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COVID-19: An infrastructure-led recovery is possible, if the key players survive

During the Government-enforced lockdown of NZ as part of its COVID-19 response, all non-essential work on capital projects has been halted.  The Government has, so far, taken a very limited view of essential works and required major infrastructure projects to stop. As a result, all levels of the NZ construction supply chain are suffering.  Construction is a low-margin, high risk industry and participants do not generally carry large balance sheets or squirrel away cash for a rainy day.  Speculation continues to grow that solvency issues abound, including for established contractors.  We look at how certain contractual models may assist the Government in kick-starting the construction sector, and the NZ economy in the wake of COVID-19. ..

News & Insights

COVID-19: An infrastructure-led recovery is possible, if the key players survive

During the Government-enforced lockdown of NZ as part of its COVID-19 response, all non-essential work on capital projects has been halted.  The Government has, so far, taken a very limited view of essential works and required major infrastructure projects to stop.

As a result, all levels of the NZ construction supply chain are suffering.  Construction is a low-margin, high risk industry and participants do not generally carry large balance sheets or squirrel away cash for a rainy day.  Speculation continues to grow that solvency issues abound, including for established contractors. 

We look at how certain contractual models may assist the Government in kick-starting the construction sector, and the NZ economy in the wake of COVID-19.


Announcements and clear intent

In January 2020 the NZ Government announced the New Zealand Upgrade Programme, a $12bn infrastructure investment package.

In the months following, the full impacts of the COVID-19 pandemic have been realised and further announcements have followed. 

The NZTA is offering ‘advance payments’ to contractors to assist with cashflow through the lockdown.  It remains to be seen whether these payments will, as seems likely from the terminology, simply defer cashflow issues to later in a project – and whether they are in addition to fair variation payments for the stand-down period. 

An Infrastructure Industry Reference Group was announced as the latest attempt to speed up project delivery, and provide assurances to NZ’s creaking construction industry, its intention being to identify “shovel-ready” projects for fast-tracking after the lockdown period has ended.

It seems almost certain that, at some stage, the Government will announce further funding for infrastructure projects, as part of its overall fiscal response to the current crisis, as NZ leveraging its comparatively healthy balance sheet to finance recovery and sustain employment levels. 

Time is of the essence

The announcements offer some hope, but it is unclear if the projects (and the money) will flow soon enough to save the construction industry from significant disruption through insolvencies, job losses and the ensuing loss of productivity. 

Certainly it seems unlikely that the Government will have the requisite volume of projects stored away in a “shovel-ready” state, ready for immediate construction – unless, in an unlikely turn of events, the Labour-led Government looks to reinstate some previously abandoned National Government projects (some Roads of National Significance, for example, may re-emerge). 

Even the most ambitious announcements refer to a six month delay before the projects are commenced (or perhaps before contracts are inked) and are already being tainted with ready-made excuses in the form of Government procurement procedures and the Resource Management Act.

So, what can be done to speed things up?

We would like the Government and its various agencies to openly commit to fast-tracking projects through collaborative contracting models.  Such models can be used to leverage the expertise and capacity of the construction industry, in order to better and more quickly feed itself projects.  They can also therefore serve as a mechanism through which Government can support the industry more immediately.

Because of their nature, these contracts can be signed far quicker (and at an earlier stage of project development) than traditional construction contracts.

In particular we believe Government agencies would benefit from using two particular contracting models:  Alliancing and a variant of Delivery Partnering.

The two models are complementary and one in particular (Alliancing) is tried and tested in the context of emergency response in NZ (the Christchurch and Kaikōura quakes), and we believe the fallout from COVID-19 should be viewed as a post-emergency scenario.  NZTA has standard forms for Alliancing, which are largely uncontroversial when fairly drafted using a conventional NZ approach.

Alliancing

Alliancing is well understood in NZ.  Essentially it involves the client bringing project participants (generally contractors and consultants, teamed in a consortium) into its team to deliver a specific project or programme of projects.  Its defining legal characteristic is that the parties enter a ‘no sue’ arrangement, and agree to work together for the good of the project.  Alliancing was developed primarily to accommodate projects of high value and risk (risk that could not be carried or priced effectively), which would include projects being procured at break-neck speed (where perhaps design is being developed on a rolling basis and there is no time to consent the whole project neatly before commencing work).

Traditionally, Alliancing has been used for single, large projects in NZ.  However, more recently Alliancing and Alliancing principles have been applied by public sector clients with large pipelines of smaller projects.  We believe that approach should continue and, in the current circumstances, with the need to move quickly, the model could be used for individual projects (schools for example).

Delivery Partner – and variants

Delivery Partnering is much less used in NZ, but elements of this model have started to creep into procurement here (most notably Watercare’s Enterprise Model and in the increased prevalence of early contractor engagement). 

It has been described by some as a glorified (or complicated) consultancy arrangement and, again, involves bringing a team of staff from contractors and consultants ‘in-house’ to work with the client.  The concept behind the model is simple: often a client will not have the expertise, capacity and industry knowledge to rapidly procure a major project (or series of projects or packages) in the way that works best for the client whilst also presenting an acceptable risk profile to the industry. 

Delivery Partnering has been successfully employed overseas on multiple projects in Australia and was used to deliver the London Olympics.

History has shown us that, Alliancing aside, projects procured quickly by Government, whether under pressure from Ministerial announcements or otherwise, will result in a ‘dumping’ of risk onto the private sector – whether appropriate or not – often with catastrophic consequences.  Under a Delivery Partner model, the client will use private sector expertise, simultaneously, across multiple projects, to identify the most efficient packages of work and the most efficient delivery model for each package and also progress design and mitigate risks to an acceptable level.

Why would collaborative contracting help now?

Both the Alliancing and the Delivery Partner models can be implemented (and participants, including contractors, can be paid) from a far earlier stage in project development than traditional contracting, if done properly.  That is the reason we believe it will be of particular use to Government now, in light of announcements.

Government could stick to its tried and tested methods of reviewing and ‘fast-tracking’ projects, while the construction industry waits with baited breath for announcements (and decisions!), or Government could invite the industry ‘into the camp’ in a meaningful way (being paid for its input) – to apply its innovation, expertise and voracious appetite for new projects to achieve Government goals.  At a time when we regularly hear we are ‘in this together’ and when other Government assistance is operating on a ‘high trust’ basis, it seems to us there is a good case for Government to be proactive and move quickly to bring the private sector in-house for mutual gain.

We believe there is scope for these models to be adopted notwithstanding existing government procurement rules.  They would not cut across neither the aim of open competition, transparency or securing strategic outcomes.  They would be exclusively focussed on securing the best public, social and economic outcomes.  In any event, Government procurement rules recognise the legitimacy of procuring projects in less conventional ways than usual, more flexibly, in and immediately following emergency situations.  Alliancing and Delivery Partner models by definition are well equipped to deal with the risks usually seen in departing from the norm, particularly in areas of risk such as conflicts of interest, over-inflated prices, improper governance and lack of accountability.

