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Retentions Regime to be Strengthened

The Government recently proposed to introduce changes to the Construction Contracts Act (CCA) seeking to strengthen the retentions regime. The Construction Contracts (Retention Money) Amendment Bill (Bill) proposes a number of clarifications and requirements on the retention regime under the CCA.  We run through the main elements of the changes...

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Retentions Regime to be Strengthened

The Government recently proposed to introduce changes to the Construction Contracts Act (CCA) seeking to strengthen the retentions regime. The Construction Contracts (Retention Money) Amendment Bill (Bill) proposes a number of clarifications and requirements on the retention regime under the CCA.  We run through the main elements of the changes.


What are retentions?
 
Retentions secure performance obligations under a construction contract. A retention is used as a form of security for a party such as a Principal to ensure that the other party (Contractor) performs its obligations under the construction contract. Retentions are generally held until final completion or until the end of the defects liability period.
 
Issues have arisen where the party holding a retention (Party A) has become insolvent, and the party whose funds are being held (Party B) is left unable to access those funds due to the being comingled with the holding party’s other funds.
 
The Bill purports to deal with these types of scenarios.
 
Key Proposed Changes
 
If the Bill passes in its current form, it would mean any party holding a retention, Party A, must hold that retention:

  • as soon as possible, either:
    • in a separate bank account or accounts at a registered bank in New Zealand; or
    • in the form of a complying instrument (such as a guarantee or insurance policy) that requires an insurance company or a bank to pay to Party B an amount equal to the retention money if Party A does not pay the retention money to Party B when required by the construction contract;
  • on trust (thereby placing fiduciary obligations on Party A as a trustee);
  • with adequate recording measures; and
  • along with updates to Party B on the status of the retention every three months after first advised.
The aim of this change is to ring-fence the funds ultimately due to Party B after final completion so that they cannot be used by Party A for daily business.
 
The Bill reiterates that all common law rules and equity doctrines apply to the fiduciary relationship between the parties. Party A must act in the best interests of Party B, and Party A cannot use retention funds for any purpose other than to remedy any defects in Party B’s performance or payment obligations.
 
Importantly, as retentions will be subject to a trust, they cannot be used by a liquidator or receiver to meet Party A’s other debts, thereby protecting Party B from Party A’s creditors. If Party A becomes insolvent, the liquidator or receiver becomes the trustee of the retention. 
 
Party A must keep all of Party B’s retention money under a particular contract in the same account. While there can be other retention money in that account, the bank account cannot be used for any other purpose. If a single account is used for multiple parties’ retention funds, Party A must keep proper accounting records showing to which party and which contract each payment into or out of the account was made. If Party A becomes insolvent, the liquidator or receiver must continue to collect, manage, and disburse the retention as if they were Party A.
 
Consequences of non-compliance
 
There are severe consequences if the above process is not followed. Failure to comply is an offence, with a maximum penalty of up to $200,000 for the company and $50,000 for each director. It will be a defence to prove that: (a) Party A took all reasonable steps to ensure that it complied with its obligations, or (b) if the defendant is a director, they took all reasonable steps to ensure that Party A complied with its obligations.
 
What next?
 
If implemented, the legislation will provide construction companies with strict but clear guidelines on how they need to treat retentions while providing reassurance to contractors that the funds will not be misused – or at least that sanctions exist if they are. From there, it is up to the contracting parties to decide whether this is the best form of security and incentive for the applicable contract works, taking into account the cost of administration and risk.

June 2021


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Overseas Investment in New Zealand

Replacement of Temporary Emergency Notification Regime with new National Security and Public Order Regime On 25 May 2021 the Government announced the emergency notification regime (ENR) would end, at least until further notice. The ENR was part of the Government’s response to the Covid-19 pandemic and came into force in June 2020 under the Overseas Investment (Urgent Measures) Amendment Act 2020. The ENR was required to be reviewed every 90 days thereafter with Ministers required to assess whether the effects of the pandemic justified the ENR remaining in place. ..

Overseas Investment in New Zealand

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Overseas Investment in New Zealand

Replacement of Temporary Emergency Notification Regime with new National Security and Public Order Regime
On 25 May 2021 the Government announced the emergency notification regime (ENR) would end, at least until further notice. The ENR was part of the Government’s response to the Covid-19 pandemic and came into force in June 2020 under the Overseas Investment (Urgent Measures) Amendment Act 2020. The ENR was required to be reviewed every 90 days thereafter with Ministers required to assess whether the effects of the pandemic justified the ENR remaining in place. 


Associate Finance Minister David Parker said in a statement on 25 May 2021, that “our successful management of the health impacts of the pandemic and the recovery of the economy, with lower unemployment and stronger growth than forecast last year, mean we can remove the temporary protection.”

Transactions entered into from 7 June 2021 will not be subject to the ENR, although transactions entered into prior to this date will still be subject to the notification requirement. Further changes coming into force shortly under the Overseas Investment Amendment Act 2021 mean that the ENR may be reinstated where there is an emergency justifying such reinstatement.

