Month: June 2016

Retirement village disputes: Who decides?

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Many people may not realise that there is a separate process for dealing with retirement village disputes.  This process is set out in the Retirement Villages Act 2003 (the Act) and the Retirement Villages (Disputes Panel) Regulations 2006 (the Regulations).  Essentially, certain types of retirement village disputes can be dealt with under this process.  The decision-maker(s) is a disputes panel, appointed by the operator of the relevant retirement village (“disputes panel”).

This article summarises some key information regarding the retirement village dispute process, such as: the types of disputes that can be dealt with by a disputes panel; how to initiate a retirement village dispute; the appointment and role of a disputes panel; and information on timeframes and costs.  The article concludes with comments on some of the issues with the current process, which may be addressed following a review of the Act currently being conducted by the Retirement Commissioner.

Types of disputes

There are particular types of disputes that qualify for the retirement villages disputes process, which are set out in the Act.  These can be disputes between retirement village residents (a “resident”) or between a resident and a retirement village operator (an “operator”).

Examples of disputes between residents that qualify for the retirement village disputes process are disputes affecting a resident’s right to occupy their unit.  It appears, however, that the majority of disputes that are contemplated for the retirement villages disputes process are disputes that arise from decisions made by an operator.  Examples include decisions relating to or affecting:

  • A resident’s occupation right or right to access services or facilities;
  • Charges for outgoings that are payable under the resident’s occupation right agreement; and
  • Charges or deductions imposed because the resident’s right to live in the unit has ended.

A dispute notice relating to those types of decisions can be issued by a resident or an operator.  A resident can include a former resident and the personal representative of a resident, such as a family member or a friend.

A resident can also issue a dispute notice regarding an alleged breach of a right referred to in the Code of Residents’ Rights (which is set out in the Act) or the Retirement Villages Code of Practice 2008 (which has been published by the Ministry of Business, Innovation and Employment). A resident cannot issue a dispute notice if the dispute concerns any health or disability services.

There is no monetary limit on disputes that can be taken to a Disputes Panel, as long as the dispute satisfies the criteria set out in the Act.

Initiating the disputes process

To initiate the disputes process, the initiating party issues the other party with a dispute notice.  A dispute notice must be in writing and must include the following:

  • The decision(s) or matter(s) that the dispute notice relates to;
  • The person(s) the dispute notice is issued against;
  • The grounds on which the dispute notice has been issued; and
  • The efforts that have been made to resolve the dispute.

There are no fees for issuing a dispute notice.

There are specific timeframes that need to be followed in issuing a dispute notice.  Generally:

  • If the initiating party is an operator, a dispute notice cannot be issued unless the resident concerned has first been notified, reasonable efforts have been made by the operator to resolve the dispute and 20 working days have passed since the resident was notified.  The dispute notice also needs to be given within six months after the resident concerned was first notified of the dispute; and
  • If the initiating party is a resident, a dispute notice cannot be issued until the dispute has first been referred to the complaints facility and 20 working days have passed since that referral.  The complaints facility is a facility that must be run by an operator for dealing with complaints by the residents.  Where the initiating party is a resident the dispute notice generally needs to be issued within six months after the 20 working day timeframe.

The six month timeframe can be extended by agreement.

Appointment of the disputes panel

Once a dispute notice has been issued, the operator has 20 working days from the date of receiving or giving the dispute notice to appoint one or more independent people to sit on the disputes panel.  The operator must consult the other parties to the dispute before making an appointment.

The Disputes Panel members are chosen from a list of persons approved by the Retirement Commissioner.  There are particular rules around the appointment of a disputes panel in what are called disposal disputes.  These are disputes concerning an operator’s breach of a resident’s occupation rights agreement or code of practice in disposing of a residential unit.  With disposal disputes:

  • the operator must appoint at least three members to the panel; and
  • the chair must be a retired Judge or have held a practising certificate as a barrister or solicitor for at least seven years.

Other than that, there are no rules around the numbers of members that must be appointed to determine a retirement village dispute.

What happens next?

After the Disputes Panel has been appointed, the operator must provide the Retirement Commissioner with a copy of the dispute notice and copies of all of the documents relating to the appointment of the Disputes Panel members.  The operator must also provide a copy of the dispute notice to the village’s statutory supervisor in certain circumstances.

Once appointed, the Disputes Panel then conducts the whole dispute resolution process.  The panel is responsible for:

  • Deciding what additional information they need;
  • Holding a pre-hearing conference with the parties;
  • Making arrangements for a hearing, including giving the notice of hearing to the parties;
  • Conducting a hearing;
  • Reaching a decision and notifying that decision in writing;
  • Providing all the relevant papers, documents and other material to the Retirement Commissioner.