With Alliancing, a project will need to be identified and funded, although typically it can accommodate a two-stage process starting with an ‘Alliance development’ phase, which is used to rapidly progress design and pricing – and to mitigate key project risks (such as consenting) to a suitable level, before the client is required to commit to the construction stage.  This model would probably suit a number of projects that the Government has already progressed to a stage where they are identified and reasonably defined.

The Delivery Partner model can be rolled out from an even earlier stage, and it is the model that most interests us in the wake of the COVID-19 lockdown – and the resulting cancellation of many private sector projects. 

The Government is looking to speed up project procurement, consenting and delivery to market.  The Government is necessarily resource constrained. However, capacity (and a hunger for sustainable long-term workflow) exists in the construction supply chain.

The Government could in theory sit back, wait for the redundancies and then look to employ the recently unemployed, but that would arguably just cannibalise and disrupt the industry. 
However, using the Delivery Partner model – or a NZ variant of it – we believe Government can effectively partner with and leverage off the private sector, leading to Government money flowing, and jobs being securedy, almost immediately – whilst also speeding up Government project planning and delivery.

Whilst the Delivery Partner model used in the UK and Australia has several financial overlays that ensure that partners are incentivised to deliver the project in line with clear targets, that degree of detail may not be available at the outset of NZ’s re-start.  We imagine however, that similar to the ‘interim’ stage of an Alliance, an early stage could be developed under which those that partner with the Government may be subject to more general KPIs (and more moderate bonuses), at least until projects become fully costed, authorised and commenced.

Put another way, under our proposed model:  Government would do what it does best in providing strategic leadership and overall decision making and the private sector would be free to do what it does best: deliver quickly.

What are the cons?

Generally Alliancing and other collaborative contracting models are regarded as being faster but more expensive on the whole (despite reporting often stating that Alliancing delivers projects ‘under budget’, it rather depends when that budget is set).  Given the challenges facing the country at present, cost seems likely to be less important now than ever before.

Recently, certain public-sector clients in NZ have begun to tweak the traditional Alliancing model (generally to erode the ‘no sue’ concept, and pass more risk to private sector participants).  Given the circumstances, we believe now is not the time for such an approach and we recommend a traditional approach to Alliancing.

Alliancing is also viewed as quite niche within the industry – and requires a different mind-set, and arguably a greater degree of sophistication than traditional contracting.  Whilst there are limited parties that have actual Alliancing experience in NZ, we believe that there is no reason others cannot be trained effectively and quickly to operate within the model.

At its most basic, and without the right protections, a Delivery Partner-based model may become a simple ‘secondment’ or ‘consultancy’ arrangement, where Government covers its partner’s staff costs for those involved.  This is why it is important to find and overlay the right financial models – to ensure partners buy into the strategic objectives, are motivated by appropriate financial returns, and to minimise the prospect of inefficiency.

Additionally, it is worth noting that projects delivered under these models will not necessarily deliver the huge volumes of immediate work (and associated cashflows) that the construction industry desperately requires at the moment.  Initially, in the early stages, the Delivery Partner model would help contractors cover their cost-base (salaries) whilst making some margin, whilst Alliancing would provide certainty of workflow. 

Additionally, it is worth noting that the industry was stretched for resource before the current crisis and, whilst a number of private sector resources have been cancelled or are in doubt, the industry may still be lacking in the type of senior expertise that would be required within collaborative contracting models.

Whilst a lot of design and planning can usefully be done without site-based activity, there are limits.  Geotechnical work and site surveying, for example, could not currently be undertaken, although if the Government’s response to COVID-19 is effective, it is conceivable such activities may become permitted – subject to specific precautions.

So, these contract models alone are not a panacea for all the industry’s ills, but we believe they are likely to be useful and effective in speeding up recovery and ‘re-starting’ the industry.

Greenwood Roche is a national law firm, which specialises in advising on major projects. Greenwood Roche’s Construction team is led by Barry Walker (Auckland), James Riddoch (Christchurch) and Amy Rutherford (Wellington).  All have gained extensive experience overseas and in NZ of project and contract structures, including Alliancing and Delivery Partnering.  For more information on our Construction team, view our website.


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COVID-19 and No Access in Emergency – Commercial Leases

The global pandemic caused by the novel coronavirus known as COVID-19 has caused rapid and widespread change and disruption as countries respond to the threat of COVID-19.  In New Zealand, we rapidly progressed from the Prime Minister’s announcement of a COVID Alert Level System on 20 March 2020, to the declaration of a national state of emergency and the implementation of COVID-19 Alert Level 4 restrictions, which resulted in an effective “lock-down” and the closure of all premises not required for “Essential Businesses” by 11:59pm on 25 March 2020.  The initial starting point will be the provisions of the relevant leases.  While there are a number of different forms of lease in use in New Zealand, the most commonly used form is the Auckland District Law Society’s Sixth Edition 2012 Deed of Lease (ADLS Lease). The ADLS Lease contains express provisions to cover situations where no access is available to the leased premises as a result of an emergency.  However, many other forms of lease (including earlier editions of the ADLS Lease) do not directly cover this situation...

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COVID-19 and No Access in Emergency – Commercial Leases

The global pandemic caused by the novel coronavirus known as COVID-19 has caused rapid and widespread change and disruption as countries respond to the threat of COVID-19. 

In New Zealand, we rapidly progressed from the Prime Minister’s announcement of a COVID Alert Level System on 20 March 2020, to the declaration of a national state of emergency and the implementation of COVID-19 Alert Level 4 restrictions, which resulted in an effective “lock-down” and the closure of all premises not required for “Essential Businesses” by 11:59pm on 25 March 2020. 

The initial starting point will be the provisions of the relevant leases.  While there are a number of different forms of lease in use in New Zealand, the most commonly used form is the Auckland District Law Society’s Sixth Edition 2012 Deed of Lease (ADLS Lease). The ADLS Lease contains express provisions to cover situations where no access is available to the leased premises as a result of an emergency.  However, many other forms of lease (including earlier editions of the ADLS Lease) do not directly cover this situation.


ADLS Lease

The current 2012 “Sixth Edition” of the ADLS Lease was introduced as a response to the Christchurch earthquakes, where the emergency red-zone cordon in the central city prevented tenants from being able to access their premises.  The cordon meant that access to buildings was extremely limited or impossible, regardless of whether or not any physical damage was suffered.  Where there was little or no physical damage, usual entitlements to rent abatements did not apply and leases did not terminate under the damage or destruction provisions.

Clauses 27.5 and 27.6 - No Access In Emergency - were introduced to deal with this situation and provide for an abatement of rent and outgoings and, potentially an entitlement to terminate the lease.  The clauses apply where there is an “emergency” and the tenant is unable to access the premises to fully conduct their business from the premises because of “reasons of safety of the public… or the need to prevent reduce or overcome any hazard, harm or loss that may be associated with the emergency including… restriction on operation of the premises by any competent authority.” An “emergency” includes a situation resulting from an “epidemic” and in our view the COVID-19 pandemic and the Government response to it will qualify as an “emergency”.

Access to the premises to fully conduct the Tenant’s business

For the clause to apply, the tenant must also be unable to access the premises to “fully conduct” their business from the premises.  This is arguably different to the permitted or business use under the lease.

