Category: Property

Update on the Construction Contracts Amendment Bill

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Introduction

We were expecting the proposed changes to the Construction Contracts Act 2002 (via the Construction Contracts Amendment Bill (Bill)) to come into force on 1 November 2013. However, the Commerce Committee (Committee) only released its report on the Bill on 11 December 2013.  The result is that the timeframe for the changes has now been pushed out, for the most part, to 1 November 2014.

The purpose of this article is to summarise the key points made by the Committee in its report.

Recap on the proposed changes to the Act

The main proposed changes to the Act are:

  • Removing most of the distinctions between the treatment of residential and commercial construction contracts;
  • Extending the scope of the Act to include contracts for design, engineering and quantity surveying work (by amending the definition of construction work);
  • Allowing for enforcement of adjudication determinations about rights and obligations of parties to a construction contract; and
  • Making the process of enforcement of adjudication determinations more efficient.
Committee report

The Bill was referred to the Committee on 11 June 2013, with public submissions closing on 25 July 2013. The Committee received 31 submissions from interested groups and individuals and heard 22 of those submissions.

Although the Committee does not appear to disagree with any of the above proposed amendments, it has recommended some changes to the relevant clauses in the Bill as well as additional recommendations – some positive, others not so much.  This includes recommended changes to the adjudication process and a recommendation that will expand the scope of payment claims.

Definition of construction work

Significantly, the Committee has recommended that the definition of construction work under the Act is further extended to include “operations that are critical for the completion of, or preparatory to, the scope of design, engineering, and quantity surveying work”.  This is because, in the Committee’s view, these “related services” directly affect the quality of building work, and it would benefit consumers if they were covered by the Act.

This may have been inspired by section 6(1)(f) of the Act, which includes in the current definition of construction work “any operation that forms an integral part of, or is preparatory to or is for rendering complete” particular categories of “construction work”.

Adjudication process

In its report, the Committee has acknowledged that the tight timeframes set out in the Act in regard to the adjudication process could create opportunities for “ambush claims”.  This is because, at the moment, claimants can set adjudication in motion straight away, and the respondent is required to reply within five working days of receiving an adjudication claim (unless an extension is agreed to between the parties or granted by the adjudicator).  The Committee noted that this is particularly an issue for residential home owners and smaller contractors as they are not likely to be familiar with the adjudication provisions of the Act.

It appears that the Committee has recommended changing the timeframe for selecting an adjudicator to two to five working days after the notice of adjudication has been referred to the adjudicator (where the parties have agreed on two different adjudicators but they are unable or unwilling to act).  The reason for this is stated in the report as being “to limit the ability of a claimant to rush an adjudication for tactical reasons”.  However, this is in fact a reduction in the timeframe that is currently prescribed under the Act of five working days, which would have the opposite effect.

The Committee has also recommended adding a new provision so that an adjudicator is required to allow a respondent additional time if it is believed that the claim has been served with “undue haste” and the respondent has “insufficient time” to prepare a response.  This is a positive change for respondents of course, however, the fact that a claimant only has five working days from service of the notice of adjudication to file their adjudication claim, means many claimants pre-prepare their claims.  On that basis claims are quite often served with “haste”, therefore it would seem that an adjudicator would be bound by this provision more often than not.

Content of payment claims

The Committee has also recommended changing the definition of“claimed amount”under the Act to include liquidated damages, breaches of implied warranties under the Building Act 2004, and construction work already carried out.  This amendment would clarify that damages could be claimed in a payment claim if they were specifically agreed in a contract or implied by law, which is a matter that has previously been the subject of uncertainty.  This will therefore be a positive and welcome change to the Act.

Conclusion

The Committee has included some positive recommendations in its report, which will be welcomed by the industry.  On the other hand, there are some recommended changes that do not make a lot of sense.  It will therefore be interesting to see whether or not those recommendations are in fact adopted in the much anticipated Construction Contracts Amendment Act.  The second reading of the Bill in Parliament, which is the next step, may shed some light on that.  We will continue to ‘watch this space’ and report back on any interesting developments.

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

Caveats: What, when, how and why?

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What is a caveat?

In general terms, a caveat is a notice that is lodged against the certificate of title for someone else’s land.  The person who registers a caveat is known as the “caveator”.