National Security and Public Order Notification regime

The ENR will be replaced by a call-in power – known as the national security and public order notification regime (NSPO).  This regime will apply to transactions entered into on or after 7 June 2021. 

The NSPO regime will apply to investments in strategically important businesses (SIB) that would not ordinarily require consent under the Overseas Investment Act 2005 (Act). The NSPO regime will allow the Government to “call-in” certain transactions and consider whether such investments pose a risk to national security and public order, and gives the Government power to impose conditions on these investments (or if required, to block or unwind the transactions) when it is considered they give rise to significant national security or public order risks. It is intended that the call-in power will be used as a backstop power only and interventions will be rare and only used where necessary. 

Strategically Important Business

A SIB includes a business:

  • that researches, develops, produces or maintains military or dual-use technology;
  • that is a critical direct supplier to New Zealand’s intelligence and security agencies (refer to LINZ’s website for the list of published critical direct suppliers, but please note that some suppliers will be unpublished);
  • involved in electricity generation (with a total capacity exceeding 250 MW), distribution, metering or aggregation;
  • involved in drinking water, wastewater or stormwater infrastructure;
  • involved in telecommunications infrastructure or services;
  • that is a financial institution or involved with financial market infrastructure;
  • that is a media business with significant impact; or
  • that develops, produces, maintains or otherwise has access to sensitive information (being genetic, biometric, health or financial information) of certain agencies or relating to 30,000 or more individuals.
In most cases the threshold is $0 and 0% ownership for an investment in a SIB, however there are exceptions to this, being investments in media businesses with significant impact, where the threshold is more than a 25% ownership or control interest, and investments in a listed issuer, where the threshold is 10% or more.

Notification to the Overseas Investment Office

Mandatory Notification:

Where there is an overseas investment in a SIB involved in the research, development, production or maintenance military or dual-use technology, or is a critical direct supplier, notification of the transaction is mandatory and notification must be made to the Overseas Investment Office (Office) before a transaction is given effect to. 

Voluntary Notification:

For all other transactions not subject to mandatory notification, notification to the Office can be made on a voluntary basis, and this can be done either before or after the transaction is given effect to. Provided there are no national security and public order concerns, prior notification means investors have the benefit of knowing the transaction would not be called-in at a later date for review. Transactions that are not notified can be called-in for review at any time.

Review by the Overseas Investment Office:

The Office has indicated that it will complete an initial assessment within 15 working days of notification, and where it determines there may be a national security or public order risk, the transaction will be considered by the Minister of Finance, which may take up to 40 working days, (together with a further period of 30 working days, if required).

There is therefore clear benefit in a prior notification, even if voluntarily, though plainly there will be circumstances where a judgment call can be made as to whether the business really is of any strategic importance. We would tend to err on the side of caution here.

Following the initial assessment, and provided the transaction does not pose a risk to New Zealand’s national security or public order, a direction order will be issued. Each direction order will be issued with an automatic condition that the investor must not, in relation to the SIB, act or omit to act with a purpose or an intention of adversely affecting national security or public order. Further conditions may also be imposed by the Office.

If you would like further advice on these or changes, please contact any lawyer in our real estate or commercial teams.
 
June 2021


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Greenwood Roche becomes a Keystone Trust sponsor

Greenwood Roche has recently had the privilege of joining the Keystone Trust whanau as a proud sponsor...

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Greenwood Roche becomes a Keystone Trust sponsor

Greenwood Roche has recently had the privilege of joining the Keystone Trust whanau as a proud sponsor.


Keystone Trust’s fundamental goal is to support and enable students who have financial need or have been affected by adverse circumstances to take up tertiary studies in the property sector.

The Trust believe that this can only be achieved by working with others with the same value, vision and integrity – from students to sponsors, friends and supporters. 

Being able to contribute to the future capability and capacity of the property and construction sector through the Trust gives us the opportunity to ‘pay it forward’. Standing alongside a young person as they grow and develop into their potential is an enormously fulfilling experience and one we look forward to doing with Keystone.


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Infrastructure Funding and Financing Act 2020: A New Approach to Infrastructure Funding

The Government has recently developed a number of initiatives, including the Urban Development Act 2020 (UDA), the National Policy Statement on Urban Development (NPS-UD) and the COVID-19 Recovery (Fast-track Consenting) Act 2020, designed to support the functioning of urban environments and eliminate barriers to their creation throughout  New Zealand...

Infrastructure Funding and Financing Act 2020: A New Approach to Infrastructure Funding

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Infrastructure Funding and Financing Act 2020: A New Approach to Infrastructure Funding

The Government has recently developed a number of initiatives, including the Urban Development Act 2020 (UDA), the National Policy Statement on Urban Development (NPS-UD) and the COVID-19 Recovery (Fast-track Consenting) Act 2020, designed to support the functioning of urban environments and eliminate barriers to their creation throughout  New Zealand.