Under the Government’s Alert Level 4 restrictions means that only certain “essential businesses” can operate from their premises.  An essential business is one that is essential to the provision of the necessities of life, such as pharmacies, and businesses supporting them, such as medicine manufacturers – the details are as described on the covid19.govt.nz internet site.

Most business, however, will not be able to operate from their premises at all or, in the case of essential businesses, will only be able to do so in a limited way.  Where this is the case, the Tenant will not be able to access the premises to “fully conduct” their business and the No Access In Emergency provisions will apply.

What happens when the No Access In Emergency provisions apply

Where the No Access In Emergency provisions apply, clause 27.5 provides that a “fair proportion of the rent and outgoings” ceases to be payable for the period in which the Tenant is unable to access the premises to “fully conduct” its business.

The Alert Level 4 restrictions commenced at 11:59 pm on 25 March 2020, so it is generally taken that these affected businesses on 26 March.  At this stage the Alert Level 4 “lockdown” is due to last for four weeks, but the Prime Minister has indicated that this level of restriction may continue beyond that period, at least for some parts of the country.

What is a “fair proportion” of the rent and outgoings?

A fair proportion will vary depending on the nature of the Tenant’s business, their premises and the terms of the lease.  There will be a range of possibilities.

At one end of the spectrum will be Tenants, such as retailers, who cannot access their premises to conduct their businesses.  However, even in those circumstances, it will at least be arguable that the premises continue to be used for the conduct of the businesses by way of storage and warehousing of stock in trade.  In addition, parts of the premises may remain useable remotely, such as IT servers.  Where that is the case, there will also be an argument that the extent to which the conduct of the business continues remotely should be taken into account.

The abatement must also be “fair”.  This might well mean that an assessment of an abatement goes beyond consideration of only the Tenant’s business, and consider what may be more broadly “fair” as between landlord and tenant.  It may be that obligations a landlord still has to perform under the lease will be relevant, such as payment of insurance.  For reasons such as this, it may also be the case that there is difference between a fair proportion of rent and a fair proportion of outgoings.

As what constitutes a fair proportion of rent and outgoings will vary depending on the individual circumstances, the landlord and tenant will need to try and negotiate to reach agreement on what represents a fair proportion.  If the parties cannot agree, the ADLS Lease requires that parties first attempt to resolve any dispute by agreement and mediation (provided that both parties agree to mediation).  If the dispute is not resolved by agreement or mediation it will proceed to arbitration.

Termination

In addition to the rent abatement in clause 27.5, clause 27.6 provides either party may terminate the lease by giving 10 working days’ notice where the Tenant is unable to gain access to the premises for the specified “No Access Period” set out in the First Schedule or the party giving notice can establish with ‘reasonable certainty’ that the Tenant will be unable to gain access during the period.  The standard No Access Period in the ADLS Lease form is 9 months, but this is subject to negotiation between the parties and, as a result, will vary depending on the lease.

Other Leases

The situation for other forms of lease is less certain.  Bespoke lease forms may address no access issues using a different approach, while older leases (i.e. leases that were entered into pre-2012/2013 and including earlier versions of the ADLS Lease, such as the Fifth Edition 2008), generally do not include an express right to a rent abatement in the current circumstances, unless a bespoke “no access” or force majeure clauses was included in the further terms of lease.  This reflects “no access” clauses becoming a feature of lease drafting following the Christchurch earthquakes.

Where the lease does not include no access provisions, tenants may attempt to raise arguments based on the doctrine of frustration.  Frustration allows a contract to be avoided where the obligations have become impossible to perform due to the occurrence of certain events that are beyond the control of the parties to the contract.  However, establishing frustration of a lease is likely to be very difficult, as the tenant would need to argue that the “common object” of that lease can no longer be achieved. Additionally, case law resulting from the Canterbury earthquakes indicates that the Courts would be very hesitant and generally unwilling to get involved in a claim for frustration for a commercial lease, particularly where the timeframes around the restrictions are so uncertain.

Should a tenant pay April’s rent?

We are seeing a number of tenants taking an aggressive approach to this issue by advising landlords that they will be withholding all rent and outgoings.  Whilst that approach may represent a litigator’s preferred option, our view is that this approach will be counter-productive in the long-run.  In all but the most clear-cut cases, landlords will have good legal arguments available to them that some rent and outgoings should be payable during the lockdown period.  If a tenant simply does not pay, it will open itself up to allegations of breach and, potentially, termination of its lease.

In addition, by simply stopping payments without prior consultation, tenants are likely to simply annoy their landlords, resulting in any goodwill being eroded and landlords taking a more combative and robust approach than might otherwise be the case.

On this basis, our view is that where tenants can afford to pay a fair proportion of their rent and outgoings, they should do so – if that assessment cannot be undertaken in time, they should reserve their rights to review the contractual position and seek a refund later.  If there are concerns about the solvency of a landlord, then tenants may perhaps pay amounts into a solicitor’s trust account (or other escrow) pending resolution of the matter as a show of good faith and good financial standing.

Of course, many tenants are in a difficult position and unable to pay.  In those circumstances, we are advising tenants to talk openly to their landlords about their situation.  We are seeing many landlords prepared to agree to non-payment or deferral in order to support vulnerable tenants.  Again, this can potentially be done on a without prejudice basis – buying time for the parties to have a sensible discussion about the permanent solution. However, where a tenant starts from the position that it will not pay, a landlord may be significantly less accommodating.

What should a landlord do if its tenants do not pay rent?

As mentioned above, in almost all cases, there are good arguments a landlord can mount that rent and outgoings (or a proportion of them) should be paid. 

In this respect, some media reporting and even some initial legal advice in this area may be problematic, and may have built an unrealistic expectation amongst tenants that a 100% abatement is possible or even to be expected.  We have already developed a series of strategies for our landlord clients to employ when dealing with tenants and we expect many tenants will need to adjust their expectations as negotiations play out.

Where possible, we recommend reserving robust legal arguments until needed.  In the interim, landlords should be (and most are) reviewing their lease terms and engaging with their tenants to assess how they have been impacted by the Alert Level 4 lockdown, and whether a commercial deal can be struck.  Of course, that will not be easy if a tenant has already stated it will not pay rent and outgoings and, in such cases, dialogue will almost certainly be more fraught – and a more legal approach may be needed from the landlord to bring the tenant to the table before open discussions and negotiations can begin.

What if a lease does not provide for abatement?

Regardless of lease terms, many of our landlord clients are keen to find ways to accommodate their tenants and secure their rent roll in the long-term.

Even if a tenant has no right to an abatement under its lease, it may find that its landlord is willing to allow rent to abate, or be deferred.  In the medium to long term this is likely to be in everyone’s interest.  Already we are seeing deals being struck that allow a percentage (40/50%) of rent and outgoings to be paid for a finite period (3 months seems to be the norm).   Many landlords are prepared to agree the arrangement as a simple abatement, others are agreeing the unpaid rent will be deferred and amortised over the balance of the lease term.  Another option may be to extend the term of the lease, (if possible) increase security provided and/or vary future rent review mechanisms in return for the abatement.