A caveat serves as a notice that the caveator claims an interest in the land subject to the caveat, even though the caveator may not be the legal owner of the land.  Lodging a caveat means that the owner of the land cannot transfer, mortgage or otherwise deal with the land without the caveator’s consent (unless the caveat is released or a Court orders otherwise).

It is important to remember that a caveat does not create an interest in land – it is simply notice that an interest is claimed by the caveator, which can be disputed by the land owner.

When and why would you register a caveat?

Only a person with a “caveatable interest” in land can lodge a caveat against it. What is a “caveatable interest” will depend on the circumstances, but some common examples are:

  • Interest of a purchaser who has an agreement to purchase land;
  • Interest of a person who has an option to purchase land;
  • Interest of a mortgagee/lender where there is an agreement to mortgage land;
  • Interest of a beneficiary who has an interest in land under a trust or estate;
  • Interest of a tenant who has a lease of land.

The most common situation we see as lawyers is where a purchaser has signed an agreement to purchase land and the settlement date is some time away.  In that case, the purchaser can lodge a caveat against the title to stop the owner from dealing with the land before the sale is completed.

Another common example is where a family member has loaned money secured by an agreement to mortgage, rather than a full registered mortgage.  In that case, the lender can lodge a caveat to ensure that there is notice on the title of the agreement to mortgage.

As mentioned above, the caveator must have a “caveatable interest” to lodge a caveat.  Some examples of when a caveat cannot be used are:

  • A lender who is owed money by a borrower cannot lodge a caveat  against land owned by the borrower (unless there is a mortgage, agreement to mortgage, or other charge in place);
  • A shareholder in a company cannot lodge a caveat against land that the company owns.

If a caveat has been lodged without reasonable cause, the caveator may be liable for loss and expenses caused to the land owner or any person who suffers loss resulting from the wrongful registration.

How is a caveat lodged?

If you have an interest in land that you believe can be protected by a caveat, you need to contact your lawyer to prepare an authority and instruction form. This form is the authority required to register an interest in land.

Your lawyer can sign this form on your behalf “as agent” and arrange for it to be lodged. This process can occur relatively quickly, provided you have the relevant information available for your lawyer.  Land registration fees will apply.

How can a caveat be removed?

The easiest way to remove a caveat is for the caveator to agree to withdraw the caveat. Similar to the lodgement process referred to above, the caveator simply needs to sign an authority and instruction form for the withdrawal of the caveat, which is then registered. Unlike lodging the caveat, the lawyer for the caveator cannot usually sign the authority and instruction form as agent for the withdrawal of the caveat – it must be signed personally by the caveator in most circumstances.

If a caveator does not agree to withdraw a caveat and the land owner believes it is wrongfully recorded, the landowner can:

  • Apply to the High Court application to have the caveat removed;
  • Apply to the Land Registrar to remove the caveat or have it lapse.

Where the land owner has applied for a caveat to lapse or be removed, it will be up to the caveator to prove that the caveat is supported by a caveatable interest and should remain lodged against the title to the land.

Conclusion

If you have an interest in land which you would like to protect, a caveat may be a suitable way to do so.  On the other hand, if you are a land owner who has had a caveat lodged against the title to your land, you have the option to apply for removal if you believe the caveat is wrongfully recorded on the title.

Talk to your lawyer for advice regarding your particular circumstances.

If you would like further information please contact Zane Mora.

Fencing: Who pays?

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Introduction

The Fencing Act 1978 (“the Act”) deals with the question of who pays for the erection of fencing and repairs to dividing fences between adjacent properties.  This can also be dealt with by way of a fencing covenant or agreement.

If you are looking to buy some land, it is recommended that you first check the title to the land to see if there is a fencing covenant or agreement in place.  If there is, it is important to consider the particular implications of the fencing covenant or agreement before committing to a purchase.

This article discusses those implications as well as the requirements of the Act.  The Act will apply in the event that there is no fencing covenant or agreement in place.

The Act

Section 9 of the Act  provides that where you are an occupier of adjoining land that is not divided by an adequate fence, you are liable to contribute in equal proportions to the costs of erecting a fence or for any work to be carried out on a fence.

However, this does not apply where there is a fencing covenant or agreement in place that is registered against the title to the land to which it relates.