As part of this package of initiatives, the Infrastructure Funding and Financing Act 2020 (“Act”) passed its final reading on 22 July 2020 and received royal assent on 6 August 2020. The Act looks to ensure that a lack of funding at local government level does not continue to constrain development. Using the Act, developers can now access a new funding structure that will allow them to raise the funds and finance necessary for large-scale projects themselves (rather than rely on local government), with repayments made by future owners through rates on the developed land.

As noted by Auckland Mayor Phil Goff, “Traditional approaches to infrastructure funding and financing are not working. Constraints on council debt levels means viable infrastructure projects are postponed for years, despite the pressing need for more housing in these high-growth areas.”

The new funding model provides an alternative funding mechanism in a bid to accelerate the development of housing in particular. The Act received cross party support and is designed to complement existing funding tools available to local government.

Milldale Model

The financing structure set out in the Act is modelled on the structure utilised in the Milldale development in North Auckland. For Milldale, a special purpose vehicle (SPV) was set up to oversee a residential development project. The SPV raised initial capital from investors, proposing to pay them back by an annual ‘infrastructure payment’ added to the rates bill. Payments will initially be made by the developer and, in time, by the section owners.

The infrastructure payment obligations are secured by an encumbrance on each title, meaning the obligation to meet the payment runs with the land and binds any subsequent owners. In the Milldale example the payments are $650 + 2.5% interest per annum for apartments and $1000 + 2.5% interest per annum for homes and will last for 30 years.

While the Milldale development is still in the construction phase it is already clear that the model has enabled acceleration of the project and therefore faster delivery of affordable housing in Auckland.

How will The Act Work?

The Act adopts a very similar model to the Milldale model, by allowing the use of multi-year levies in large scale development that place the cost of infrastructure on those who will benefit directly from it. Levies will be able to be proposed for the provision or improvement of the following:
 

  • new water services infrastructure;
  • transport infrastructure;
  • community infrastructure or community facilities; or
  • environmental resilience infrastructure.
The process for creating an SPV and initiating levies will broadly involve the following:
 
  • The making of a detailed levy proposal to the government;
  • The proposal must include, among other matters, details of the SPV proposed, the financing structure and who will be responsible for construction;
  • The Minister for Housing and Urban Development as “recommender” will consider the levy proposal with reference to a number of factors and in consultation with the relevant local authorities and make a report to the responsible Minister (a Minister to be confirmed by the Prime Minister);
  • The report will include an assessment of the proposal, a recommendation and endorsement from the relevant levy authority;
  • The Responsible Minister may then recommend the Governor-General accept the levy (but may not amend the terms of the proposal).
Once a levy order has been made, the SPV will borrow funds to finance the infrastructure and set an annual levy that will be collected by the relevant local authorities on behalf of the SPV to pay back the borrowing. Vesting agreements will ensure that the conditions of any transfer of ownership of the infrastructure are clear. An encumbrance will secure payment of the levy by all future owners of the properties to benefit.

Commentary

Support for the Act has been reasonably wide as it is generally agreed that addressing infrastructure funding issues will enable faster provision of housing in areas where demand has been eclipsing provision. All major parties supported the Act, which then Infrastructure New Zealand CEO Paul Blair commented would “enable a bolder, more streamlined way of delivering new infrastructure for the benefit all New Zealanders”.

The Act will work with the direction in the NPS-UD that local authorities must have particular regard to plan changes for “out of sequence” (ie not zoned) development in some circumstances. In most cases “out of sequence” development will not be serviced by infrastructure, nor will the funding for requisite infrastructure be part of the local authority’s short to medium term plans. The combination of the NPS-UD and the Act will provide an avenue for development to take place in response to the ever-rising demand for housing outside of that already anticipated.

As summarised by the Minister for Urban Development:

“We need to remove restrictive planning rules that stop our city expanding on the fringes, which creates an artificial scarcity of land and drives house prices up, and remove height and density rules that stop the city growing up, which, effectively, rations floor space. Local authorities need to plan ahead and make room for growth.………

This bill is part of our Government's policy response to that public policy failure. It's one step towards fixing a broken funding and financing system to support more and better urban development. It’s complemented by the National Policy Statement on Urban Development gazetted this week, joint spatial planning work with local government in our six high-growth metro cities, and the Hon David Parker's review of the Resource Management Act.”
 
For any questions on the Act please don’t hesitate to contact Lauren Semple or Francelle Lupis for further information on the Urban Development Act, the NPSUD and the COVID-19 (Fast-Track Consenting) Act 2020, see here.


September 2020


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The National Policy Statement for Freshwater Management 2020

The National Policy Statement for Freshwater Management 2020 (NPS-FM) has recently been gazetted and will come into force on 3 September 2020. The NPS-FM will replace the current National Policy Statement for Freshwater Management 2014 (amended 2017) and will make fundamental changes to the way freshwater is managed in Aotearoa...

News & Insights

The National Policy Statement for Freshwater Management 2020

The National Policy Statement for Freshwater Management 2020 (NPS-FM) has recently been gazetted and will come into force on 3 September 2020. The NPS-FM will replace the current National Policy Statement for Freshwater Management 2014 (amended 2017) and will make fundamental changes to the way freshwater is managed in Aotearoa.