We strongly recommend that tenants open discussions with their landlords, to investigate what options may be available – regardless of the strict legal position.

This article is for general information purposes only and not to be relied upon as legal advice.  For more information, please contact your usual Greenwood Roche partner or lawyer.


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COVID-19 – Implications for Commercial Leasing

COVID-19 is having a significant and unprecedented effect on people and businesses in New Zealand. At 11:59pm on Wednesday 25 March, New Zealand will be at Alert Level 4 of the Government’s COVID-19 Alert System. People must stay at home, travel is severely limited and all non-essential businesses must close. Further information is available at https://covid19.govt.nz/...

COVID-19 – Implications for Commercial Leasing

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COVID-19 – Implications for Commercial Leasing

COVID-19 – Implications for Commercial Leasing

COVID-19 is having a significant and unprecedented effect on people and businesses in New Zealand.

At 11:59pm on Wednesday 25 March, New Zealand will be at Alert Level 4 of the Government’s COVID-19 Alert System. People must stay at home, travel is severely limited and all non-essential businesses must close. Further information is available at https://covid19.govt.nz/.


All aspects of business will be affected by the restrictions, including commercial leasing. Landlords and tenants will be considering their obligations under their leasing arrangements, what health and safety duties they have and how rental streams and contractual obligations may be affected.

Health and safety

An immediate focus for landlords and tenants will be on health and safety and their respective duties under the Health and Safety at Work Act 2015. Provided the parties work together and comply with government directives and requirements, there should be less risk of breaching the Act.

WorkSafe New Zealand has given a clear directive that, at this time, employers (including both landlords and tenants) must keep their workers (and all other persons) healthy and safe and comply with government directives and requirements. Once Alert Level 4 is in place all non-essential businesses and offices must be closed and workers are required to work from home. Building owners, property managers and tenants will want to communicate with each other, and to consider such things as ensuring that the building is secure, that they are not available to the public and who may enter the building during the lockdown.

Agreed rent abatement

The restrictions imposed by Alert Level 4 will affect business revenue streams very quickly. Therefore, businesses will look to reduce costs, and assess whether contractual obligations must continue. Rent represents a large cost to most business. Landlords and tenants may consider working together to share the burden of rent costs and improve cash flow for both parties in the short term. Parties may be more amenable to this approach to preserve a long-term leasing relationship.

Options that landlords and tenants may consider are:

  • rent holidays or incentives to assist tenants;

  • temporary rent suspensions for a period of time, with the suspended rent to be paid off through a payment plan once restrictions ease; or

  • reverting to a turnover-based rental with rent reduced, for example, by the same proportion as the tenant’s reduction in monthly turnover as against the previous year.

It will depend on the terms of the particular lease what option may work best. Care would need to taken to ensure that neither party waives any existing rights under the lease in agreeing any interim arrangements.

No access and force majeure provisions

It is possible that relief may be available to tenants under the terms of the lease. Some more modern leases may include “no access” provisions that allow a tenant to rent abatement or possibly a right to terminate the lease in certain circumstances, including where access to the premises is prevented or substantially affected. It is highly dependent on the wording of the particular clause whether the current circumstances would allow the clause to apply.

Similarly, a lease may include a force majeure clause. Although there is no standard force majeure clause, ordinarily this clause would provide that if a certain set of circumstances arise, that are outside the parties’ control (e.g. Acts of God, war, strikes) and, as a consequence, performance of the lease is impossible, impracticable or adversely affected, the lease may be able to be terminated.

However, the criteria to prove that a force majeure clause applies can be difficult to meet and the wording of the clause would need to be carefully considered, before determining that the effects of COVID-19 were sufficient to constitute a force majeure event in a particular lease.

Doctrine of frustration

If there are no lease provisions that may provide rental relief, a tenant could consider applying to the court under the common law doctrine of frustration. If successful, the lease would be terminated from the date of the frustrating event. Frustration occurs where the entire “common object” of the contract is frustrated. It is not enough if only one party’s advantage gained by the contract has been frustrated.

The courts have determined that a very high bar must be reached to prove frustration, and the circumstances of the particular lease and the effects of COVID-19 on that lease would need to be carefully weighed up. Court action may also be expensive and uncertain and in the current environment, and may even be practically impossible.  The case law also suggests that frustration relief will not be available where the contract itself deals with the circumstances, whether through a force majeure clause, a change in circumstances clause or otherwise.

Insurance

Both landlords and tenants may have business interruption insurance available to them. However, the policy would need to be reviewed in light of the current situation as often pandemics are excluded in these policies. Landlords may have loss of rent policies but again individual policies would need to be checked as they will often cover claims that arise from physical damage only.

Given the rapidly changing environment, both landlords and tenants will want to carefully review their particular lease arrangements to assess what options may be available to mitigate risks and reduce costs. If you need any advice in reviewing your lease options, we would be happy to assist you.

For more advice, please contact any Greenwood Roche partner or your usual Greenwood Roche lawyer.


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Report suggests NZS Conditions of Contract overdue for an overhaul

In September 2019 the Government passed legislation creating the New Zealand Infrastructure Commission, Te Waihanga (Commission). The Commission seeks to lift infrastructure planning and delivery to a more strategic level and by doing so, improve New Zealand’s long-term economic performance and social wellbeing. In August 2019 the Commission (then the Infrastructure Transactions Unit of Treasury) published a report by Urban Outcomes entitled ‘An examination of issues associated with the use of NZS Conditions of Contract’ (Report).  The Report found that the standard form contract governing many of these infrastructure projects is not operating as effectively or efficiently as intended. ..

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Report suggests NZS Conditions of Contract overdue for an overhaul

In September 2019 the Government passed legislation creating the New Zealand Infrastructure Commission, Te Waihanga (Commission). The Commission seeks to lift infrastructure planning and delivery to a more strategic level and by doing so, improve New Zealand’s long-term economic performance and social wellbeing.

In August 2019 the Commission (then the Infrastructure Transactions Unit of Treasury) published a report by Urban Outcomes entitled ‘An examination of issues associated with the use of NZS Conditions of Contract’ (Report).  The Report found that the standard form contract governing many of these infrastructure projects is not operating as effectively or efficiently as intended.


The New Zealand Standard Conditions of Contract for Building and Civil Engineering Construction (NZS Conditions of Contract) is designed to provide comprehensive, balanced and readable contract forms that are widely understood by industry players and can be used for a variety of projects. NZS 3910:2013 is the most widely used construction contract in the New Zealand market.

While NZS 3910 has benefited from ‘limited scope reviews’ in 2003 and 2013, the contract has not undergone significant revision since 1987. The Report indicates that further significant revision may be required or, at the very least, that a change in the broader contracting culture surrounding the contract needs to take place.

The overarching finding of the Report is that there exists a ‘culture of mistrust’ between the public and private sectors. The Report identifies several issues with public sector procurement and contracting of major infrastructure projects that have led to this, namely:

  • that a skills gap is evident within most public sector agencies;

  • the perception that the public sector prioritises lowest price over value for money;

  • that special contract conditions are difficult to read and understand;

  • that time bars are being used as a means for the public sector to get “something for nothing”;

  • that there is no provision in the NZS Conditions of Contract for caps on contractors’ liability;

  • the impartiality of the Engineer to the Contract; and

  • that use of risk transfer is unsustainable and aggressive.