Fencing covenant

A fencing covenant is an agreement between two parties where one party may not be required to contribute towards the costs of erecting a fence or the the costs of any work to be carried out on a fence.

If you have the burden of a fencing covenant noted on the title to your land and wish to erect a boundary fence, the adjoining owner will not be required to make any contribution towards the cost.  It is usual for developers to ensure that they hold the benefit of a fencing covenant when they sell lots on subdivided land.

If you are purchasing a rural block of land, the cost of erecting fencing will have greater financial significance.  Therefore it will be more important to make sure that, before committing to a purchase of a rural block of land, the title of the land does not give you the burden of a fencing covenant.

If a fencing covenant is registered after 1 April 1979, it will expire automatically 12 years from the date it was registered.  Subject to this, the burden of a registered fencing covenant will run with the land.  The benefit of a fencing covenant will not bind any subsequent purchaser of the adjoining land.

Fencing agreement

A fencing agreement works in a similar manner to a fencing covenant.  In terms of content however, a fencing agreement can also include an agreement not to erect a fence.

A fencing agreement can be registered, allowing the benefit of the agreement to run with the land and be passed on to any subsequent purchaser.

No fencing covenant or agreement

If there is no fencing covenant or agreement that applies, the position is as per section 9 of the Act, as set out above.  Under the Act, there is a specific process that must be followed by any occupier who wants an adjoining occupier to contribute to the costs of any fencing work.

The first step is to serve a notice on the adjacent owner.  The notice must contain particular matters such as a description of the boundary along which the work will be done, details of the work that it is proposed be undertaken, an estimate of the costs for the work and details of the consequences of failure to comply with the notice.

If the adjacent owner does not agree with what is proposed in the notice, an objection can be made within 21 days by serving a cross-notice.  The adjacent owner may propose a different approach in their cross-notice.  By way of an example, they may think that the existing fence is adequate or that the proposed new fence is too expensive.  If you and your neighbour cannot agree, you can take the dispute to the Disputes Tribunal.  Under section 24A of the Act, the Disputes Tribunal can deal with fencing disputes if the dispute is regarding an amount up to $15,000 (or $20,000 by agreement between the parties).

An adjacent owner will not be required to contribute to the costs of erecting or carrying out work on a fence where:

  • The work is done prior to the relevant notice being served;
  • The work is done between service of the notice and before service of a cross-notice; and
  • The work is done while any dispute about the work is being resolved.
Conclusion

If you are purchasing land with the burden of a fencing covenant noted on the title, your legal representative should review the covenant or agreement to confirm whether it is still subsisting.  If the land is not fenced, you will need to factor in the cost of erecting a fence on top of the purchase price.  If you do not want to erect a fence you may consider waiting until either the fencing covenant has fallen away after the 12 year expiry period or the adjoining property is sold to a new owner.

Where there is no fencing covenant or agreement, section 9 of the Act applies.  A copy of the Act can be located online.  It is self-explanatory and easy to follow.  You will also find sample notices and cross-notices and detailed information regarding the steps to be taken by both parties where there is no fencing covenant or agreement in place.  The Act can also help you to clarify whether a document noted on the title to your land is a fencing covenant or agreement.

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

Body corporate governance: A warning to committee members

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Introduction

Every owner of a unit title property is a member of the body corporate.  Every body corporate is supposed to have a chairperson, and almost every body corporate of any size has a body corporate committee.

Guardian Retail Holdings (2013) is the latest word of the Courts on the risks of being a member of a body corporate committee.  The case highlights the potential personal liability involved in being a committee member and the importance of being aware of the nature of the role.

Outline of claims

Guardian Retail Holdings was a member of body corporate 323599 and brought proceedings against the body corporate and three members of the body corporate committee, claiming various breaches of body corporate rules and misuse of monies.

The body corporate tried to ratify the actions that were the subject of the claims, and also tried to support the committee members, including by meeting their defence costs.

Part of Guardian’s claim was that the body corporate’s law firm had a conflict in acting for both the body corporate and the committee members, particularly as the law firm’s advice was in issue in the proceedings.

Guardian also claimed that the body corporate should not fund the committee members’ defence costs, as this was not in the best interests of the body corporate.

Guardian therefore sought orders to stop the law firm from acting, and to stop the body corporate from funding the committee members’ defence.