A prominent shift in the new NPS-FM is the incorporation of Te Mana o te Wai as the primary approach to managing freshwater. Te Mana o te Wai is defined in the NPS-FM as “a concept that refers to the fundamental importance of water and recognises that protecting the health of freshwater protects the health and well-being of the wider environment.  It protects the mauri of the wai.  Te Mana o te Wai is about restoring and preserving the balance between the water, the wider environment and the community”.  The NPS-FM identifies a hierarchy of obligations within Te Mana o te Wai that prioritises:
 

  • First, the health and wellbeing of water bodies and freshwater eco-systems.
  • Second, the health needs of people (such as drinking water).
  • Third, the ability of people and communities to provide for their social, economic and cultural wellbeing, now and in the future.
 The core principles of Te Mana o te Wai informing the NPS-FM and its implementation are:
 
  1. Mana whakahaere: the power, authority and obligation of tangata whenua to make decisions that maintain, protect and sustain the health and well-being of, and their relationship with, freshwater.
  2. Kaitiakitanga: the obligation of tangata whenua to preserve, restore and enhance, and sustainably use freshwater for the benefit of present and future generations.
  3. Manaakitanga: the process by which tangata whenua show respect, generosity, and care for freshwater and for others.
  4. Governance: the responsibility of those with authority for making decisions about freshwater to do so in a way that prioritises the health and well-being of freshwater now and into the future.
  5. Stewardship: the obligation of all New Zealanders to manage freshwater in a way that ensures it sustains present and future generations.
  6. Care and respect: the responsibility of all New Zealanders to care for freshwater in providing for the health of the nation.
The NPS-FM directs that freshwater is to be managed in a way that gives effect to the concept of Te Mana o te Wai – as articulated through the hierarchy and the principles.  The NPS-FM is also clear that regional councils must engage with communities and tangata whenua to determine how this concept applies to water bodies and freshwater ecosystems in the region, including through the development of the core “deliverables” under the NPS-FM including:
 
  • The development of long-term visions. Every council must include the long-term visions as objectives in regional policy statements. The long-term visions must be developed through engagement with the community and mana whenua about their long term wishes for the water bodies and freshwater ecosystems in the region.
  • Implementation of the national objectives framework. The national objectives framework is a process that requires regional councils to undertake a range of steps such as identifying freshwater management units and values, setting environmental outcomes and including them as objectives in regional plans, identifying and setting baseline states for attributes for each value, setting targets to support the achievement of environmental outcomes and prepare action plans to achieve those outcomes.
  • Developing objectives, policies, methods and criteria for any purpose relating to natural inland wetlands, rivers, fish passage, primary contact sites, and water allocation.
Alongside these requirements, the NPS-FM also prescribes a number of policies that must be included by all Regional Policy Statements and requires district and regional plans to align objectives with the environmental outcomes sought. Every local authority must give effect to the NPS-FM as soon as reasonably practicable.
 
This new NPS-FM is one of several streams of work in the freshwater space. The National Environmental Standards for Freshwater Management have also been introduced and will come into effect on the same day as the NPS-FM.  The standards will set requirements for carrying out activities that pose risks to the health of freshwater and freshwater ecosystems.
 
A full copy of the NPS-FM may be found on the Ministry for the Environment’s website here:
 


September 2020


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Major changes to residential tenancy legislation

The Residential Tenancies Amendment Bill 2020 was passed by Parliament on 5 August 2020, and is awaiting Royal Assent. The Bill makes a number of changes to the Residential Tenancies Act 1986, which will affect all residential landlords and tenants...

Major changes to residential tenancy legislation

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Major changes to residential tenancy legislation

Major changes to residential tenancy legislation

The Residential Tenancies Amendment Bill 2020 was passed by Parliament on 5 August 2020, and is awaiting Royal Assent. The Bill makes a number of changes to the Residential Tenancies Act 1986, which will affect all residential landlords and tenants.


Media have rightly focused on the reduced frequency of rental increases and changes to the termination of periodic tenancies, with these provisions being substantially amended for the first time in over 30 years.

Most residential property landlords will only be able to terminate a periodic tenancy:
 

  • by giving 63 days notice if the owner of the premises, or a member of the owner’s family (which includes extended family and whānau), requires the premises as their principal place of residence within 90 days after the termination date; or
  • by giving 90 days notice, but only for certain specified reasons. The list of reasons for terminating a tenancy is narrow, and the “no cause” ground has been removed.

Tenants will need to give at least 28 days’ notice to terminate a periodic tenancy – up from 21 days.

A late change was made to allow tenants to withdraw from a fixed-term or periodic tenancy on 2 days’ notice in circumstances of family violence. Any remaining tenants are then able to apply to the Tenancy Tribunal to be released from the tenancy on hardship grounds. A landlord who is physically assaulted by a tenant can terminate the tenancy by giving 14 days’ notice, but only if a charge is laid against the tenant for that assault.