Skills Gap within the Public Sector
Given that the primary role of most public sector agencies is to deliver services to the public, infrastructure investment takes on a subsidiary role. As a result, there is a lack of experience and expertise in construction at an executive level within the public sector which inhibits the potential for informed and proactive approaches to the resolution of issues during construction projects. The Report suggests that ‘unworkable bureaucracy’ is then required to get a project complete.

The Report recommends that executive level governance is encouraged to call on independent industry experts to advise on project dynamics alongside legal advisors.  Such support would assist executive members’ understanding of key success and risk factors as well as advising on the feasibility of project timelines.

Lowest Price Procurement Practices
There is a view within industry that the Government follows a ‘lowest-price-wins’ culture. The fourth edition of the Government Procurement Rules (Rules), which came into force on 1 October 2019 (after the Report was released), aims to change this perception. The Rules require public sector agencies to undertake a holistic assessment of the public value of a tender during the procurement process. Whether the Rules result in a change to this culture will be known in time. Ultimately, poor procurement processes can lead to poor documentation, poor supply chain performance, and an increased risk of contractor failures.

In order to rebuild confidence in public sector processes, the Report proposes agencies strive for greater transparency, publish high quality tender documentation, and actively pursue and resolve examples of poor internal procurement processes.

Difficult to Understand Special Conditions
Special conditions are often added to the NZS Conditions of Contract to provide contractual flexibility for different operating environments. Accordingly, contracts can become long and highly technical. General, specific and special conditions, as well as schedules and often annexures together form contracts consisting of multiple documents that need to be pieced together.
The Report recommends following other international standards by allowing the tracking of changes into the general conditions of contract. This would allow parties to create one succinct but comprehensive document.

Unreasonableness of Time Bars
Time bars are a common special condition that provide the public sector with cost and time certainty in relation to variations. Time bars disentitle the contractor from claiming for the cost and time impact of variations that are instructed and completed on site, if the contractor has not submitted its claim within a set time.

The contractual timeframe is often limited to 10 working days. If a contractor fails to meet the timeframe or fails to provide the level of detail required, it may be ineligible for payment despite still having to complete the works required by the variation. This conduct heightens the culture of mistrust between parties and creates an expectation that the condition will be used as a disentitlement regime.

Among its proposals, the Report recommends time bars be adjusted to a minimum of one month or, alternatively, fixed for the final account and linked to the retention release.

Lack of Contractors’ Liability Caps
Clients and contractors have starkly contrasting views on the inclusion of liability caps and, if included, how they should operate.

An apprehension to bearing all liability is based on the industry’s perception that such liability may extend far beyond what could otherwise be earnt for the work. Clearly an unsustainable approach. Conversely, principals face a potential risk highlighted in the Report where, if a project is going badly, and the contractor is approaching a liability cap, it may decide to walk away rather than completing the project.

There is opportunity to contribute to a sustainable construction sector by providing guidance to public sector agencies outlining when a liability cap is appropriate and what that limitation might look like.

Impartiality of the Engineer to the Contract
The Engineer to the Contract (Engineer) is expected to act, simultaneously, as an impartial intermediary between parties, an independent certifier and expert advisor and representative of the principal, giving directions to the contractor on the principal’s behalf. The Engineer undertakes all of these roles while generally being on the principal’s payroll. The potential for conflict issues to arise is clear.

The role of the Engineer is critical for both parties under a construction contract, which is why it is vital that the actual independence (as well as the perceived independence) of the role remains. The Report advocates for the establishment of a panel of individual experts who can be procured by the public sector for a specific project. These panel members would be agreed on upfront by public sector agencies and industry.

Unsustainable Risk Transfer
The transfer of specific risk should only occur if the recipient is best placed to manage the risk and its cost. In some cases, the Report found risks that were entirely out of the contractor’s control were nonetheless transferred despite the contractor having no viable means to mitigate that risk. In other cases, where risk has not been transferred, contractors have been unwilling to assist in managing risks because they were not directly affected by them.

The Report suggests that guidance be issued in relation to risk transfer, detailing the purpose of risk, as well as the potential impacts of misplaced risk. Business cases should include a transparent risk transfer table together with cost and time implications so that informed decisions can be made as to whether a risk is retained, shared, or transferred.

New Zealand’s public sector spends up to $10 billion annually on the procurement of infrastructure.

The Report concludes that addressing the highlighted issues will enable the NZS Conditions of Contract to function as intended and provide a contractual foundation for infrastructure where both the public and private sectors feel that their interests are protected. This in turn will increase the performance of the sectors in procuring and delivering infrastructure projects.

Our Construction team prepares a number of NZS 3910 contracts for infrastructure projects throughout New Zealand and we are dedicated to developing and maintaining strong partnerships between the public and private sectors.  We contributed to the Report (through a client) and participated in a subsequent workshop led by the Infrastructure Transactions Unit to discuss its findings.


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New standard sale and purchase agreement

27 November 2019 marked the release of the latest version of the commonly-used agreement for sale and purchase of real estate...

New standard sale and purchase agreement

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New standard sale and purchase agreement

New standard sale and purchase agreement

27 November 2019 marked the release of the latest version of the commonly-used agreement for sale and purchase of real estate.


While the new version released by Auckland District Law Society Incorporated and Real Estate Institute of New Zealand Incorporated is intended to be easier to read and incorporates some useful changes, the most significant changes relate to the vendor’s warranties, compensation claims by purchasers, Good and Services Tax and toxicology reports.

The agreement introduces a new standard warranty given by vendors that, at the date of the agreement, the vendor has no knowledge of any fact that might result in legal proceedings (including referral to mediation or arbitration) other being brought in relation to the property. This is a broad warranty, and vendors will need to consider whether anything exists that might give rise to proceedings before they enter the agreement.

The procedures for a purchaser to claim compensation now include a two step process in situations where the vendor disputes the purchaser’s claim to compensation. Previously, a vendor could pressure a purchaser into settling for the full amount as the consequences for the purchaser for failing to settle would be significant if the purchaser was later found to be wrong. The new agreement allows for the dispute about the purchaser’s right to claim compensation to be dealt with in advance of determining the interim amount to be withheld on settlement, but does not deal with the substantive claim.
The GST provisions have been updated to protect the vendor where the agreement provides for a GST-inclusive price with the expectation of a zero-rated sale, and the purchaser changes its status before settlement so that the vendor needs to account for GST from the purchase price. This is intended to ensure that the vendor does not lose out due to the purchaser’s actions.

A new optional condition has been inserted which allows for the agreement to be entered into conditional on the purchaser obtaining a satisfactory toxicology report. The purpose of the report is to test contamination from the preparation, manufacturing or use of drugs with specific reference to methamphetamine. The report must be completed objectively and in good faith, and must be in writing.

The finance clause has also been amended so that the purchaser is able to select what financial institution the purchaser wants to seek funding from. If the purchaser seeks to avoid the agreement for non-satisfaction of this condition, the purchaser must give the vendor reasonable evidence confirming that finance is not available.