The Disputes Panel must hold a hearing unless the applicant withdraws the dispute notice, the parties agree not to have a hearing or the Panel refuses to hear the dispute.  A Disputes Panel can only refuse to hear a dispute if it considers that:

  • The dispute is frivolous or vexatious or an abuse of process;
  • The dispute should be heard by a Judge; or
  • It has “any other sufficient reason” not to hear it.  In this case the operator must appoint another Panel to hear the dispute.

The operator is responsible for paying the costs incurred by the Disputes Panel, including their fees and expenses, such as a travel costs.  Each party has to pay for their own legal costs and is also responsible for paying for the costs and expenses of their witnesses.  The Disputes Panel may, however, award some or all of the costs and expenses incurred to any party, or to the operator if there is a dispute between residents.

The decisions of Disputes Panels are enforceable in the Courts.  They can also be appealed within 20 working days of the decision to either the District or High Court.  The appeal is a rehearing and the decision of the Court hearing the appeal is final.

Comments on process

There are a number of issues with the retirement villages disputes process.  The main issue in my view is the jurisdiction of a disputes panel, which, in a monetary sense, is limitless – beyond that of a District Court.  This is quite unusual and is problematic without additional protections being put in place, such as minimum requirements for panels deciding higher value disputes.

Another issue is the power imbalance between an operator and a resident.  In every retirement village dispute the operator is responsible for appointing the disputes panel.  Yes, the operator must consult with the other party(s) before appointing the panel, but there are no rules around what that means in the Act or Regulations, and there is no requirement for an agreement to be reached.  This is a huge advantage for operators, who can choose whichever panel member(s) they want to decide a dispute that they are involved in.

That said, there are some provisions that disadvantage operators too, such as the requirement that they pay all of the costs of the disputes panel.  There is the possibility that another party with be ordered to pay those costs, but there are no guarantees of that.  Even so, this does not negate the huge disadvantage to a resident in the appointment of the disputes panel.  Residents would likely prefer to share the disputes panels’ costs if the appointment of disputes panels had to be by agreement.

The Retirement Commissioner is apparently investigating some of the issues with the current system so changes may be on the horizon.

If you would like further information please contact Gerard Rennie on 07 958 7429.

Are you selling or purchasing a unit title? Do you know about the disclosure requirements?

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The Unit Titles Act 2010 (“the Act”) sets out three different statements a seller must provide to a buyer at different stages in the sale and purchase transaction.  The first disclosure statement is called a “pre-contract disclosure statement”.

Pre-contract disclosure statement

As the name suggests, this disclosure statement must be provided to a prospective buyer before they sign an agreement for sale and purchase.  If you are selling your property through an auction process, you should ensure that the pre-contract disclosure statement is attached to the auction terms and conditions that are provided to prospective buyers.

The agreement for sale and purchase includes an acknowledgment that the buyer has received the pre-contract disclosure statement from the seller.  It is very important, as a seller, that you provide this statement to the buyer as soon as possible.  If it is not provided to the buyer before the agreement is signed, the buyer could seek to cancel the agreement.

If you are a buyer, it is important that you obtain the disclosure statement; when acting for buyers, we recommend that we review the pre-contract disclosure statement to see if the statement raises any alarm bells.  If there is any particular cause for concern, further questions may need to be asked of the seller and the body corporate.

The onus in providing the disclosure statement falls on the seller even though most sellers will rely on the body corporate manager or chairperson to provide the required information.  The statement must be signed by the seller or an authorised representative.

The Unit Titles Regulations 2011 (“the Regulations”) set out the prescribed information that the statement must contain.  The disclosure statements can be somewhat unclear in terms of what the seller should be disclosing to the buyer.  Some owners have the view that they will give the prospective buyer everything they have about the unit and body corporate; in contrast, other owners will provide as little information as possible, without actually under-disclosing.

Regulation 33 sets out the information that must be disclosed.  This includes:

  • A description of unit title property ownership, unit plans, ownership and utility interests, body corporate operational rules, computer registers, easements and covenants, Land Information Memorandums and information about what is required in a pre-settlement disclosure statement and an additional disclosure statement;
  • The amount of the contribution levied by the body corporate for the particular unit being sold;
  • The details of maintenance that the body corporate proposes to carry out on the unit within the next year and how the maintenance costs will be met;
  • The balance of every fund or bank account looked after by the body corporate; and
  • Whether the unit or the common property is or has been the subject of a weathertightness home claim.

