Category: Commercial

Incorporated Societies Act 2022

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The Incorporated Societies Bill received Royal Assent on 5 April 2022, passing the Bill into law as the Incorporated Societies Act 2022 (“the Act”).  The provisions of the Act will likely come into force in stages, with the first subparts having come into force on 6 April 2022.  The rest of the Act comes into force on a date/dates appointed by the Governor-General, with a final date for full enactment (if not completed prior) of 5 April 2026.

The Act intends to replace the Incorporated Societies Act 1908, modernising the requirements of incorporated societies and providing a clear framework for high quality governance.

There are a number of key elements to be aware of under the Act:

  • Officer duties are clarified – while this does not change the current law, the duties are not necessarily widely understood or followed by officers;
  • Reporting standards/requirements have been clarified, with large incorporated societies required to have their financial statements audited;
  • Changes have been made to the requirements for officers, with certain factors that will disqualify some from being officers;
  • There is an ongoing requirement for incorporated societies to have a minimum number of members; and
  • There are clear, updated requirements for what must be included within a constitution.

Some incorporated societies may find that they need to appoint new officers, and many will need to update their constitutions to comply with the Act’s requirements.

Importantly, the Act requires all current incorporated societies to re-register as a society under the Act.  The transition period is not yet set in stone, however it will be two years and six months after clause 4 of schedule 1 comes into force, whenever that may be (or no later than 1 December 2025).

There are over 24,000 incorporated societies in New Zealand needing to ensure their rules comply with the requirements of the Act and re-register with the Registrar of Incorporated Societies.  It is recommended that societies wanting to make the transition begin the process as early as possible to create as little disruption to operation as possible.

The Act also makes provision for registered charitable societies by amending the Charitable Trusts Act 1957 (“the CTA”).  Any society currently incorporated as a charitable trust board has a choice to transition to the Act.  Once the relevant section of the Act comes into force, societies will no longer be able to apply to incorporate as a charitable trust board under the CTA.

Incorporated societies should embrace this opportunity to review their constitutions and create a governing framework that is fit for purpose to serve them well into the future.  For assistance with reviewing your constitution, guidance through the re-registration process, or to further discuss how the Act impacts your society, get in touch with our team.

 

Kaylee Bird is a Solicitor in our Asset Planning Team and can be contacted on 07 808 6066.

Name Your Discount – What is a “Fair Abatement” of Rent?

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On 28 August 2021, the COVID-19 Response (Management Measures) Legislation Bill (“the Bill”) was passed, and the Bill will be rubber stamped into the law shortly. Somewhat surprisingly, the Bill introduces a new “rent reduction in an emergency” clause which will function as the default “rent reduction” clause for leases that do not already have one. This article discusses what the Bill means for landlords and tenants in the commercial space.

Background – ADLS clause 27.5

The current standard form ADLS commercial lease, the ADLS Deed of Lease 6th edition (2012) (5) (“ADLS Lease”) includes clause 27.5, titled “no access in an emergency”. This clause was formulated as a response to the 2012 Christchurch earthquakes. The concern then was that tenants should not have to continue to pay the full rent for premises they could not access (i.e. premises in the Christchurch Red Zone). In the wake of the COVID-19 pandemic, clause 27.5 has been thrust into the spotlight as a way to justify rent reductions for tenants unable to access their business premises, but there are a number of problems:

  • The operating terms of clause 27.5 (emergency; inability to gain access to the premises; and inability to operate fully from them) are vague, and vary from lease to lease;
  • Clause 27.5 was designed as a response for emergencies in localised areas (i.e. Christchurch), and most likely did not contemplate an emergency stretching across all of New Zealand;
  • Clause 27.5 has never actually been interpreted by the Courts, meaning despite its existence, there is very little guidance on what to do if a “fair abatement” of rent cannot be agreed.

As a result, working out the exact amount of rent to “discount” has largely been left to landlords/tenants to work out between themselves, and various landlords and tenants have resorted to drafting their own “no access in emergency” clauses which are yet to be tested in the event of disagreement.

The Bill

The Bill was passed on 28 September 2021. One of the Bill’s key changes is introducing a standardised “no access in emergency” clause (“the Amendment”). The Amendment is largely based on the ADLS Lease clause 27.5, and allows landlords and tenants to agree an appropriate rent reduction for an “affected period”, which is effectively the period of the pandemic. The start date of the affected period stretches as far back as 18 August 2021 (i.e. the date that all of New Zealand moved back to Level 4), and the Amendment is implied into all commercial leases that do not already have a similar clause.

The Amendment will be contained in the Property Law Act 2007, and we outline our key observations.

Who does this affect?

The Amendment affects anyone with a lease that does not contain an equivalent “no access in emergency” clause; and/or parties that have not otherwise agreed an existing arrangement. This means recent, unamended, ADLS leases are likely unaffected, but parties with non-ADLS leases, amended ADLS leases, or hastily made alternative rent arrangements, may be caught out. If you have an ADLS lease that commenced on or before December 2012, there is a good chance that it will not contain a “no access in emergency” clause and you will be affected by the Amendment.

