“Leaky” unit title escrow scheme
NZBA member banks have agreed on a process when lending to customers to assist with remediation work at a unit title development due to “weathertightness” issues.
The scheme being progressed is designed to ensure that unit owners with bank funding can get access to the entire repair amount therefore giving the Body Corporate comfort that it can enter into the requisite contractual arrangements for the repairs. This is a significant move by the banks and in our view the comfort that the banks are looking for is reasonable. They do not want to disburse funds if the Body Corporate does not have the balance of the funds available to it. We understand that absolute certainty of funding may be difficult to certify but in our view there needs to be a credible story on how a repair programme is to be funded. We also understand from industry participants that understanding the funding profile of all owners in a unit title development is also a challenge, especially when certain owners will not engage in the process.
As the project has developed it became apparent to us, irrespective of whether a Body Corporate was requiring the funds in full at the commencement of the repair programme or in progressive drawdowns, there was significant protection for both owners and their banks in requiring the arrangements contemplated by the Escrow Deed. Accordingly the banks are now requiring the Escrow Deed to be entered into where customers are borrowing to fund remediation work unless there amount levied to undertake the repair work is lower than a threshold amount. However where this is the case, the banks are still requiring certain information about the remediation project from the Body Corporate before loans are advanced.Scheme outline.
Accessing bank funding previously presented a range of issues for unit title developments where the owners sought to fix “leaky home” issues. This scheme aims to ensure that unit owners with bank funding can get access to the entire repair amount and so give the body corporate comfort that it can enter into the requisite contractual arrangements for the repairs.
Banks now require the escrow deed to be entered into where customers are borrowing to fund remediation work unless the amount levied to undertake the repair work is lower than a threshold amount. Even then, banks require certain information about the remediation project from the body corporate before loans are advanced.
Which owners are involved?
There are likely to be five classes of owners in these projects:
1. Lender-funded owners who are required under the terms of their loan approval to be a party to the escrow arrangements;
2. Lender-funded owners who are not required under the terms of their loan approval to be a party to the escrow arrangements and who prefer to pay their repair levy to the escrow account rather than the body corporate building account;
3. Self-funded owners who are more comfortable paying their repair levy to the escrow account rather than the body corporate building account;
4. Lender-funded homeowners who are not required under the terms of their loan approval to be a party to the escrow arrangements and who are comfortable paying their repair levy to the body corporate building account; and
5. Self-funded owners who are comfortable paying their repair levy to the body corporate building account.
The escrow deed provides for owners in classes 1 to 3.
The escrow agent may be any law firm selected at the discretion of the body corporate. The law firm acting as escrow agent must be independent in the sense that it is not also acting for the body corporate in the project. The law firm must request the approval of the relevant bank(s) before it can act as escrow agent – accordingly it is recommended that the law firm engage the relevant bank(s) as early as possible in the remediation project. Similarly, the law firm must request the approval of the relevant banks(s) before it can make any amendments to the escrow deed or the escrow deed certificate.
What does the escrow deed do?
Under the escrow deed the escrow agent will hold all the monies “paid” by the homeowner (both loans made available by the banks and an owner’s deposits from their own funds) and will only release these funds following payment instructions from the body corporate. These payment instructions will either be a payment schedule issued by the building professional under the building contract or a payment claim from a consultant to the body corporate or another expense associated with the repairs which is payable by the body corporate.
A quantity surveyor appointed by the body corporate pursuant to the escrow deed will provide the escrow agent with certificates in respect of the payment schedules. The body corporate chairperson will provide a certificate to the escrow agent in respect of a payment claim. These terms and this process are described in the escrow deed, with the escrow agent confirming to lenders when the requirements of the escrow deed have been met. Escrow agents must notify the banks at the commencement of a new remediation project.
All interest earned on the funds will belong to the body corporate because the repair loans and homeowner deposits will be satisfaction of the levy raised by the body corporate. The deed describes how this interest is dealt with by the body corporate.
Building contract documents
Another condition applying will be the requirement for quantity surveyor sign-off addressed to the banks via the escrow agent. There are two types of building consultant documents:
- Building contract reports – these reports are based on the initial development review reports (which are reasonably similar between the banks) provided to banks by a quantity surveyor where a bank is funding a development. An initial report is provided before repair loans are advanced to the escrow account on the instructions of customers and a final report is provided before payments are permitted from the escrow account; and
- Quantity surveyor certificate in respect of a payment schedule under the building contract – this is a more limited certification in respect of the standard of work completed for which the payment schedule is being submitted.
Escrow deed certificate
Before any payments are permitted from the escrow account the body corporate, or the solicitors acting for the body corporate, will need to provide the banks with the escrow deed certificate.
Under this certificate the body corporate (or its solicitors):
- certify the building contract has been executed and that there have been no changes to the building contract since the provision of the building contract report (the first quantity surveyor sign-off referred to above);
- attach a copy of the designer certificate (which is a certificate from the designer who prepared the designs, plans and specifications required to undertake the repairs to remediate the damage).
Under both types of escrow deed one of the certifications in the escrow deed certificate is that all owners have paid their repair levy to either the body corporate building account or the escrow account. Where not all owners have paid their repair levies the body corporate must be satisfied that it has sufficient funds to complete the remediation project.
The intention with the provision of this certificate is to provide certainty that funds are available for the body corporate to complete the project.
The costs of the quantity surveyor, the designer (if required) and the escrow agent need to be met by the body corporate.
Accessing the scheme
If there is a Financial Assistance Package (FAP), a separate escrow deed should be used. Because the FAP has finished, only a limited number of pre-existing claims can access the FAP. Advice should be sought if the FAP may apply.
The non-FAP escrow deed is available here.
The information above is a general comment on how the escrow deed is intended to operate. No representation is made or warranty given by the NZBA or its member banks as to the suitability of the escrow deed for particular transactions.
Before using the escrow deed, independent and specific advice should be obtained from appropriate experts. It is the responsibility of the users of the escrow deed to ensure that the documents are in acceptable form to them.
The escrow agent may be any law firm selected at the discretion of the body corporate. The law firm acting as escrow agent must be independent in the sense that it is not also acting for the body corporate in the project. The law firm must request the approval of the relevant bank(s) before it can act as escrow agent under the escrow deed – accordingly it is recommended that the law firm engage the relevant bank(s) as early as possible in the remediation project. Similarly, the law firm must request the approval of the relevant banks(s) before it can make any amendments to the escrow deed or the escrow deed certificate.
The NZBA and its member banks will not be liable for any loss arising from acts or omissions relating to the escrow deed.