The pre-contract disclosure statement allows the buyer to obtain initial information about the unit and describes certain terminology associated with unit title properties.  It can be useful for the seller to have a solicitor look over the statement to ensure the correct information is being provided to the buyer (and the sellers are not over- or under-disclosing).

Additional disclosure statement

Once the agreement has been signed, a buyer may, within five working days of signing the agreement but no later than 10 working days before the settlement date, request an additional disclosure statement from the seller.

We always recommend obtaining this statement however, it may depend on the information already provided to you as a buyer as to whether you request this.  We see a number of sellers providing most of the information in the pre-contract disclosure stage, removing the need for an additional disclosure statement.

Also there is no requirement under the Act for a buyer to approve or agree to the content of a disclosure statement.  When acting for a buyer we therefore recommend that a condition is included in the agreement that allows you to approve the contents of the additional disclosure statement and various other body corporate matters.  Please note that this would not be applicable if you were purchasing the property at an auction.

The statement provides important information such as:

  • Summaries of the long term maintenance plan;
  • Text of motions voted on at the last general meeting and whether each motion was passed or not;
  • Details of regular expenses that are incurred at least once a year;
  • Amounts owed to the body corporate at the date the additional disclosure statement is requested; and
  • Details of every current contract entered into by the body corporate.

The pre-contract disclosure statement sets out how much an additional disclosure statement will cost.  Although it is the seller’s responsibility to provide an additional disclosure statement, the cost of this must be met by the buyer.

Again, for the seller, most of the information will need to come from the body corporate chairperson or manager.  However, the onus falls on the seller to provide the statement to the buyer and, crucially, the seller is responsible for the content of the statement.

Pre-settlement disclosure statement

This is the final statement that makes up the trio of disclosure statements to be provided to the buyer.  The seller must provide this statement no later than the fifth working day before the settlement date.

The information required to be disclosed in this statement is very important for a buyer.  Yet, there is no ability for the buyer to “approve” the information contained within statement.  If there was information that the buyer was unaware of or did not agree with, the buyer may be unable to cancel the agreement.

The statement is mainly concerned with what levies have been raised by the body corporate, and whether there are any unpaid levies by the unit owner and unpaid costs relating to repairs of building elements or infrastructure.  This information is important to ensure the buyer is not taking on any outstanding debt by the seller and also to highlight the amounts payable by the buyer from the settlement date onwards.

Again, the statement must be provided by the seller and the onus falls on him or her to provide it.   Unlike the previous statements, a  pre-settlement disclosure statement requires a certificate to be signed by the body corporate stating that the information contained in the statement is correct.  Therefore it is vital that the information in the statements is up to date and accurate.

There are also serious consequences if the buyer does not receive the statements within the specified timeframes set out in the Act, or if the seller does not provide the statements at all.  In those cases, the buyer could delay the settlement date or cancel the agreement altogether.

The disclosure requirements under the Act have caused some headaches due to the unclear wording of the Act and Regulations, the double-up of information required to be disclosed, the overtly complicated structure that could easily be simplified and the serious implications of not getting the disclosure requirements right.

If you are in doubt about the disclosure requirements, either as a seller or buyer, ensure you obtain legal advice to avoid any costly mistakes.

If you would like further information please contact Dale Thomas on 07 958 7428.

Changes to the tax regime affecting property transactions

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The NZ government has recently taken legislative steps with the stated objectives of: collecting more information about property buyers and sellers; improving tax compliance; and cooling the heated property market.

Some measures are in place and others are well on the way.  This article covers each of those measures.

Tax information regime

On 1 October 2015 the Land Transfer Amendment Act 2015 came into force.

For agreements dated after 1 October 2015, there is now a requirement that people buying and selling property must provide a completed Land Transfer Tax Statement.

The Tax Statement must include the following information:

  • The name of the buyer/seller;
  • Whether the land has a home on it;
  • Whether the buyer/seller or a member of their immediate family is a NZ citizen or visa-holder; and
  • If the buyer or their immediate family has a work or student visa and whether they intend living in the property.

Some sellers and buyers will also have to give:

  • Their IRD number; and
  • Their tax number in another country (if they have one).

A natural person who is buying/selling their main home can claim the “main home exemption” and does not need to provide their IRD number (and overseas tax information).  However, this exemption can only be used twice in two years (discussed further below under the Bright-line Test).

Any trust, company or overseas person must provide an IRD number (and overseas tax information) and cannot claim the main home exemption.  This will mean that previously unregistered people or entities must obtain an IRD number in order to sell or buy property.

The Tax Statements are given to Land Information New Zealand (as part of the process to change land ownership), who pass the information on to the Inland Revenue Department (“IRD”).  The IRD may use this information to identify those people who have a pattern of property trading and who possibly should be paying tax on any gains accrued as a result of such property trades.