What is the “affected period”?

The “affected period” is a rental period:

  • That runs from 18 August 2021, and ends when the Epidemic Preparedness (COVID-19) Notice 2020 expires or is revoked. It does not apply to the initial lockdown in 2020;
  • Where the lessee is unable to access all or any part of the leased premises to fully conduct their operations because of reasons of health or safety related to the epidemic.

The “affected period” also includes any rent or outgoings arrangements made from 18 August 2021.

What is a “fair proportion” of rent reduction?

The Bill does not list any particular considerations to take into account when agreeing rent reductions. This is to avoid restrictions on what can and cannot be taken into account. A submission from the NZLS (which was not implemented into the Amendment) suggested these factors to consider:

  • the lessee’s ability to operate remotely;
  • the nature of the lessee’s business;
  • the continuing right of the lessee to store goods and business equipment in the premises;
  • any Government wage subsidy;
  • the number of staff able to attend at the premises and the extent to which the premises can be used in a manner that is consistent with social distancing requirements;
  • the borrowings and commitments of the lessee in relation to its business, and the borrowings and commitments of the lessor in respect of the lessor’s building in which the premises are situated.

This means that ultimately, the reduced rent amount will be agreed by the landlord and tenant on a case-by-case basis.

What happens if there is no agreement on rent reduction?

Any disagreement for an appropriate rent reduction under the Amendment will first be resolved between the parties, or failing that, by arbitration.

Would this apply to ground leases?

While the changes in the Bill will apply to all leases, the Amendment provides relief for leases that cannot fulfil their purpose. It is unlikely a ground lease will have an applicable no access provision because, for ground leases, the purpose is long term land use for the improvements to the land (primarily buildings) and that purpose has not been interrupted by the epidemic.

Can I get out of the Amendment?

People can “contract out” of the Amendment, but this does require agreement from both sides. Landlords that try to contract out of the Amendment, without a satisfactory alternative in place, will find this position difficult to support.

It is worth noting that the Amendment will expire when the Epidemic Preparedness (COVID-19) Notice 2020 expires or is revoked. You will need to consider whether a “no access in emergency” clause is appropriate for any other emergency or natural disaster that may occur.

Conclusion

The Amendment will be keenly observed by many, and we will continue to keep a close eye on developments in this space. We would advise anyone with commercial interests to closely examine their version of a “no access in emergency” clause, especially if they are under an older version of the ADLS lease or a non-standard ADLS lease.

Should you have any concerns or questions about the Bill and how it affects you, get in touch with one of our experts at McCaw Lewis.

Andrew is a Solicitor in our Dispute Resolution Team and can be contacted on 07 958 7447.

Privacy Act 2020

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Although it retains the same basic approach as the 1993 Act, the new Privacy Act 2020 introduces some new features and obligations of which all businesses and organisations dealing with personal information need to be aware.

Information Privacy Principles

The privacy regime in New Zealand is governed by a series of information privacy principles, which act as guidelines for all collection, storage, use, and disclosure of personal information.

The new Act leaves these principles largely unchanged against the 1993 Act, however there are a few additions:

  • Data minimisation: You can only collect identifying information if it is necessary. If you don’t need it to achieve your purposes, you should not collect it.
  • Manner of collection: This must be fair and reasonable (g. not unreasonably intrusive, in the circumstances). The new Act uses the collection of information from children and young people as a particular example of where circumstances need to be carefully considered.
  • Unique identifiers: If you are assigning a unique identifier to an individual (which can only be done if necessary to carry out your functions efficiently), you need to take reasonable steps to protect that identifier from being misused. This is designed to minimise the risk of identity theft.
  • Overseas disclosure: This is a brand new principle, applying where you disclose personal information overseas. This is discussed further below.
Mandatory Breach Notification

Under the new Act, agencies which hold personal information now have an obligation to notify individuals and the Privacy Commissioner if they have lost control of that information, where that loss has caused or is likely to cause serious harm. This notification must be made as soon as practicable after you become aware of that loss of control, and must contain certain prescribed information. This gives affected individuals a chance to regain control of their information, for example by changing their password or cancelling their credit card.

However not every breach will require disclosure, and care needs to be taken when determining whether disclosure is necessary in a particular situation. When assessing whether or not a breach has or is likely to cause serious harm, organisations must consider a range of factors including the nature of the information, the nature of the harm, who has obtained access to that information as a result of the breach, and any action that has been taken to reduce the risk of harm.

The Privacy Commission has an online tool called “NotifyUs”, which can be used to determine whether a privacy breach meets the “serious harm” threshold, and needs to be disclosed.

Failure to notify the Commissioner is a criminal offence carrying a potential fine up of to $10,000.00. An affected individual can also make a complaint to the Commissioner, which could result in additional penalties.