Rent may not be increased within 12 months after the start date of the tenancy or 12 months after the last increase took effect. This applies even if the tenancy agreement (including for a fixed term tenancy) provides otherwise. As with the current Act, rent cannot exceed the market rent and cannot be charged more than 2 weeks in advance.

In addition:
 

  • landlords must allow tenants to undertake minor changes to the property (such as hanging pictures and redecorating), subject to certain conditions and provided that the changes do not require a building consent;
  • landlords must facilitate the installation of fibre connections to a property, although not if the installation will materially compromise the weathertightness, character or structural integrity of a building;
  • landlords must include the rent when advertising properties, and cannot hold auctions or solicit bids;
  • fixed-term tenancy agreements will automatically become periodic tenancies on expiry, unless both parties agree otherwise or in limited other situations;
  • to evict a tenant for anti-social behaviour (being harassment and activities causing non-minor alarm, distress or nuisance), the landlord will need to warn the tenant (in writing) at least 3 times in a 90 day period of that behaviour before seeking a Tenancy Tribunal order;
  • all tenancies (except social housing tenancies where the tenancy agreement prohibits assignment) are assignable with the prior written consent of the landlord, and that consent cannot be unreasonably withheld; and
  • financial penalties are increased, generally by 50% or more, but with significant additional penalties potentially imposed where a landlord has 6 or more tenancies.

The amendments also strengthen the Residential Tenancies (Healthy Homes Standards) Regulations 2019 (which set “healthy homes standards” for heating, insulation, ventilation, draughtiness, moisture ingress and drainage) by requiring that landlords retain information about compliance with the healthy home standards and provide that information to tenants on request.

The changes largely result from a public consultation process undertaken by the Ministry of Business, Innovation and Employment in 2018, and driven by the Government’s desire to make life better for tenants in light of home ownership being at a 60 year low and the number of rented properties exceeding 600,000. The changes therefore increase the rights of tenants, and reflect that tenants will often occupy rental accommodation for many years.

We advise a range of social housing and residential property investors on the acquisition, management and disposal of properties. If you would like further advice on the changes to the Residential Tenancies Act 1986, please contact our real estate and property team.

August 2020


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Urban Development Act 2020

The Urban Development Bill 2020 passed into legislation on 6 August 2020, becoming the Urban Development Act 2020 (Act)...

Urban Development Act 2020

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Urban Development Act 2020

The Urban Development Bill 2020 passed into legislation on 6 August 2020, becoming the Urban Development Act 2020 (Act).


The purpose of the Act (and the end to which its powers are to be deployed) is to facilitate urban development that contributes to sustainable, inclusive and thriving communities. The primary "beneficiary" of the Act is Kāinga Ora—Homes and Communities (Kāinga Ora), the Crown entity established in 2019 with the objective of contributing to sustainable, inclusive and thriving communities through, amongst other things, initiating, facilitating or undertaking urban development. 

Powers given to Kāinga Ora

The Act provides Kāinga Ora with a "tool-kit" of statutory powers, a number of which are, in effect, modified versions of existing development powers currently available to local government. Included in this "tool-kit" are powers relating to the planning and consenting of urban development projects, land acquisition, infrastructure development powers, and funding mechanisms.

Most powers apply only to "specified development projects", but some powers also apply to any urban development project initiated, facilitated or undertaken by Kāinga Ora. For example, Kāinga Ora is empowered to acquire land for any urban development project.

"Specified development projects"

The establishment of a "specified development project" allows Kāinga Ora to access the full suite of statutory powers to facilitate complex development projects. 

The process for establishing a specified development project under the Act can be initiated by either Kāinga Ora or the Ministers of Urban Development and Finance (acting jointly). In either case, Kāinga Ora must engage with; Māori entities with an interest in the project area, hapū associated with any former Māori land in the project area, and with key stakeholders including local authorities, Heritage New Zealand Pouhere Taonga and the operators of affected infrastructure. Kāinga Ora must also invite public feedback on the key features of the project. 

The Ministers may accept the recommendation that the project be established as a specified development project where it meets identified criteria, including whether the project objectives are consistent with the purpose of the Act and the national directions under the Resource Management Act 1991.

Kāinga Ora must then prepare and seek public submissions on a draft development plan for the project. The submissions on the draft development plan are reviewed by an independent hearings panel, which then recommends to the Minister for Urban Development whether to approve or amend the draft development plan.

Powers relating to "specified development projects"

Once the development plan takes effect:

  • Kāinga Ora becomes the ''consent authority'' for resource consent applications in the project area;
  • only designations that have been identified in the development plan have effect in the project area. Kāinga Ora then becomes the territorial authority for the purpose of considering notices of requirement lodged by other requiring authorities;
  • certain statutory powers relating to reserves, conservation interests, infrastructure and funding mechanisms may be exercised to further the project;
  • existing planning instruments under the Resource Management Act 1981 may be amended, overridden or suspended by the development plan. 

