Suzanne Green and Nicola Page have both had to find about $45,000, after EQC changed the way it covered their Marion Square apartment building.

Nicola had to extend her mortgage. Suzanne maxed out her revolving credit loan. Paula emptied her savings account. Judith is in her 80s and had to use her retirement savings.

The residents of Wellington's Marion Square apartments are fighting EQC over a rule change that has left them unexpectedly – and they say inexplicably – $2.3m out of pocket.

But the stoush is costing more than just money. Judith was too frail and stressed to talk. A former body corporate chairwoman, she's already led the residents through a messy leaky-building claim.

And the case could have serious implications for any building throughout the country that is made up of both residential apartments and commercial space, such as shops and car parks.

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Marion Square body corporate chairwoman Rachel Valentine explains the issue best:

"It's a very complex issue and yet if you strip it down, it's not complex at all. What EQC is trying to do is reclassify the building."

Cameron Burnell EQC has reclassified the Marion Square apartment building as less than 50 per cent residential, because it includes two floors of car parks and one floor of retail.

The central city Marion Square complex is unusual in that the 40 apartments are arranged around a central open courtyard. But it's not unusual in having a mix of commercial and residential spaces.

Vibrant, publicly accessible street-level spaces such as shops and restaurants make for lively cities, so city planners generally encourage apartment buildings to have some commercial elements. The national Body Corporate Chairs' Group has about 40 mixed-use buildings in its database.

At Marion Square, there are shops on the ground floor, then two floors of commercial car parks. Above that are four levels of car parks and apartments accessible only to residents.

Under the Earthquake Commission Act, the extent to which the Earthquake Commission (EQC) covers a mixed-use building depends on how much of that building is residential. If a building is more than 50 per cent residential, EQC will cover damage anywhere in the building. But if it's less than 50 per cent residential, EQC covers only damage in the residential areas.

That seemed pretty straight forward – Marion Square is 68 per cent residential, when you count all the residential areas such as the residents' stairs, car parks and storage lockers. And when the 2013 Seddon earthquake shook some cracks in both the apartments and the commercial areas below, EQC paid out on the basis the building was more than half residential.

But when the body corporate put in their $3m claim for damage from the 2016 Kaikoura earthquake, there were rumblings of an altogether different kind.

CAMERON BURNELL/STUFF While Marion Square's courtyard configuration is unusual, its combination of residential and commercial spaces is common.

Through the swipecard-access doors, up the private lift, across the private courtyard and up another set of private stairs is Suzanne Green's apartment. The damage wasn't bad here – a few hairline cracks but the apartments were all still liveable. The car parks below, though suffered damage in the November 2016 quake, and the public car park remains out of action.

Nicola Page was in her apartment when the quake struck – it was so violent it shattered her tied-down TV. She and her partner, who had just undergone heart surgery, thought they were going down with the building. But after the dust settled, a new shock awaited.

When 62-year-old Green found out residents were liable for a $2.3m special levy, the f-word was used. "It was really awful," she says. She was already facing a near-doubling of her body corporate fees, from about $8000 a year to $15,000 – that's $300 a week – because of astronomical post-quake insurance hikes. Now she suddenly had to find another $44,700.

EQC had changed its mind about Marion Square being a primarily residential building, choosing instead to adopt a restrictive definition of dwelling under the EQC Act. That means all those exclusively residential spaces you pass through to access Green's apartment no longer count in the residential calculation. Instead, EQC counted only the floor space behind each apartment's front door, which amounts to 38 per cent of the building.

As another resident, Paula Attrill, says: "It's not like it's [the shared space] some nebulous thing that's in no-man's land, which is where EQC puts it. This vacuum of space that's neither residential nor commercial. It makes no sense."

Page agrees. EQC still counts the residents' private car parks, corridors and staircases as residential for the purposes of insurance cover. But not for the purpose of deciding whether or not a building is mostly residential.

"It's either in or it's out. It does not make sense," says Page.

Asked how a space could be residential for the purposes of cover, but not for the purposes of the building calculation, EQC said: "This is how the EQC Act operates".

CAMERON BURNELL/STUFF Page and Green say EQC's reclassification is unfair and makes no sense.

While the argument might seem technical, the impact is very real. As Page points out, the commercial area is "the bit that basically holds us up. And that's the expensive damage".

Because EQC is refusing to cover the whole building, the body corporate now has to rely on its private insurance to cover damage to the car park ramps. That means paying the $2.3m insurance excess. Had they known EQC wouldn't cover the whole building, they could have paid a higher premium to reduce that excess. But why would they, says Valentine, when EQC had already paid the 2013 claim on the basis the building was more than 50 per cent residential.

And so Green – an ESOL teacher on about the average wage – has nearly maxed out her revolving credit to pay her $45,000 share. She already has flatmates to help cover the body corporate fees, and considered moving to Featherston and renting out her apartment.

Page – a 47-year-old building services draughtswoman – feels like she's working for free, to make up the $48,000 she had to extract from her mortgage and savings. While she still lives in a nice place, she can't afford to make the most of the benefits of living in town – eating out, going to the movies.