Cross-Border Protections

The new Act recognises that an increasingly globalised economy means that disclosure of information across borders has become commonplace, so a new information privacy principle has been introduced. This allows you to disclose information to overseas organisations, if:

  • There is a contract between you and the overseas organisation which includes privacy protection provisions (the Commission has published model clauses which are available to use);
  • The overseas organisation carries on business in New Zealand, and is consequently subject to the Act;
  • The overseas organisation is covered by comparable privacy laws in its country of origin; or
  • The affected person understands the consequences and consents to the disclosure of their information.

Where you give information to an overseas organisation just to hold, and not to use for its own purposes (for example cloud-based storage), you are still responsible for any privacy breach by that organisation. In some situations, the overseas organisation can be responsible as well.

Access

Individuals have the right to access information held about them. If you refuse to provide that access, the individual can make a complaint to the Privacy Commissioner, who will review your decision to refuse.

You don’t have to provide access in all circumstances, and the grounds on which you can refuse have changed slightly with the new Act. In addition to the existing grounds (for example, protection of an individual, evaluative material, trade secrets), you can now refuse to disclose personal information if disclosure would create:

  • A serious threat to the health, safety or life of an individual or public health and safety; or
  • A significant risk of serious harassment, or would cause significant distress to the victim of an offence.

If the Commissioner disagrees with your decision to refuse, it can issue an access direction requiring you to provide the information.

Compliance Notices

The Privacy Commissioner has a new power to issue compliance notices, requiring you to do or to stop doing something in order to comply with the Act. The intention is that these notices will allow the Commissioner to go beyond just responding to individual complaints focussing on enforcement and individual harm. Instead, the Commissioner can proactively address systemic issues to reduce the aggregate effect of breaches, without the need for serious harm to an individual.

If the Commission determines that you could be issued with a compliance notice, you have the right to respond to the draft notice and the right to appeal if and when it is issued. Notices may be either privately issued or publicly notified, depending on the nature of the notice and the public interest in its content. Failure to comply with a notice is an offence, with a penalty of up to $10,000.00.

Other Offences

In addition to the offences of refusing to comply with a compliance notice and failing to report a privacy breach, the new Act introduces two more offences, each of which carry a penalty of up to $10,000.00:

  • Misleading an organisation to access someone else’s personal information (e.g. impersonating someone else to access their information, or pretending to act with that person’s authority); and
  • Destroying someone’s personal information in response to an access request from them.
Evaluation

Although no material changes may be required to your privacy policy as a result of the changes to the Act, now is a good time for every organisation dealing with personal information to review the systems they have in place for collecting and storing personal information to make sure they are fit for purpose, sufficiently secure and able to be accessed and corrected if requested.

Jessica is an Associate in our Commercial Team and can be contacted on 07 958 7436.

Business Debt Hibernation – Survival Following COVID-19

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What do you do when a debtor company asks you for Business Debt Hibernation?  Business Debt Hibernation (BDH) allows companies affected by COVID-19 to put in place a one month voluntary arrangement whereby creditors are paid a percentage of outstanding debt, with the balance delayed. Under the new Schedule 13 of the Companies Act 1993, where debtors require further time, and if creditors agree, a further period of six months protection can be arranged.

Does your debtor company qualify?

A debtor company may apply for BDH if:

  • It was able to pay its debts as at 31 December 2019;
  • It has or is likely to have in the next six months significant cashflow problems, however will be able to pay its debts after that six month period (and by no later than 30 September 2021);
  • At least 80% of the directors pass a resolution for BDH for an initial one month period;
  • The directors who vote for BDH sign a certificate setting out the grounds as to how the company will be able to pay its debts within the prescribed timeframe;
  • The directors state they are acting in good faith.

Companies registered after 1 January 2020 and before 3 April 2020 are automatically excluded from applying for BDH.

What say do creditors have?

Before expiry of the initial one month period, creditors must vote as to whether BDH should continue for a further six months.  All company creditors should receive:

  • A copy of the proposed resolution for BDH for a further six months;
  • The proposed arrangement;
  • “How to vote” instructions;
  • Confirmation that the vote is binding.

For the vote, a “related creditor’s” vote cannot be taken into account.  After a successful vote, notice of the BDH extension will be registered with the Companies Office.  The six months starts from the date of registration.

The arrangement

An arrangement can:

  • Reduce the amount to be paid during BDH (however, creditors cannot alter debt interest rates);
  • Postpone payment dates;
  • Prevent the exercise of powers/restrain creditor rights during BDH.  For instance, it could be that a debtor company only pays 40 cents in the dollar during BDH, but the 60 cents in the dollar remains to be paid after BDH.

An arrangement cannot cancel, vary, or prevent the exercise of creditor rights at the end of the BDH.

During BDH, recovery options can be limited.  To ensure recovery, it is important to closely review the arrangement and decide whether the arrangement affords adequate protection.

Following BDH

BDH will end:

  • After the initial one month plus six months (seven months in total); or
  • Earlier if the directors agree.