Background

The relevant building in the Guardian Retail matter was a mixed use building, with seven commercial units and 169 residential units.  Guardian owned six of the commercial units, giving it 21% of the ownership interest and voting rights.

The developer had tried to put in place body corporate rules that would relieve the commercial owners from meeting common area and facility servicing costs, as the relevant units were only used by the residential owners.

In 2011, the body corporate received advice that the rules were invalid. Based on the advice received, the body corporate concluded that all levies should be based on unit entitlement (now ownership interest/utility interest).

The committee had also taken steps to replace the body corporate secretary.  Guardian’s representative on the committee was excluded from some decisions because of a perceived conflict.

The removal of the secretary was challenged by Guardian on the basis that this was a power reserved for a resolution at a general meeting of owners.

The committee then resolved to reverse the 2010-2011 levies and recharge them, leading to the proceedings.

Liability of committee members

The Court’s view on liability deserves to be set out at some length:

A body corporate that has a body corporate committee exercises its powers through its committee. It is vicariously liable for breaches of its obligations occasioned through the conduct of the committee. However, the committee members themselves have personal obligations to act in accordance with the relevant statutory powers and rules. Breaches by them of those rules may result in personal liability in two ways. First, the body corporate has a right of action against the committee members concerned for ultra vires acts that result in liability to the body corporate. Secondly, other members of the body corporate may look to individual committee members for losses caused by breaches of their duties.

… Individual members of a body corporate must act in accordance with the body corporate rules and are personally exposed for their wrongful acts. If that were not the case … there would be no constraint on committee members and, importantly, any claim brought by a member of the body corporate would be devalued by the fact that the member would be required to meet a proportion of the claim himself.

That is, committee members may be personally liable for actions they take.

This is an important finding – particularly given the fact that many bodies corporate find it difficult to get committee members to stand for office at all.

Conclusion

The Court held that the body corporate could not indemnify the committee members for their legal costs.  The Court restrained the body corporate from contributing to or otherwise funding the defence costs of the relevant committee members.

This left the committee members responsible for their own costs, reinforcing that committee members need to be very clear on their obligations and the risks associated with a committee role if things go wrong.

It also means that body corporate secretaries will find it even more difficult to get unit owners to stand for a committee.

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

When do lease negotiations become binding on the parties?

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Often when parties enter into negotiations before signing a contract, the parties will intend that they are not bound until the contract is drawn up and signed.  In terms of leases, section 24 of the Property Law Act 2007 sets out that, in order to be enforceable, a lease must be in writing and signed by the party against whom it is to be enforced.   A recent decision of the High Court, Dunroamin Nurseries Ltd v Zealandia Horticulture Ltd [2013] NZHC 1074 (Dunroamin), holds that this can be negated if the circumstances indicate that the parties intended to be bound by negotiations entered into before a formal lease was signed.  This article summarises that case and provides some guidance for both landlords and tenants when entering into lease negotiations.

The facts

In Dunroamin, the landlord (Dunroamin Nurseries Limited) and tenant (Zealandia Horticulture Limited) had been in a business arrangement with each other for some years.  The tenant was leasing a premises which belonged to the landlord and after some time the tenant’s business grew to the point where new premises were required.  A proposal was developed to demolish the existing building and build a new purpose-built distribution depot.  The depot was constructed and the tenant started operating from the new premises.  A draft deed of lease was prepared but a final version was never signed.  The tenant was paying rent to the landlord in accordance with the draft lease.

After three years, a dispute arose between the parties as to the terms of the lease.  The tenant sought to terminate the lease, alleging that it had never agreed to the terms of the draft deed, and that there was a month to month tenancy in place.  The landlord asked the Court to enforce the draft deed of lease.