There remains no standard solicitor’s approval as to title condition, valuation condition or due diligence condition. Purchasers (and vendors) should therefore consider adding other conditions before signing an agreement.

The new agreement for sale and purchase coincides with the release of the New Zealand Law Society’s Property Transaction Guidelines, which were developed with the assistance of Julian Smith, from Greenwood Roche.


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The Emissions Trading Scheme – time for an update

New Zealand takes its place on the global stage with its efforts to combat the effects of climate change.  The Emissions Trading Scheme is at the centre of these efforts.  Improvements to the Emissions Trading Scheme were announced on 31 July 2019.  ..

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The Emissions Trading Scheme – time for an update

New Zealand takes its place on the global stage with its efforts to combat the effects of climate change.  The Emissions Trading Scheme is at the centre of these efforts.  Improvements to the Emissions Trading Scheme were announced on 31 July 2019. 


Climate change is arguably one of the most pressing threats to the planet.  According to the United Nations, climate change “is the defining issue of our time and we are at a defining moment”. 
 
The Kyoto Protocol requires its members to monitor their actual greenhouse gas emissions and precise records of trades have to be kept.  It has set the framework for numerous policy, legislative and environmental initiatives.  New Zealand has the unique opportunity of playing its part in reducing greenhouse gas emissions through forestry.  Forestry exports are worth around $5 billion a year and forestry directly employs approximately 20,000 people.  It is a crucial part of our climate change response.
 
With that in mind, it is imperative that New Zealand implement a sufficient, robust and effective Emissions Trading Scheme (ETS).  On 31 July 2019, improvements to the ETS regulations were announced to reach that goal.  An Amendment Bill to the Climate Change Response Act 2002 will be introduced to Parliament later this year.  Four changes in this Amendment Bill are worth noting:
 

  1. the introduction of “averaging accounting” for foresters;
  2. the reduction of free allocation to major industrial emitters;
  3. the cancellation and replacement of units from the first commitment period of the Kyoto Protocol; and
  4. the introduction of a “stand down period”.
 
Averaging Accounting
 
The original carbon stock accounting provides that foresters must surrender their ETS units at deforestation (even if forestry is planted elsewhere).  Now, averaging accounting provides that a forest owner will not surrender its emissions units provided the deforested land is replanted (regardless of its location).  Given new forestry can be planted in a different location, farm land can be converted to other uses.  Foresters are given more flexibility.  Under the new regime, the ETS units accumulate as the forest grows up to a determined average level of long term carbon storage.
 
Previous accounting measures required foresters to repay their emissions units in the event of a natural disaster.  The latest changes to the ETS remove the obligation to repay provided replanting is done within 4 years. 
 
Averaging accounting will be optional for forests registered under the ETS from 2019 and will be mandatory for forests registered from 2021 onwards.  It will not apply to forests registered under the ETS prior to 2019.
 
Industrial Allocation
 
There are currently 26 industrial activities within New Zealand that are eligible to receive free industrial allocation.  This allocation reduces their expenses under the ETS which provides an incentive for businesses not to go offshore.  These activities are estimated to be responsible for up to 14 percent of New Zealand’s greenhouse gas emissions.  From 2021, changes to the ETS will phase down the industrial allocation.  During the time period of 2021-2030, industrial allocation will be reduced at 1 percent per year.  The reduction will then increase to 2 percent from 2030-2041 and increase again to 3 percent from 2041-2050.
 
Industrial businesses will be encouraged to invest in clean energy alternatives that reduce emissions.  The Government has said it will review rates from 2031.
 
Cancellation and Replacement of Units  
 
There are currently privately held units issued from the Kyoto Protocol’s first commitment period (2008-2012).  The ETS now require these units to be cancelled and replaced with an equivalent number of New Zealand units.  Currently, a host country and the country buying the units could both claim a credit for the emission reductions.  Cancelling these units avoids double-counting.  The units will be cancelled on 30 November 2020.
 
Stand Down Period
 
Previously, forests planted after 1989 outside of the ETS (and some inside the ETS) could deforest and not be liable under the ETS.  If replanted, these forests would earn more units under the ETS and would therefore achieve a windfall.  This should be avoided since there is technically no increased benefit as the number of trees planted has not changed.
 
Changes to the ETS now create a “stand down period”.  If the described land is deforested, the land cannot be replanted (and joined to the ETS) for a period of time. 
 
Commentary
 
The above recent changes to the ETS are aimed at more effectively capturing the purpose of the ETS.  The introduction of the stand down period and removal of industrial allocations create a more universally comprehensive scheme.  However, major industrial emitters will continue to point to the wider economic and fiscal implications of their becoming fully subject to the scheme (and lack of any net environmental benefit in a global context).  The issues here are indeed vexed.
 
The new averaging accounting regime favours foresters.  It improves the ETS’s flexibility and creates a more appealing system.  Forestry land can be replanted in different locations and foresters are also more adequately protected from natural disasters.  Encouragement to plant forestry must be met with a realistic scheme that recognises farming and forestry are not static or predictable.  Rotating land use enables farmers and foresters to productively work their land without ETS liabilities arising.  There are currently concerns over productive farm land being turned into forestry permanently.  It is arguable that workable farm land could be lost, reducing New Zealand’s agricultural industry.  The ability to convert forestry land back to farm or cropping land (with forestry planted elsewhere) helps address these concerns. 
 
Having an effective ETS helps New Zealand to more accurately monitor and work towards reducing its greenhouse gas emissions. These new changes take us one step further to reaching that goal.


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Chief Ombudsman releases final opinion on East Lake Trust/Regenerate Christchurch case

Greenwood Roche lawyers, Lauren Semple and Rachel Murdoch, have been working with Regenerate Christchurch on the development of the draft Otakaro Avon River Corridor Regeneration Plan which is the subject of this review case...

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Chief Ombudsman releases final opinion on East Lake Trust/Regenerate Christchurch case

Greenwood Roche lawyers, Lauren Semple and Rachel Murdoch, have been working with Regenerate Christchurch on the development of the draft Otakaro Avon River Corridor Regeneration Plan which is the subject of this review case.


In response to a complaint, the Chief Ombudsman’s opinion confirms that Regenerate Christchurch acted lawfully and in an administratively reasonable manner in the development of the draft plan.  The draft plan is currently with the Minister for Greater Christchurch Regeneration for her approval or decline. For more information and to review the case note please click here.


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Productivity Commission - LG funding and financing

On the 4th of July the New Zealand Productivity Commission released a draft report on Local Government Funding and Financing.   This report is the result of the Government’s request for the Productivity Commission to undertake an inquiry into local government funding and financing; and where shortcomings in the current system are identified, to examine options and approaches for improving the system...

News & Insights

Productivity Commission - LG funding and financing

On the 4th of July the New Zealand Productivity Commission released a draft report on Local Government Funding and Financing.
 
This report is the result of the Government’s request for the Productivity Commission to undertake an inquiry into local government funding and financing; and where shortcomings in the current system are identified, to examine options and approaches for improving the system.