Bright-line test

Another recent law change is the so-called “bright-line test”.  The Taxation (Bright-line Test for Residential Land) Act 2015 came into force on 16 November 2015.

This regime requires tax to be paid on any income made from residential property that is sold within two years of acquisition.  This is intended to supplement the existing rule that gains from the sale of land are taxable if the land was bought with the intention to sell.

Not all sales will trigger this tax obligation.  The following transactions will be exempt:

  • Sale and purchase of the main home;
  • Disposal of property by the executors of an estate; and
  • Transfers under a relationship property agreement.

The main home exemption can only be used twice in two years.  If a person buys and then sells their third main home in two years, they will be assessed for tax on the gains of their third home.

Residential land withholding tax

The third aspect of this suite of legislative changes is the proposed withholding tax on sales of residential property by people who live overseas.  This is to come into force on 1 July 2016.

This will catch “offshore persons” who sell residential land in NZ, that they acquired on or after 1 October 2015, and that they have owned for less than two years.  There is no “main home” exemption.  This is a collection mechanism for the bright-line test as it applies to offshore persons.

“Offshore persons” will include:

  • People who are not NZ citizens;
  • People who do not hold a residence class visa; and
  • NZ citizens and residence class visa holders who have been away from NZ for a significant period of time (three years in the case of NZ citizens).

“Offshore persons” selling NZ residential property must pay a tax on any gains they have made from the sale.  The tax is collected and paid on their behalf by their “conveyancing agent” (for example, the lawyer handling the sale).

The tax paid is the lesser of:

  • A specified percentage of the gain on the property;
  • 10% of the sale price of the property; or
  • The amount left after repaying any mortgage and rates for the property.
 Summary

The new tax information regime is designed to give the IRD a better insight into property transactions on the back of concerns that not all property traders are meeting their tax obligations.

The Government has been at pains to stress that the regime will not affect the main home of ordinary New Zealanders.  Nevertheless, the new and proposed rules are complex and care will be needed around settlement to ensure buyers and sellers are disclosing the correct information, complying with existing and new property trading taxation obligations and, if an overseas person, meeting the proposed withholding tax requirements.

If you are in any doubt as to the tax implications of these changes for you, please speak to your accountant and/or your usual McCaw Lewis contact.

Employee share purchase schemes under the Financial Markets Conduct Act 2013

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What is an employee share purchase scheme?

An employee share purchase scheme (“Scheme”) is defined by the Financial Markets Conduct Act 2013 (“FMCA”) as a scheme that is, “established by an entity under which employees or directors of the entity or any of its subsidiaries … may acquire specified financial products … that are issued by the entity”.

Essentially, a Scheme will enable employees, directors, managers and occasionally contractors (“Employee”) of an employer to “buy into” that employer’s business (“Employer”) by purchasing financial products in the Employer, namely equity securities or shares.

Schemes do not have a particular shape or form meaning that Schemes can either be simple and designed to benefit a small number of key Employees (such as directors and managers) for a single issue of shares, or Schemes can be detailed and complex, intended to apply to a wide range and number of Employees over a long period of time and for multiple share issues.  As such, Schemes are diverse and have the potential to encompass any arrangement whereby Employees can acquire shares issued by the particular Employer.

What are the benefits of an employee share purchase scheme?

The benefits of Schemes can be wide-ranging to both the Employer and the participants of the Scheme.

A key advantage is the retention (and attraction) of key Employees.  The general consensus is that where an Employee has a mind-set that he or she is an ‘owner’ of the Employer, that particular Employee’s vested interest in the Employer will be realised in the work he or she does.  International research has reinforced this concept and indicates that Schemes can be conducive to an Employer’s growth and productivity, while at the same time fostering a sense of loyalty amongst its Employees.

Directly related to the retention (and attraction) of key Employees is the incentivisation of those key Employees.  This links in with the concept set out above that where an Employee has a vested interest in the Employer, this interest will be realised in the work he or she does.  Where an Employee stands to experience a gain and/or profit through the success of the Employer, this prospect incentivises that Employee to work harder to realise that gain and/or profit.

Schemes can also be useful for the succession planning of ownership of a particular Employer.  By allowing Employees to slowly buy into the Employer, Employees are able to slowly work their way to a director level, eventually taking over the existing leadership of the Employer and thereby providing for a smooth transition in ownership of the Employer.

Another benefit of a Scheme is that it provides an Employer with a method of rewarding Employee performance that does not negate or reduce the operating cashflow of the Employer.

Employee share purchase schemes under the Securities Act 1978

Reviewing the history of Schemes in New Zealand highlights a general reluctance to implement a Scheme due to the complexity and costs associated with a Scheme’s establishment and maintenance.