The Court may order that a creditor is not bound by an arrangement if the arrangement approval process was flawed or is unfairly prejudicial to the creditor.  There are strict timeframes on challenging an arrangement in Court, so being proactive is essential.

On receipt of a BDH notice, reviewing the proposed arrangement is a useful first step in deciding whether further action is required.  If you are unhappy with the arrangement, Court action is available.

If you would like further information, please contact Daniel Shore on 07 958 7477.

Commercial Leases During COVID-19 – How Does Arbitration Work?

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Commercial leases have been in the spotlight during COVID-19. With many tenants unable to operate from their premises during the Alert Level 4 (and 3 to a lesser extent), resulting in a loss of revenue, the Government has been encouraging landlords to negotiate with tenants. On 4 June 2020, the Government announced that small business commercial tenants and landlords who cannot reach agreement on a fair reduction in rent will enter into a subsidised, compulsory arbitration process.

Eligibility

The rent dispute process will be for businesses with 20 or fewer fulltime employees that can prove a loss of revenue as a result of COVID-19 disruption. The same 20 employees provision applies to landlords (in disputes about paying their own mortgage).

However, commercial tenants and landlords who have already reached agreement in response to COVID-19 will not be eligible.

Step 1: Negotiation

Good-faith negotiation (discussing over a coffee, meeting at the workplace or involving lawyers to advocate for you) is the preferred first step – the relationship is more likely to remain amicable and can result in lower legal costs for both parties. Many tenants and landlords have already been through this negotiation phase and reached an agreement. The Government guidelines also suggest this stage could include mediation; however, this will be up to the parties.

The landlord and tenant should try to negotiate a fair proportion of rent and outgoings which would not be payable by the tenant. A “fair proportion” will depend on the particular circumstances of the tenancy; our article “COVID-19 – What happens to my commercial lease?” discusses the relevant factors. It is important to enter negotiations in good-faith, and it helps if both parties take time to understand how the other side may be being impacted by the COVID-19 pandemic.

The actual rent reduction can be implemented in several ways:

  • A rent-free period;
  • A reduced-rent period (including reductions of varying levels over successive periods);
  • A scheduled rent increase being deferred;
  • Continuing current rent; or
  • A combination of the above options.
Step 2: Arbitration

If the tenant and landlord cannot agree on a fair rent price, a temporary change to the Property Law Act will lead to a compulsory arbitration process, even if there is no existing agreement to arbitrate in the commercial lease. The arbitration will be subsidised up to around 75%. The Government has estimated the cost of each arbitration to be approximately $8,000, so the landlord and the tenant will need to make up the remaining $2,000.00 (approximate) shortfall.

What is arbitration?

Arbitration is a way to resolve disputes other than through the public Court system. An independent and impartial Arbitrator will consider the merits of both parties’ cases and decide the outcome. The Arbitrator’s decision is called an “award” and is final and binding, subject to a limited right to challenge/appeal the award of the Arbitrator. One of the benefits of an arbitration is not having to wait for a Court date in the public Court system, which in some cases can take up to two years. By contrast a typical arbitration can usually be dealt with over a period of several months.

While we are still waiting on details on how the “compulsory” element will work, in general parties can agree on an Arbitrator or one can be appointed by a professional body such as the New Zealand Law Society or the Arbitrators’ and Mediators’ Institute of New Zealand. It is usual for a person to be appointed as the Arbitrator who has experience in commercial property/lease disputes.

How does arbitration work?

Although the details are yet to be provided, the Arbitration Act 1996 is likely to apply. Under the Arbitration Act, a formal arbitration agreement is usually drawn up and signed off by the parties and Arbitrator. Pre-hearing conferences may also be held between the Arbitrator and the parties. One of the common provisions in an arbitration is that there is no right of appeal from the Arbitrator’s decision except on questions of law. The parties to the arbitration can agree to waive (i.e. forego) the right to appeal. It is not possible to appeal findings of fact by the Arbitrator at an arbitration.

The arbitration process is generally similar to a Court proceeding, with both parties preparing evidence, presenting formal claims, statements of defence and submissions. Parties will also prepare and then present evidence at the arbitration hearing, usually in written form, and parties can cross-examine opposing witnesses. At the end of the hearing the Arbitrator will either issue the award immediately or send a written award to the parties some time after the arbitration hearing.

If you are considering arbitration, or think you may need to engage in compulsory arbitration as a result of COVID-19, the McCaw Lewis team can assist you with this process. Contact our Dispute Resolution Team for more information.

If you would like further information, please contact Daniel Shore on 07 958 7477.

COVID-19 – Can we use electronic signatures to sign documents?

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Electronic signatures have been considered valid by New Zealand law for some time.   Faced with the challenges of the Covid-19 crisis and ongoing restrictions on our ability to travel and meet with others, it is likely we will see widescale adoption of electronic signatures as parties seek to progress matters remotely. However, the use of electronic signatures has not yet completely replaced the practice of signing documents by hand.  This article summarises the law on electronic signatures, and discusses the differences (and advantages) of “digital signatures” versus other forms of electronic signature.