Comment

The Act is a key feature in the suite of Government-led initiatives designed to support the creation and delivery of well-functioning urban environments. While the tools available to Kāinga Ora under this Act are powerful, the process for accessing them provides ample opportunity for Ministerial decision-making and therefore judicial oversight. These consultative and decision-making requirements are likely to (appropriately or otherwise) limit the number of projects that will be suitable candidates for progression under the Act. However, for projects facing significant barriers, the Act can offer a comprehensive pathway to facilitate their development where they will contribute to sustainable, inclusive and thriving communities. Navigating the different stages of decision-making under the Act will require considerable skill and strategic nous.

For any questions on the Act and/or the COVID-19 Recovery (Fast-track Consenting) Act 2020, and how these alternative processes might be used or impact developments, please don’t hesitate to contact Lauren Semple, Francelle Lupis or Jeannie Warnock.

August 2020


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Honey Bees Preschool: The Law against Penalties Confirmed

On 5 June 2020, the Supreme Court issued its decision on an appeal by 127 Hobson Street Limited (127 Hobson) against the Court of Appeal’s finding that a requirement to indemnify lessee Honeybees Preschool Limited (Honey Bees), for all financial obligations incurred under a lease as a result of 127 Hobson’s failure as lessor to install an elevator, was not an unenforceable penalty...

Honey Bees Preschool: The Law against Penalties Confirmed

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Honey Bees Preschool: The Law against Penalties Confirmed

Honey Bees Preschool: The Law against Penalties Confirmed

On 5 June 2020, the Supreme Court issued its decision on an appeal by 127 Hobson Street Limited (127 Hobson) against the Court of Appeal’s finding that a requirement to indemnify lessee Honeybees Preschool Limited (Honey Bees), for all financial obligations incurred under a lease as a result of 127 Hobson’s failure as lessor to install an elevator, was not an unenforceable penalty.


The issues on appeal involved an examination of the scope of the current rule against penalties in New Zealand and whether the clause in question constituted an unenforceable penalty.

Upholding the Court of Appeal finding, the Supreme Court has usefully re-stated the law on penalties in New Zealand.

Background

Honey Bees runs a childcare centre in central city premises leased from 127 Hobson. When the Deed of Lease was entered into, the parties also entered into a separate agreement under which 127 Hobson and its director agreed to install a second lift in the building to facilitate the arrival and departure of children at the central city high rise preschool.

This agreement included a provision whereby both 127 Hobson and its director agreed that in the event this second lift was not operational by 31 July 2016, Honey Bees would be indemnified against all rent and outgoings it incurred under the lease until its expiry.

The Supreme Court looked at the circumstances around entry into the overall transaction, examining why the separate second lift agreement was central to the lease’s suitability.

What is the scope of the rule against penalties in New Zealand? 

The Supreme Court summarised the rule against penalties as follows:

  • A clause will be an unenforceable penalty if a consequence is out of all proportion (exorbitant) to the legitimate interests of the innocent party in performance of the primary obligations.
  • Determining if the clause is an unenforceable penalty requires an objective exercise of construction, undertaken at the time of contract formation, and by reference to the terms and circumstances of the contract (including commercial context).
  • A legitimate interest to be weighed includes any consequences designed to protect the interests of the party in performance of the primary contractual term.
  • A party’s legitimate interests may extend beyond the loss caused by the breach as would be measured by a conventional assessment of contractual damages, i.e. the four corners of the contract.
  • Legitimate interests will not include objectives unrelated to the performance interest – including punishment – but deterring a breach can be a legitimate objective of the clause.
  • The respective bargaining power of the parties is relevant, including whether legal advice was obtained.
  • It is not always necessary for the court to assess damages – but there will be cases where such a monetary calculation will be the appropriate measure of the innocent party’s interest in performance.

Was the indemnity clause an unenforceable penalty? 

To answer this, the Court looked at Honey Bees’ legitimate interests and found that the only relevant interests were those that flowed from a failure to install a second lift on or before the due date. As the preschool was operating on the fifth floor of a busy high rise building, children and parents would be arriving and leaving within concentrated blocks of time. Honey Bees was looking to increase the capacity of its preschool over the forthcoming years. This was important to the commercial success of the venture.

The Court also found that there was no discrepancy in the parties’ respective bargaining powers.

The Court agreed with the Court of Appeal’s finding that, despite the ‘all or nothing’ nature of the indemnity clause, the consequences of the indemnity being triggered were not out of all proportion to the legitimate interests secured, and therefore the clause was not an unenforceable penalty.

Other issues

This Court also read the wording “all obligations” as applying to only “payment obligations”, i.e. Honey Bees was indemnified against all its financial obligations under the lease but the agreement did not give Honey Bees a right to breach its own obligations under the lease.

It is worth noting that the Court confirmed the general understanding in property law that rights of renewal of leases are in fact grants of a new lease, not an extension of the existing lease. Therefore the indemnity provided under the indemnity agreement only applied to the initial term of the lease, rather than a 24 year period including all renewals.
 
10 July 2020


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Overseas Investment – New Temporary Notification Regime: Treatment of Property Transactions and Process

The Overseas Investment (Urgent Measures) Amendment Act 2020 (Urgent Measures Act) came into force on 16 June 2020, bringing into effect the temporary notification regime...