Under the Securities Act 1978 (“the Former Act”), Employees of an Employer were generally considered to be members of the public, meaning that Schemes would be caught by the underlying rule of the Former Act which provided that an issuer of securities could only offer securities to the public for subscription where that offer was accompanied by an authorised advertisement, investment statement and/or registered prospectus.

While the Former Act contained particular exemptions that, in particular situations, might exclude a certain Scheme from the required compliance with the underlying rule, it was often found that these exemptions could be difficult to apply with Employers finding that the Scheme may not wholly fit under any one particular exemption.

One such example of an exemption under the Former Act was the Securities Act (Employee Share Purchase Schemes – Unlisted Companies) Exemption Notice 2011 which was introduced to provide relief for unlisted companies.  While the exemption notice did reduce some costs and particular administrative issues, the underlying requirement for a registered prospectus remained and it also introduced a number of restrictive conditions, all of which contributed to an exemption notice that lacked effect.

A further exception to the underlying rule was section 3 of the Former Act, which provided that an offer made only to a ‘close business associate’ could be exempt from the standard disclosure requirements.  However, a review of case law and commentary on the Former Act indicates that a close business associate is viewed as someone who is more than an ordinary worker of the Employer, and is more closely linked to a person who holds a position of leadership, such as a director or manager.  As such, ordinary workers of the Employer were normally unable to come within the exception provided for in section 3.

In light of these (and other) difficulties posed by the Former Act, Employers have largely tended to avoid implementing Schemes.  However, with the replacement of the Former Act by the FMCA in 2014, Schemes have been given a new lease of life, with a specific exemption being included for such Schemes under the FMCA.

Employee share purchase schemes under the Financial Markets Conduct Act 2013?

The introduction of the FMCA has made it easier for Employers to participate in Schemes.  Section 8 of Schedule 1 to the FMCA provides for a specific exemption for Schemes whereby an offer of shares or an option to acquire shares in an Employer or one of its subsidiaries to an Employee under a particular Scheme does not need to comply with the standard FMCA disclosure requirements, provided that certain conditions are complied with.

Those conditions are three-fold and are set out below:

  • The offer must be made to the Employee as part of the Employee’s remuneration, or the offer must be made in connection to the Employee’s employment/engagement;
  • The raising of funds cannot be the primary purpose behind the offer to the Employee; and
  • The number of shares issued in the Employer under all Schemes that the Employer is operating in any 12 month period cannot exceed 10% of the total number of shares in the Employer that are on issue.

In addition, by offering Employees the chance to participate in a Scheme, Employers must still provide Employees with certain information, including:

  • A warning statement in respect of the Scheme which outlines the particular exemption under the FMCA being relied upon by the Employer, and which is intended to explain what the offer is, what the risks of investment to the Employee are, and sets out a general requirement on the Employee to be prudent in his or her investigations of the Scheme;
  • Basic information regarding the Scheme, including the terms and conditions; and
  • Access to the Employer’s most recent annual report and financial statements.
Further considerations

When considering whether or not to establish a Scheme, Employers should also turn their attention to other considerations, which include (without limitation), factors such as:

  • The number of shares able to be offered (in light of the restrictions described above), and consequently the number of shares that will be offered;
  • What price the shares will be offered at, which will dictate what the Employer entity is valued at; and
  • Particular time constraints, such as how long an Employee must first work for the Employer before being able to participate in a Scheme (which can also directly assist with fostering Employer loyalty and incentivise Employees to remain with the Employer).

Another important consideration is the tax consequences for both the Employer and Employee.  Toward the end of 2015, the Inland Revenue Department announced that certain situations might be considered tax avoidance, with Schemes now included as such a situation (whereas they had previously been accepted by the IRD).  The tax consequence of a Scheme arises as a result of Employees being able to purchase shares in the Employer at a discounted price (pursuant to the Scheme).  That discount is the difference between the market value of the shares and the purchase price, which is a taxable benefit to the Employee.

In light of the above, it is clear that setting up a Scheme can be a protracted and complex process with a variety of considerations to pay attention to.  As such, both legal and accounting advice should be sought in order to ensure a Scheme is structured so as to meet an Employer’s particular aims and objectives, while at the same time maintaining attractiveness to Employees.

If you would like further information please contact Laura Monahan on 07 958 7479.

Contact us

HAMILTON OFFICE

P. 07 838 2079

E. reception@mccawlewis.co.nz

Level 6, 586 Victoria Street
Hamilton 3204
New Zealand

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P. 07 878 8036

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Te Kūiti 3910
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