The validity of electronic signatures

So long as certain requirements are met, an electronic signature is just as valid as a written signature under New Zealand law.

Part 4 Subpart 3 of the Contract and Commercial Law Act 2017 (the “Act”) regulates the use of electronic technology for legal purposes.  It aims to promote functional equivalence (meaning the law will not discriminate between paper-based transactions and electronic transactions) and technological neutrality (meaning the Act does not specify or favour any particular technology platform).

For an electronic signature to be valid, the Act requires three core elements: (1) identification; (2) reliability; and (3) consent.  To elaborate further, an electronic signature meets the legal requirement for a signature (including a witness’ signature) if:

  • It adequately identifies the signatory (or witness) and adequately indicates the signatory’s approval of the information to which the signature relates (or that the signature has been witnessed);
  • It is as reliable as is appropriate given the purpose for which, and the circumstances in which, the signature (or witness’ signature) is required; and
  • The person receiving the signed information (or requiring the witnessing) consents to receiving the signature in electronic form.

For the purpose of the Act, an electronic signature will be deemed reliable if:

  • The means of creating the electronic signature is linked to the signatory and to no other person;
  • The means of creating the electronic signature is controlled by none other than the signatory;
  • Any alteration made to the electronic signature after time of signing is detectable; and
  • Where the requirement for a signature is to provide assurance as to the integrity of the information, any alteration made to that information after the time of signing is detectable.
Are there any exceptions?

There are some significant general exceptions to the application of the part of the Act that deals with meeting legal requirements by electronic means.  Some of the key exceptions include:

  • Affidavits, statutory declarations or other documents given on oath or affirmation;
  • Powers of attorney or enduring powers of attorney; and
  • Wills, codicils or other testamentary instruments.

These (and other) important categories of document must still be on paper.

Other documents common in a law office that have always required written signatures include bank documents and authority and instruction (A&I) forms.  While it remains to be seen whether lending institutions will collectively update their current policies regarding written signatures and witnessing in light of the Covid-19 crisis, we have already seen new guidance issued in relation to land transfer documents.    

In its Authority and Identity Requirements for E-Dealing and Electronic Signing of Documents Interim Guideline 2020 published 30 March 2020, Land Information New Zealand (“LINZ”) acknowledged the validity of electronic signatures under New Zealand law and permitted their use with land transfer documents, provided that the electronic signature complies with the requirements of the Act and that the signature is a “digital signature” as opposed to an image of a signature simply inserted onto a document.  Digital signatures are discussed in more detail below.  Practitioners will also have to ensure that an audit record of the digital signing log can be produced, and that the system provides sufficient assurances so that the required certifications can be made.

Digital signature software

The most technologically secure signature (and the form of electronic signature required to comply with the new LINZ guidance) is a digital signature.  A digital signature is a form of encryption technology created and verified by code, and provides a platform to build a secure electronic signature.  Its purpose is to provide verification of the authenticity of a signed record.  Digital signatures will provide a log of the signing activity and, once a signature has been made, that signature and its information, as well as the contents of the document, are locked and unable to be edited or tampered with.

Examples of popular digital signature technology packages include Secured Signing and RightSignature.  This software is not available free to users, and in some cases the cost of obtaining and maintaining a digital signature may not be viable/desirable for lower value and/or lower risk transactions.  However, where a document of significance is to be signed by electronic means, a digital signature offers the highest level of security and reliability, provided the statutory requirements have also been met.

An electronic signature that is not a “digital signature” is an electronic symbol or reference that captures the user’s intent, and is commonly used in email software as a means of signing off.  These simple forms of electronic signature are much less secure than digital signatures and more vulnerable to being challenged on the basis of reliability.

Conclusion

New Zealand law provides a mechanism for the use of electronic signatures on a variety of legal documents.  In most circumstances an electronic signature is a valid way of creating a legal signature where a handwritten written signature would otherwise be used.  For the purposes of security, it is best practice to use encrypted signing software.  There are some significant categories of document where electronic signatures are not yet recognised by the law.  Regardless of the preferred method for signing agreements (whether by hand or electronically), appropriate care should be taken, and advice sought, before assuming legally binding obligations.

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

COVID-19 – What happens to my commercial lease?

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As New Zealand slowly becomes accustomed to our new normal of COVID-19 Level 4 Government restrictions, landlords and tenants are now beginning to wonder what this may mean for their leasing arrangements.

What does my lease say?

Those who have entered into leases using the Auckland District Law Society Sixth Edition standard Deed of Lease (generally, leases entered into since December 2012) will, unless amended via negotiations at the time, have included in their lease standard clause 27.5, which provides that if the tenant cannot “fully conduct” its business from the premises because of an emergency, then a “fair proportion” of the rent and outgoings will cease to be payable from the time the tenant became unable to gain access to the premises to fully conduct its business.

Is this an emergency?