Overseas Investment – New Temporary Notification Regime: Treatment of Property Transactions and Process

News & Insights

Overseas Investment – New Temporary Notification Regime: Treatment of Property Transactions and Process

Overseas Investment – New Temporary Notification Regime: Treatment of Property Transactions and Process

The Overseas Investment (Urgent Measures) Amendment Act 2020 (Urgent Measures Act) came into force on 16 June 2020, bringing into effect the temporary notification regime.


The manner in which the temporary notification regime applies to property transactions and how a change of control is calculated has now been clarified by the Overseas Investment Amendment Regulations 2020 (Regulations). In addition, the Overseas Investment Office (OIO) has recently published details of what information is required when making a notification to it and provided some additional guidance.

When is notification requirement triggered?

One of the key things achieved by the Regulations is to clarify when various property transactions require notification to the OIO.

The Urgent Measures Act provides in section 82(2)(b), that, an acquisition of property by an overseas person used in carrying on business in New Zealand that effectively amounts to a change in control of that business, as defined in the Regulations, is subject to the temporary notification regime. The Regulations define what is meant by a change in control of the business, and here take a novel approach. Change in control is to be assessed by reference to what proportion of the counterparty’s (i.e. the vendor’s or lessor’s) total assets are being acquired. A “change in control in relation to the acquisition of property used in carrying on a business” is where the value of the property being acquired is more than 25% of the value of all New Zealand property owned by the person from whom the property was acquired, as assessed immediately before the acquisition. If this threshold is exceeded, the transaction must be notified.

This means that both the purchase of land, as well as the entry into a lease (being an acquisition of an interest in land), will be subject to the temporary notification regime and require notification to the OIO if they involve more than 25% of the counterparty’s total assets.

The value of property is to be determined by reference to the most recent financial statements, accounting records and all other circumstances which affect the value of the property. Reliance may be placed on valuations that are reasonable in the circumstances.

Further, value is to be determined by reference to the assets of the actual counterparty, not its related companies. If a particular property asset is held in a special purpose vehicle, as is often the case, regard cannot be had to the total value of group assets.

It is quite possible that a counterparty will resist having to provide its confidential financial information. If so, one solution would be to include a warranty that the threshold is or is not met, and if need be, proceed, or not proceed, to notification accordingly. The OIO has indicated it will be providing further guidance here shortly.

Incorporating companies

One thing to watch out for in relation to the application of the notification regime to business transactions generally is that it covers any acquisition of securities by an overseas person. Strictly speaking, this would have covered even the uncontroversial incorporation of a New Zealand subsidiary of the overseas person, without any business transaction occurring.  After we raised this anomaly with the OIO, it has now been clarified by the enactment of the Overseas Investment Amendment Regulations (No 2) 2020 that a mere company incorporation does not require notification to the OIO.

A few process comments

If it is determined that a transaction is subject to the temporary notification regime, notification to the OIO is to be made prior to giving effect to a transaction. A transaction may be entered into before notification, provided the transaction is conditional on receiving a direction order from the Minister. Transactions entered into before 16 June 2020 are not subject to the temporary notification regime at all.

The notification process is completed online via an online form on the OIO’s website. The information required includes:

  • details of the overseas investor (including an ownership structure diagram);
  • copies of the passport identity page for each individual director or trustee of the acquiring entity or individual involved in the transaction;
  • details of the transaction;
  • details of the business being invested in or the interest being acquired;
  • the value of the assets or interest being acquired; and
  • financial statements for the previous two financial years.

This information must be submitted with the online form and cannot be sent separately to the OIO. No fee is payable.

Unless the OIO makes appropriate changes to its online form, the process for completing it will remain clunky. All the information needs to be gathered, and ready for upload as required, in advance. No provision has been made for the counterparty to submit its financial information privately, on a confidential basis. There is no ability to provide additional material (for example a statement that the counterparty refuses to provide financial statements, or a letter explaining any necessary departure) and there is a tick-box requirement that the party submitting confirms that all required information has been included in the notification (without which the online submission will not work).

Once a transaction has been notified, the OIO will conduct an initial review and make a recommendation to the Minister of Finance, who will decide whether the transaction is contrary to the national interest. No delegation of this decision-making power has been made, regardless of transaction value, and if all parties comply then it is possible to foresee a bottleneck arising at the ministerial level. This initial review is expected to be completed within 10 working days, although the legislation does actually provide for the initial review to take up to 40 working days, with provision for extension by the Minister for a further 30 working days.

A notified transaction cannot progress until a direction order is issued. The Minister may:

  • make a direction order that no conditions are imposed (and therefore the transaction may proceed);
  • make a direction order imposing conditions on the transaction; or
  • make an order prohibiting the transaction from being given effect.

If it is found that further assessment is necessary, the transaction will be subject to a detailed review against the national interest test. This is a discretionary power, and guidance on this test notes that considerations are to be given to a range of factors and the likely impact of the investment.

