inconsistent with land covenants and/or other territorial authority requirements to which residents’ associations are subject.
- Practical issues
There is no ideal alternative structure to a residents’ association which is an incorporated society, and residents’ associations continue to be a practical necessity.
The unit title approach differs significantly and is subject to an entirely different legal regime. While a residents’ association could move to the unit title model and become a body corporate under the Unit Titles Act 2010, the practicalities of that change are complex, costly, and require agreement among all owners and the developer.
A company model poses further problems and practical challenges, while the owners operating as an unincorporated group of individuals is unlikely to be palatable to developers, councils, or the owners themselves.
At present, residents’ associations must navigate the requirements for re-registration as best they can, including adopting compliant constitutions which meet the new Act’s requirements. This is a highly specialised area of law, and the implications for residents’ associations are uniquely challenging compared to other types of incorporated societies. The team at MoranLaw have expertise in incorporated societies law and its intersection with property law, and have been involved in law reform advocacy in respect of these challenging issues. If your residents’ association needs support navigating the re-registration process, get in touch today.