The definition of “emergency” in the standard ADLS lease includes an epidemic.  It has been generally agreed among the legal community that clause 27.5 is triggered for most businesses, with the possible exception of essential services, on the basis that the tenant is unable to fully conduct its business from the premises during the Level 4 lockdown period.

What is a “fair proportion”?

What is less certain is what constitutes a “fair proportion” by which to reduce a tenant’s rent and outgoings – and the opinion will no doubt be different depending on whether you are looking at the issue through the eyes of the tenant or the landlord.

There is no standard answer here.  What is a “fair proportion” in each case will depend on the particular circumstances of the tenancy.  As most lease disputes are resolved via arbitration or some other alternative dispute resolution, there is also no case law on this issue to guide us.

Arguably, this is a valuation issue – and a discussion with your valuer could indeed be helpful.  In our opinion, the interests and rights of both the landlord and the tenant need to be balanced when negotiating any reduction:

  • Presumably the tenant is still storing items in the premises, albeit that it is not fully carrying on its business from the premises. This will be especially relevant if all or part of the tenant’s “business use” stated in the lease is warehousing, storage or similar.
  • The tenant may have a specialist fit-out, and branding on the premises which remains during the lockdown.
  • The tenant has the benefit of being able to immediately commence business from the premises once the lockdown ceases; the landlord cannot re-let the premises.
  • The landlord still needs to pay its mortgage or similar.
  • But importantly, in most situations the tenant will simply be unable to trade.

One thing is clear, whether you are the landlord or the tenant: early discussion around this issue is important.  The team at McCaw Lewis are happy to help with these discussions as needed, and are operating fully from our homes during the lockdown period.

What if my lease does not have a “no access” provision?

Your lease may not include a “no access” provision if it was prepared on an earlier version of the ADLS form (Fifth Edition and earlier) or if it was prepared on the Sixth Edition and the provision removed during negotiations between the parties.

Where a tenant is unable to trade during the COVID-19 Level 4 Government restrictions and, as a result, is struggling with its obligations under the lease, we are encouraging the parties to work together in good faith to find a solution that allows business to resume as normal as soon as the restrictions are lifted.  Solutions might include a reduction of a “fair proportion” of rent, even though the lease does not strictly provide for one, or deferring rent until the restrictions are listed.

Most landlords will not want to see their tenant’s business fail.

If you need assistance with any commercial lease issues, please contact Laura Monahan or Dale Thomas.

Laura is the Managing Associate in our Commercial Team and can be contacted on 07 958 7479.

Dale is the Managing Associate in our Property Team and can be contacted on 07 958 7428.

Business law issues arising from COVID-19

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With COVID-19 (novel coronavirus) now being declared a pandemic, what are some of the potential legal issues for New Zealand businesses to consider?

Capital markets have been shaken and global supply chains and international trade has been disrupted. These effects are already being felt by businesses in New Zealand.

Existing Contracts

As New Zealand businesses prepare to deal with the short and longer-term impact of COVID-19, one aspect of a broader risk management strategy is to review key commercial contracts with customers and suppliers. Key elements to consider include:

  • Termination provisions.  For example, what options (if any) are there for you to terminate early?  Equally, what is the likelihood of you being on the receiving end of a contract termination notice?
  • Termination provisions.  For example, what options (if any) are there for you to terminate early?  Equally, what is the likelihood of you being on the receiving end of a contract termination notice?
  • Liability and damages:  What are the consequences of a failure to deliver products on time?  Is your liability capped, or is it potentially unlimited?
  • Insurance:  Check with your insurer to see whether your current policies include cover for business interruption in the current circumstances.
  • Force majeure clauses:  Does the contract contain a provision designed to protect the parties in an event beyond the parties’ control?  Although there is no such thing as a “standard” force majeure clause, such provisions tend to cover catastrophic events such as acts of God, civil unrest, war, terrorism, widespread industrial action and the like.  Acts of government (such as closure of borders or restrictions on exports/imports) would normally also be included as a force majeure event, so even if pandemic itself is not expressly mentioned it may still be possible to claim force majeure in those circumstances.

Contracts may have a “boilerplate” force majeure clause tucked away in the back, or (less likely) the parties may have specifically negotiated the allocation of risk for unforeseen or catastrophic events.

Contracts may contain a force majeure-type clause even if they aren’t specifically characterised as such.  For example, some New Zealand standard form construction contracts relieve contractors of their obligation to complete on time in “any circumstances not reasonably foreseeable by an experienced contractor at the time of tendering and not due to the fault of the contractor” – although in that case a contractor will likely not be entitled to financial compensation (in other words they will get extra time, but not extra money).

New Contracts

For any new contracts, it will likely be difficult for parties to argue that the effects of the Coronavirus weren’t foreseeable at the time of contracting. Extra caution may now be required around the allocation of risk and responsibilities; this might even include specific drafting to address particular identified risks such as disrupted supply chains and unavailability of labour.