The OIO expects the majority of transactions to be able to proceed without any intervention. However, as the notification requirement effectively amounts to a temporary ministerial power of veto over transactions, at the very least resulting in potentially significant delay, the new regime is of concern to business.

Thankfully the new emergency notification regime is only temporary and an assessment of the regime is to commence by the end of July to ensure that classes of transactions subject to the regime are not broader than reasonably necessary.  Treasury has advised this review will be completed after the 2020 General Election.  Further, the emergency notification regime will be reviewed by the Minster at 90 day intervals to ascertain whether the effects of the pandemic justify the regime remaining in place. Where it is determined, the emergency notification regime is no longer required, this will be replaced by a permanent call-in power (see our previous article here for details of this).  The first 90 day review has now been completed, and on 1 September Treasury issued a statement advising that New Zealand would retain the temporary notification regime for a further 90 days.  The next statutory review is due on 28 November 2020.   Following the initial review the OIO confirmed it had received 102 notifications, with three being called in by the Associate Minister of Finance for further assessment.  Of these three, two transactions have been allowed to proceed, and one is currently being reviewed.  We will watch with interest the outcome of this assessment.

Please contact Brigid McArthur or one of our lawyers in our Property team if you would like help on interpreting the temporary notification regime and the recent changes to the Overseas Investment Act.

10 July 2020 (updated September 2020)


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Decision not to offer surplus PWA land back to a former owner was not lawful

Navigating the Public Works Act 1981 (PWA) can be difficult for both landowners and the government agencies charged with developing public works, especially when divesting surplus land. Recently, the Court of Appeal provided some clarity about the obligation to offer surplus land to its former owner, when that former owner is a company which has been removed from the companies register...

Decision not to offer surplus PWA land back to a former owner was not lawful

News & Insights

Decision not to offer surplus PWA land back to a former owner was not lawful

Decision not to offer surplus PWA land back to a former owner was not lawful

Navigating the Public Works Act 1981 (PWA) can be difficult for both landowners and the government agencies charged with developing public works, especially when divesting surplus land. Recently, the Court of Appeal provided some clarity about the obligation to offer surplus land to its former owner, when that former owner is a company which has been removed from the companies register.


In Aztek Limited v Attorney-General [2020] NZCA 249, the Court of Appeal held that, even though the company former owner had been removed from the companies register, the chief executive of Land Information New Zealand (LINZ) should have enquired into the ability to make an offer to that company. The chief executive’s decision, made in February 2011, that it would have been “impracticable” to sell the land to that company was set aside and the chief executive is now required to reconsider that decision.

The case relates to properties acquired from Aztek Limited for the “Avondale Extension” (later known as the Waterview tunnel project) by agreement in 2005. As Aztek’s only significant asset was that land, the directors of the company had ceased filing annual returns and the company was removed from the companies register in March 2009. In November 2010, NZTA decided that the land was no longer required for the Avondale Extension and, on 21 February 2011, the chief executive of LINZ approved an offer-back exemption under section 40(2)(a) of the PWA. This section provides an exemption to the standard rule that land must be offered for sale to its former owner when it would be “impracticable” to do so. The reason given was that the company had been removed from the companies register.

Aztek was restored to the companies register in 2015 after the directors of the company discovered that the land had been declared surplus. The restoration of the company, in effect, brought it back to life as if it was never removed from the companies register.

The Court of Appeal relied on both the wording and purpose of section 40 of the PWA to decide that the chief executive of LINZ should have enquired with the shareholder of the company as to whether it was possible for the company to be restored to the companies register in order to receive an offer of the land. That enquiry should have been made between the decision that the land was surplus and the decision that a sale to the former owner was “impracticable”. In this case, those decisions were made at the same time.

The Court relied on a number of previous decisions about the rights of former owners under the PWA and concluded that the PWA is designed to ensure that, so far as practicable, land is returned to the persons from whom it was acquired as “that is the right thing to do”. The Court held that, in this case, it was both reasonable and practicable to advise the shareholder of the company of the possibility of receiving an offer if the company was restored to the companies register.

This was a case where the company was closely-held, and the company had been removed from the companies register less than two years before the land became surplus. The reasonable performance of the chief executive’s duties could have resulted in the company being restored to the register in order to receive an offer in the months following the November 2011 decision that the land was surplus.

Restoration to the register is a relatively straightforward process under sections 328 to 331 of the Companies Act 1993 where the relevant ground for removal did not exist (generally, that the company had ceased to carry on business) and a useful provision in a variety of scenarios, both inside and outside of a liquidation.

The PWA remains a complex piece of legislation, which is well overdue for reform, with the rights and obligations of landowners and governmental agencies becoming more and more governed by caselaw. In this particular case, it is not yet known if an appeal to the Supreme Court will be sought by the Crown.

A number of our lawyers regularly provide advice on the PWA and one of our senior consultants, John Greenwood, advised Aztek and its shareholder on this matter. If you would like further information about this or any other PWA matter, please contact one of our property lawyers. Our corporate team can also assist with restoration to the companies register or other company law matter.

July 2020


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