While there were a number of suggestions made, the draft report found the current framework is broadly sound. The Commission Chair stated “The current framework measures up well against the principles of a good funding and financing system for local government. It is clearly separated from the central government’s tax base which is an important feature. It is relatively simple and economically efficient. It also provides a high degree of flexibility for councils to shape how they raise their revenue.”
 
Existing tools
The report notes that councils can make better use of the tools they already have access to, and there is room to improve organisation performance, transparency and decision making that will help to relieve cost pressures. These existing tools include rates, fees are user charges, development contributions, central government funding and debt.
 
The Commission favours the “benefit principle” as the primary basis for deciding who should pay for local government services. Those who benefit from a service should pay for its costs. Additionally, where local services benefit national interests, central government should contribute. User charges or targeted rates should also be utilised.
 
The Commission found that there is no clear evidence that rates have become less affordable over time, despite this being one of the key reasons the inquiry was undertaken. Overall, rates have continued to broadly align with population and income growth over the past 3 decades, but have not become relatively more burdensome.
 
Cost pressures and new tools
The report noted some new tools are needed to help councils deal with some specific cost pressures. The highest priority pressures have been identified as:
 

  • Supply of infrastructure to support rapid urban growth: the failure of high growth councils to supply enough infrastructure to meet demand is a serious social and economic problem.
  • New tools: special purpose vehicles; central government funding; tax on vacant land; volumetric charging of wastewater; road congestion pricing; and value capture for property owners who enjoy “windfall gains”.
 
  • Climate change: rising sea levels and more intensive rain events threaten infrastructure, particularly roads and waste / storm water infrastructure. These risks are large and unevenly distributed across the country.
  • New Tools: Extended NZTA model; Local Government Resilience Fund and Agency; and more national leadership in developing and providing high-quality and consistent data, information, guidance and legal frameworks.
 
  • Tourism: the increasing number in tourists has led to pressure on several types of services and infrastructure in districts that are popular tourist destinations. Tourists are using mixed-use facilities without making a direct contribution.
  • New Tools: A tourist accommodation levy; and provide local councils with a share in the new international tourist border levy.
 
  • New standards and requirements from central government: e.g. meeting health and environmental standards in the three waters sector is a major challenge for many councils, and the Commission makes the case for significant reform of the sector.
  • New tools: development of a “Partners in Regulation” protocol to improve the state of relations between central and local government.
Submissions on the draft report are open until 29 August 2019. The final report is ultimately a recommendation to the Government and will not be bound by the results of the report. It is set to be released on 30 November 2019.


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Infrastructure Commission Bill Released

As part of its broader focus on the construction and infrastructure sectors, the Government is proposing a bill which would establish a Crown entity tasked with providing strategic independent advice and oversight on the planning, co-ordination and delivery of public sector-led infrastructure projects in New Zealand. ..

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Infrastructure Commission Bill Released

As part of its broader focus on the construction and infrastructure sectors, the Government is proposing a bill which would establish a Crown entity tasked with providing strategic independent advice and oversight on the planning, co-ordination and delivery of public sector-led infrastructure projects in New Zealand. 


Summary
The establishment of Te Waihanga – New Zealand Infrastructure Commission as a Crown entity is one of the more significant actions taken by the Government towards addressing the major infrastructure deficit in New Zealand, and the existing challenges with the planning, co-ordinating and delivery of infrastructure projects which have contributed to New Zealand’s current position.  Taking lead from similar initiatives in Australia, the UK and elsewhere, the Commission will provide strategic oversight and leadership over the way in which infrastructure projects are planned, co-ordinated and procured.  Critically, its functions are advisory only.  Any decision-making regarding infrastructure projects (including investment in those projects, or the timing for or manner in which they are procured and delivered) will remain with the relevant Ministers/departments.  

Specifics
Under the bill, Te Waihanga would be established as an autonomous Crown entity, governed by a board of up to 7 members.  The entity will largely take shape from the existing Infrastructure Transactions Unit currently within Treasury which will be incorporated into Te Waihanga once it is established (anticipated for October 2019).

The overarching function of the Commission is to co-ordinate, develop, and promote an approach to infrastructure and resulting services that improve the well-being of New Zealanders.  The bill authorises the Commission to carry out that function through two main ways:

1.  Strategy and planning through:

b. Providing advice on infrastructure including the current state of infrastructure, current and future infrastructure needs, infrastructure priorities, and matters which may prevent the effective delivery of infrastructure.

a. Promoting a strategic and coordinated approach to the delivery of infrastructure projects;

c. Providing support services to those projects, including advice, services or staff to assist in the delivery of a project.

While not specifically included as a provision in the bill, the explanatory note identifies that Te Waihanga would be empowered to, and will be expected to, promote best practice infrastructure delivery as part of its supporting function.  To that end, it is expected that the Commission will:

e.  Publish a pipeline identifying existing and upcoming infrastructure projects (the first of these can be accessed on the Treasury website);

f.  Produce best practice guidance on infrastructure procurement and delivery.  This function will be part of its role as the “centre of expertise to assist infrastructure projects to be delivered efficiently and effectively”.  To that end, where requested by the relevant department/Minister, the Commission will also provide advice on business cases for proposed projects. 

In support of its functions (and in addition to its general powers as a Crown entity), the bill both grants powers to, and imposes obligations on, the Commission, including:

  • The requirement to publish a strategy report setting out the Commission’s views on the ability for existing infrastructure to meet community expectations over the next 30 years, and the priorities for infrastructure over that same time period.  The report (which will be issued at least once every five years) may also include any other matter the Commission considers relevant.  The Minister for Infrastructure has the opportunity to comment on the report before it is finalised, but once finalised, the Government will then be required to provide a formal response to it which must be made public.
  • The Minister may also direct the Commission to provide a report on any matter relating to infrastructure.
  • Where necessary and desirable to enable the performance of its functions, the Commission is also empowered to require the provision of specific information from specified government departments, agencies, statutory entities and the New Zealand Defence Force. 

Comment
This proposal has generally received strong support and input from industry and experts within both the public and private sector, and represents a critical step towards a more informed, strategic and coherent approach to infrastructure planning, procurement and delivery.  Perhaps the biggest potential shortcoming is the general lack of any strong levers which would at least encourage action/compliance by other government departments with the advice of the Commission.  For example, while the Government would be required to issue a response to the Commission’s strategy reports, government departments are not obliged to consider the findings of the reports in reaching any decisions relating to procurement or planning of capital projects, nor consult with the Commission.  Consequently, to successfully effect change at the decision making level, the Commission will need to build a narrative around the positive impacts of sound planning and procurement, and the role that it can play in supporting other departments in achieving those outcomes.  Even if it is able to do so, there is still the risk that the Commission could be sidelined.

Among the options to mitigate this risk, there is the opportunity to expand the Commission’s mandate to include monitoring and reporting on the Government’s progress in addressing New Zealand’s infrastructure challenges.  While under the current proposal it would be required to provide “state of the nation” assessments, there is no explicit directive to undertake on-going monitoring of how the Government is responding to the findings of the Commission’s assessments, including how it is addressing identified constraints on the effective delivery of infrastructure.  Expanding the Commission’s mandate to include monitoring and reporting on the Government’s response to the identified challenges and opportunities (which would also, as a first step, require the development of some form of metric) would strengthen the Commission’s ability to keep the Government accountable for effecting improvements in the planning, procurement and delivery of infrastructure.