Frustration

The contractual doctrine of frustration may also provide some relief. The Contract and Commercial Law Act 2017 has codified in statute the treatment of frustrated contracts, but the starting-point is still always the terms of the contract itself.

It should be noted that there is a high threshold to reach before parties are released from their contractual obligations due to frustration: it’s usually not enough that future performance has simply been rendered more expensive, onerous or difficult.

Mitigation

In most cases parties still have a duty to mitigate losses. For example, contracting parties will likely need to be proactive in attempting to source alternative suppliers or resequencing construction projects.

Conclusion

A thorough understanding of your key commercial contracts should be part of a prudent COVID-19 risk management strategy.

In most cases early communication – with the other contracting party, with the bank, with insurers, with other key stakeholders – is generally the best approach.

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

Security over personal property and the importance of getting registration right

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The High Court’s decision in Partners Finance and Lease Limited v Richmond [2019] NZHC 34 serves as a timely reminder to ensure that your registrations on the Personal Property Securities Register are accurate.  Companies and other entities that lease or provide goods and services to customers on consignment or deferred payment arrangements, in particular, should take note.

Background

The case was about a bulldozer, the expensive kind.  Partners Finance and Lease Limited (Partners) loaned money (Westland Hire) for the purchase of the bulldozer.  Partners then registered a financing statement on the Personal Property Securities Register (PPSR).

A few years later Westland Hire agreed to sell the bulldozer to the trustees of the Richmond Business Trust.  The trustees borrowed money from ASB Bank Limited (ASB) to fund the purchase, and ASB took security over the bulldozer.  ASB registered a financing statement on the PPSR.

Partners applied for summary judgment against the trustees and ASB, claiming that Partners was the rightful owner of the bulldozer and requiring ASB to discharge its security interest over the bulldozer.  ASB also applied for summary judgment on Partners’ claim.

Who has priority?

The central issue to be determined by the High Court was whether Partners’ or ASB’s financing statement had priority.  ASB claimed that its registration had priority as Partners’ financing statement was incorrectly registered such that it was ‘seriously misleading’.

‘Seriously misleading’ financing statements

Sections 149 to 152 of the Personal Property Securities Act (1999) (the Act) deal with the validity of registration of financing statements.  The key, in section 149, is that a PPSR registration will be invalid only if it is ‘seriously misleading’.  This is to be objectively determined.

The High Court provided the following guidance:

  • The registration must specify the correct collateral type.  In this case, Partners’ registration was made against ‘goods – other’ on the basis that the bulldozer had no VIN or chassis number, which is required for a registration against motor vehicles.  The Court looked to the expert evidence and the definitions of ‘motor vehicle’ and ‘chassis number’ in the Act.  It decided that the bulldozer was a motor vehicle and therefore Partners’ registration was made against the wrong collateral type.  It is also worth noting that ASB was not aware of the Partners’ registration, as it had conducted a search of the PPSR under the motor vehicle category only.
  • Every ‘yellow goods item’ will have a unique identification number stamped on it or an attached plate, and it is industry practice to use that as the ‘chassis number’.
Final decision and thoughts

The High Court granted ASB summary judgment.

The obvious learning from this case is to ensure that registrations correctly record the asset or collateral that is secured.  Too often we come across incorrect registrations.  Small to medium enterprises often have terms of trade which allow them to register against goods or services supplied by them and which they are yet to receive payment for.  Those rights are worthless unless the registration is correct.  The difficulty is that the responsibility for making the registrations often falls to a person who does not have access to or knowledge of the requirements.  There is a need for wider education on the PPSR.

Interestingly, the High Court did not make mention of the fact that Partners’ registration was out of time to be considered a Purchase Money Security Interest (PMSI).  PMSI registrations apply to goods leased for a term greater than 1 year and have a ‘super priority’ over other registrations.  In this case Partners leased the bulldozer to Westland for a term of 6 years commencing in July 2015, but did not register its financing statement until November 2015.  Presumably the issue was not mentioned as there were no prior registrations made against Westland that would have affected priority.

Amanda is an Associate in our Commercial Team and can be contacted on 07 958 7451.

Farm failure and family fallout leads to Supreme Court ruling on prejudiced shareholders provision

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Baker v Hodder [2018] NZSC 78 deals with important company law issues, and at the highest level.  In a sadly familiar set of facts, the case concerned a farming business run on land owned by a family company which was unsuccessful and ultimately became insolvent, forcing the sale of the farm.  It is worth noting as it is the first decision by the Supreme Court on the ‘prejudiced shareholders provision’, a widely relied upon provision in the Companies Act 1993 (“the Companies Act”).

Background

Kadd Farm Limited (the Company) was a family company with its shareholders being Wallace and Ann Hodder (70%) and Duncan and Kathryn Baker (30%).  Kathryn Baker is Wallace and Ann Hodder’s daughter.