"If something goes wrong, or my partner has another health crisis, we're going to be in a bit of trouble."

And because of soaring insurance premiums, the residents now face a $5m excess in the event of another earthquake.

Cameron Burnell Marion Square apartment owners are fighting an EQC reclassification that leaves them out of pocket by $2.3m.

EQC is adamant it hasn't changed its interpretation of the EQC Act, it just miscalculated Marion Square's 2013 claim.

"For the 2013 claim, EQC did not correctly assess the building against the 50 per cent threshold. Therefore EQC made payments for damage to areas in the building, such as the ground-floor commercial premises," EQC chief executive Sid Miller said in a statement. No-one would be interviewed about the issue.

EQC could not say whether any other buildings had lost their 50 per cent residential classification, or whether any other body corporates had challenged their calculations.

It's not clear whether this was an issue in the Christchurch rebuild; however, their insurance excesses were calculated differently so the impact of a reclassification would have been much lower.

Valentine, who has been working 20-30 hours a week on the dispute, does not accept that this is how the law has always been interpreted.

"What they're doing is changing the way that all the buildings are insured, and what people's cover is, and what they think they have ... It's pretty appalling behaviour, really."

EQC's interpretation is also at odds with the view of everyone else spoken to. Stuff is aware of at least one Wellington apartment building that has been recently resurveyed to decide whether it met the 50 per cent threshold, and just sneaked in when all the shared residential spaces were included.

Craig Simcox Former Body Corporate Chairs Group president Neil Cooper says EQC's new interpretation is "totally foreign" and "potentially devastating".

Former Body Corporate Chairs' Group national president Neil Cooper says the idea a building's residential component is restricted to the floor space of each apartment is "totally foreign", and the implications are "potentially devastating".

"I don't know where it's come from ... Almost every building is what they call mixed use. And if they're deciding then to say we only count the space within apartments – so no corridors, or anything, no parking spaces even – that's a nonsense. It seems to be a totally inconsistent view."

A director of Meridian General Brokers, Bernie Kane, agrees everyone in the industry had understood the residential calculation to include all residential space, not just individual apartments, and EQC's own documents seemed to support that.

"The client is being denied the opportunity to arrange an insurance – which they could have arranged – which would reduce their excess and reduce their exposure. And EQC have denied them that, by adopting an interpretation – and paying all their past claims based on that interpretation – and then changing their minds. They're the ones that are charged with interpreting the act, so how can they say they got it wrong?"

The uncertainty also makes it impossible for brokers to advise body corporates what insurance they should be taking, Kane says.

"We are charged with calculating and collecting levies and giving advice to our clients. How can we do that when EQC are changing the rules as they go along?"

Nikki Macdonald EQC's EQCover Insurers' Guide 2017 uses this structure as an example of a building that would meet the 50 per cent residential threshold. But that would only be true under their restricted interpretation, if the building had no internal lift, stairs or access corridor, which seems unlikely.

​EQC's restrictive interpretation also appears to conflict with its own advice. Its EQCover Insurers' Guide 2017 includes an example of a building that would meet the 50 per cent residential threshold. Its lower floor is made up entirely of retail, with three apartments covering the same floor space above. The only way such a configuration could reach the 50 per cent threshold under EQC's new interpretation, is if there are no internal corridors, lifts or stairs to the apartments, which seems highly improbable.

EQC does not accept that the example conflicts with its restrictive interpretation.

"Not all multi-unit buildings have access corridors," Miller says. "For example, some buildings in this configuration could have separate external access for each upstairs unit."

The scale of the impact is hard to gauge. The Body Corporate Chairs Group has 40 mixed-use buildings on its database, but has no idea how many are close to the 50 per cent threshold.

The reclassification of mixed use buildings could have broad implications, because so many apartment buildings include shops and car parks. PHOTO: SUPPLIED

Justin Leonard, of Alive Building Solutions, manages about 30 Wellington buildings, of which about 75 per cent are mixed use. Most have one or two shops, so are unlikely to be caught by a change in interpretation, he says. Chews Lane, which has apartments built across two commercial buildings, would be unaffected as it has two separate body corporates – one commercial and one residential.

Leonard suggests if EQC is worried about the cost of covering commercial areas in mostly residential buildings, it could levy commercial areas as well.

"In some cases, where there's only one shop at the bottom, it's neither here nor there for EQC. But when you start to get close to that 50 per cent, then the cost to EQC could be relatively high. Then you've got to ask whether EQC should be applying their $200-a-year levy within insurance to the commercial units in buildings where it's over 50 per cent residential. So that EQC are at least getting fees in for covering that component of it."

EQC argues it has dealt with Marion Square in good faith. Paula Attrill, a public servant, does not agree.

"They've suddenly made this about-face with no notice, which has left us with no means left – no ability to take any steps to mitigate the risk. And now we're left with enormous financial cost. We just don't think that's fair. That's not how government should do business with the public of New Zealand."