For further information on the Commission or if you are interested in receiving further updates on this matter, please do not hesitate to contact us.


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Climate Change Response (Zero Carbon) Amendment Bill Released

The Government’s most significant legislative response to the climate crisis was released ahead of its first reading in Parliament earlier this week.  Taking its lead from the UK’s climate change legislation, the bill seeks to provide a framework for developing and implementing climate change policies that will contribute to the international effort to limit the global average temperature increase to 1.5 degrees Celsius above pre-industrial levels. ..

Climate Change Response (Zero Carbon) Amendment Bill Released

News & Insights

Climate Change Response (Zero Carbon) Amendment Bill Released

Climate Change Response (Zero Carbon) Amendment Bill Released

The Government’s most significant legislative response to the climate crisis was released ahead of its first reading in Parliament earlier this week.  Taking its lead from the UK’s climate change legislation, the bill seeks to provide a framework for developing and implementing climate change policies that will contribute to the international effort to limit the global average temperature increase to 1.5 degrees Celsius above pre-industrial levels.


Utilising the existing emissions trading scheme, the bill proposes the allocation of emissions budgets (issued every five years) designed to enable a “just and fair” transition of New Zealand’s industry and economy towards meeting the 2050 target.  The target adopts a “split-gas” approach, where by 2050:

• Biogenic methane emissions will have reduced by 24 – 27% below 2017 levels.  By 2030, they will have reduced by 10%.
• All other net greenhouse gas emissions will have reduced (through reductions, removals and offshore mitigation) to zero.

Under the bill, the relevant Minister must ensure that net emissions do not exceed the emissions budget for the relevant emissions budget period.  Along with setting the budget, the Minister will also be required to prepare an emissions reduction plan which will set out the policies and strategies for meeting such a budget.  There is however no legal remedy or relief available for failing to meet an emissions budget or for failing to meet the overall 2050 target, other than the issuing of a declaration and an award of costs.  Similarly, meeting the emissions budgets and the 2050 targets are only permissive considerations for those exercising public functions.  A failure to take a budget or the 2050 target into account will not invalidate the action.  Consequently, as with the UK legislation, much of the success of this legislation will therefore rely on political and industry pressure to achieve compliance with the emissions budgets.

In addition to requiring the preparation of emissions budgets and ensuring that they (and as a result the 2050 target) are met, the bill would establish the Climate Change Commission.  The Commission is an independent Crown entity tasked with both advising the Government on its emissions budgets and reductions and adaption plans, and monitoring and reporting on progress towards meeting emissions budgets and the 2050 targets.  In particular, the Commission will be required to recommend the quantity of emissions permitted for each period, how the budget will be met including pricing and policy methods, and the indicated proportion of reductions, removals and offshore mitigation.  While the Minister is not required to accept its advice or recommendations, the Minister is required to present the Commission’s reports to the House and issue a public response to that assessment.  Critically, the bill is prescriptive in the skillsets required for the Commission which include expertise in climate science, matauranga Māori and Te Ao Māori, central and local government policy and decision making, and experience from a range of sectors and industries. 

As mentioned, the bill anticipates that emissions budgets will be met through some combination of emissions removal (sequestration of some form), reduction and, in limited circumstances, offshore mitigation.  Offshore mitigation would allow the purchase of emissions reductions and removals, or allows from international emissions trading schemes.  While the use of offshore mitigation is generally discouraged under the bill, the ability to utilise that method provides some further flexibility to both industry and Government in seeking to meet the emissions budgets.  Unlike the UK legislation, there is no mention of whether and how New Zealand’s contribution to international aviation and shipping emissions will be accounted for, though this may be a matter that is subject to consideration by the Commission once it is established.

Commentary

Informed by extensive public consultation and a range of technical (including environmental and economic) analysis, the bill has of course already attracted a wide ranging response across different sectors.  While applauding the framework for action, climate scientists and environmentalists have generally voiced concerns around the absence of enforcement/accountability for failing to meet targets.  While similarly applauding the intent, other industries have voiced concerns over how realistic the targets are given the available technology. 

From the analysis in support of the bill, it is clear that if the targets are to be reached then significant investment in innovative technologies to support industry towards more carbon neutral operations, and planting of trees (or use of other devices) that effectively sequester carbon will be critical. It is also clear that if the bill passes, there is a great deal of work ahead for particularly the Climate Change Commission in its role as an advisor to, and watchdog of, the Government in its response to the climate crisis.  As has been illustrated by the UK Commission, critical success factors for this agency will be strong credibility and influence generated by well-rounded and in-depth expertise (including in policy making, business and industry), independence and transparency.  Partnership with Māori at all levels of decision-making will also be vital.  

There appears to be strong (albeit not complete) consensus across industry and political parties alike that taking action to reduce New Zealand’s carbon footprint is critical if we are to contribute to the global effort to slow the rate of our changing climate.  How extensive that action is, how quickly it can be taken, and of course who pays for it remains to be seen.  However this bill provides a strong framework for ambitious decisions to be made – ambitious decisions which will be required if the 2050 target is to be met.  The (largely equivalent) UK legislation is highly regarded, having been replicated in a number of other countries.   That Commission has been identified as having an excellent reputation, producing reports that carry “immense authority” and influence over Government.  

Notwithstanding the absence of any obligation on other facets of Government to consider the Commission’s advice, it is clear that both the Commission and the Act itself has influenced policy development across sectors.  Reports on the Act have also noted that the planning and reporting obligations on Government and the Commission have added value in “produc[ing] a kind of transparent dialogue that invites political accountability”.  Moreover, as a result of the work undertaken by the Commission, Government and industry, the UK has met its first emissions budget and looks set to meet its second and third.  It is however acknowledged that “low-hanging fruit” in the early years have made this task more straightforward, and more ambitious, controversial decisions are ahead if the UK is to continue its path of emissions reductions. 

The Zero Carbon bill has a way to go before it passes, and we may well see some changes as it moves through the House.  With National supporting the bill through its first reading earlier this week, it will now progress to select committee stage where the public will have the opportunity to share its views on the bill.

Our team is following this closely, so please do not hesitate to contact us if you have any questions about the bill.  We have also prepared a more detailed summary of how the bill operates and we are more than happy to provide this to you and your team should you wish.

________________________________________

1.  New Zealand Productivity Commission Te Kōmihana Whai Hua o Aotearoa Note: Examining the UK Climate Change Act – Research Note, Teresea Weeks, September 2017 at p.20.
2.  Macroy, R. (2014).  “The UK Climate Change Act – Towards a Brave New World? (2012)” in Regulation, enforcement and governance in environmental law (2ed), 261-274.  Oxford: Hart Publishing, p 267
3.  Church, J. (2016). Mind the Gap – Reviving the Climate Change Act.  October 2016. London: ClientEarth, p.13.
 


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