The Company owned a farm known as Heron Creek.  The farm was run by the Bakers and the Company leased the farm to Mr Baker’s company, DB Contracting Agriculture Ltd (DB Contracting).  Unfortunately, the Bakers were unsuccessful in their enterprise and DB Contracting defaulted under the lease causing the Company to default under its mortgage.

The farm was ultimately put on the market and offers were received.  The shareholders did not agree on an appropriate counteroffer to those offers.  The Hodders made a counteroffer on behalf of the Company without consultation or agreement by the Bakers.  An agreement for sale and purchase was signed.  As the sale constituted a major transaction for the Company, the agreement was conditional on the necessary approval of at least 75% of the shareholders required by section 129 of the Companies Act (a special resolution).  The Bakers refused to sign a special resolution approving the sale.

High Court decision

The Hodders sought relief under section 174 of the Companies Act alleging that the Bakers’ refusal to sign a special resolution was oppressive and/or unfairly prejudicial to the Hodders and the Company.

The High Court truncated the timetable for the proceedings on the basis that the matter was urgent (though it was acknowledged that there may have been some artificiality to the urgency given that the proposed purchasers were already in possession of the farm).  It held that the refusal to sign constituted prejudicial conduct and ordered the Bakers to sign a special resolution allowing the sale of the farm.  Further to this, the High Court refused to stay its decision to allow the Bakers to appeal it.

The Bakers signed a resolution in compliance with the Court order and Heron Creek was sold.

Court of Appeal decision

The Bakers unsuccessfully appealed to the Court of Appeal.  The Court of Appeal held that the appeal was moot as the farm had already been sold.

Supreme Court

The Bakers sought leave to appeal to the Supreme Court.

Although the Supreme Court accepted that the appeal was moot in the sense that the farm had been sold it decided that the Court of Appeal should have heard the appeal on the basis that:

  • The award of costs may be reversed on appeal;
  • The High Court decision raised important questions about the interaction between sections 129 and 174 of the Companies Act; and
  • The truncation of the process in circumstances where the outcome was final, rather than interlocutory, was unfair.
Unfair process

The Supreme Court held that:

  • the truncation of the process;
  • the High Court’s order requiring the Bakers to sign the special resolution was not a matter that had been the subject of pleading or advance notice; and
  • the final determination made by the High Court might stand in the way of any future proceedings by the Bakers against the Hodders,

all which unfairly affected the Bakers’ presentation of their case.

Prejudiced shareholders provision

Commonly, applications of prejudicial conduct arise in the context of small, family owned companies.  In these companies there is often an understanding that all shareholders will take part in the business and it transpires that either a shareholder is excluded from the management of the company, or its corresponding director fails to pull his or her weight.  Courts have very wide powers to make an order to remedy the prejudicial conduct, though such orders are usually in the form of liquidation or forced share sales.

In the High Court the Hodders argued that the Company’s position and their position as shareholders were unfairly prejudiced by the Bakers’ refusal to sign a special resolution.  The High Court confirmed that they were prejudiced in their capacities as directors and shareholders on the basis that unless the farm was sold, the Company’s debts would increase with no prospect of repayment.  It took full advantage of the wide powers available to it to remedy the prejudicial conduct in ordering the Bakers to sign a special resolution under section 129 of the Companies Act.

The Supreme Court disagreed with the High Court’s decision.  As part of its discussion of the prejudiced shareholders provision, the Supreme Court referred to the Law Commission’s report recommending company law reform (Law Commission Company Law: Reform and Restatement (NZLC R9, 1989) along with the explanatory note to the Companies Bill 1990.  It confirmed that in most circumstances, including voting on major transactions, shareholders can vote according to self-interest and they are not subject to the obligations imposed on directors.  This is a fundamental principle of company law.

The Supreme Court rather sensibly held that the Bakers were merely exercising their rights as shareholders by withholding their approval under section 129.  It confirmed that the Bakers did not owe any statutory duty to the Company or to the Hodders in relation to the sale of the farm (meaning there was no prejudicial conduct in refusing to sign the special resolution).

Relationship between sections 129 and 174

The Supreme Court confirmed that the language in section 174 was not properly suited to the Bakers’ case, where the oppression complained of consisted of a shareholder invoking the right to decline to approve a major transaction under section 129.  However, it noted section 174(3) which allows an order to be made against a person other than the relevant company, including a shareholder, suggesting that section 174 could apply.

Company members must take care when drafting documents such as constitutions or shareholders agreements to ensure that no unintended duties are created which might give rise to an action under section 174 (and conversely any intended duties are accurately recorded).  In some relief, the Supreme Court issued a cautionary note confirming that the power to make an order against a person other than a company under section 174 should be exercised very carefully.

The Court’s decision is sound and ensures the fundamental principles of company law protecting shareholders are maintained.

Conclusion

Ultimately the Bakers were successful in their appeal.  The Supreme Court confirmed that the Court of Appeal should have heard the Bakers’ case and the order made under section 174 was quashed.

Amanda is an Associate in our Commercial Team, specialising in Company Law,  and can be contacted on 07 958 7451.

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