The negotiations and the Court decision

The Court considered the lease negotiations between the parties in detail, which were as follows:

  • Negotiations started in February 2008 on very general terms.  The Court could not find any concluded agreement on any aspect of the proposal at this stage.
  • In April 2008, the parties met to discuss the terms of the lease.  Again, it was clear that the parties had not reached agreement.
  • The landlord then commenced with the construction of the premises and obtained advice from a valuer as to a likely rental figure.  The landlord passed this figure onto the tenant.  The Court found that at this stage there was no formal offer made nor any acceptance.
  • In May 2008, the landlord instructed its solicitor to prepare a deed of lease which included terms usually included in a lease such as term, commencement date, rent reviews, and rights of renewal.
  • The parties met in June 2008 and the landlord presented the deed of lease to the tenant.  The tenant did not take the lease away from this meeting.  The presentation of the deed of lease at this time was not considered by the Court to be a formal offer as it was not taken away to be considered.
  • There was a further meeting in August 2008 where the lease was given to the tenant and taken away.  Handing over the deed of lease was considered by the Court to be an offer by the landlord.
  • Later that month, the tenant entered into possession of the premises and did not make any offer of other lease terms to the landlord.  The tenant did not make any suggestion that the lease terms were not acceptable to it.

The Judge noted that acceptance of an offer can be inferred by looking at the conduct of the parties.  The Court held that silence is not acceptance, but silence accompanied by certain conduct may be acceptance.  The Court considered that the conduct of the tenant in this case could only be interpreted as acceptance of the landlord’s offer.  On that basis, the Court made an order that the draft deed of lease was enforceable against the tenant.

Guidance for landlords and tenants

This case highlights the importance of being clear as to when an offer has been made and whether and when the offer has been accepted, binding the parties to the agreement.  The failure to expressly reject an offer or make a counter offer may result in acceptance of an offer being inferred.

To avoid a similar situation, we recommend:

  • Parties clearly document any contract between them.
  • Entering into an agreement to lease prior to construction of premises or prior to spending significant sums of money, even if you have a longstanding relationship with the other party.
  • If you do not intend to accept an offer, you must communicate this clearly and in writing.
  • If the intentions of either party are unclear, or could be misinterpreted, make your position clear and seek confirmation of the other party’s position.  In this case, the tenant should have communicated with the landlord that it did not accept the terms of the draft lease.  Likewise, the landlord should have followed up with the tenant and insisted that the deed of lease be signed.

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

Agreements to lease

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Before entering into a formal commercial deed of lease the landlord and the tenant are often presented with an agreement to lease to sign, particularly where a real estate agent is involved with the leasing of the property. The agent sometimes uses its own version of an agreement to lease. Where agents are not involved and parties wish to enter into an agreement to lease they often use the Auckland District Law Society agreement to lease form (currently the 5th Edition 2012 version).

Why enter into an agreement to lease before the deed of lease?

Clients often ask why it is necessary to first enter into an agreement to lease and then a formal deed of lease rather than proceeding directly to sign the deed of lease. An agreement to lease is commonly used where there are:

  • Works to be carried out to the premises by either the landlord or tenant prior to the commencement date; or
  • Conditions to be satisfied by either party before the lease agreement becomes unconditional. Examples include a due diligence condition which means the tenant secures the premises pending the completion of their due diligence investigation and conditions relating to resource and other consents.
Some points to consider before entering into an agreement to lease
Tenant entity

If you are the Landlord has the tenant got “substance”? Does the tenant have the financial resources and commercial experience to comply with its lease obligations?

If you are a tenant should you be entering into the lease personally or setting up a company to enter into the lease?

Personal guarantees

Consider who should provide personal guarantees – normally directors/ shareholders of tenant company.

Premises description

Check the address and legal description of the property and attach a plan clearly identifying premises and any car parks being leased. Is there sufficient access to the premises?

Fitout obligations

Itemise the fitout obligations of both the landlord and tenant so parties are clear as to exactly what they must do and when.

Term and rights of renewal

Check these are acceptable.

Rent reviews

Consider how often rent review are to take place and whether these are to be based on CPI or the market rent (or a mix).

Insurance obligations

Check insurance options and likely costs. Usually the landlord insures the premises but the tenant pays the premium. If you are the tenant you may wish to ask the landlord about the amount of insurance cover.

Business use

Is the proposed activity permitted within the relevant zoning rules? Most standard lease agreements leave this squarely in the tenant’s corner.

Costs

Is each party to pay its own costs relating to negotiation and completion of the agreement to lease?

Summary

It is important parties obtain legal advice before signing an agreement to lease. By doing so the parties have the ability to negotiate terms of the deed of lease. Just because the agreement is a “standard” form doesn’t mean it is right for the particular circumstances. On signing the agreement to lease the parties are almost always committed to entering into a deed of lease under the terms in the agreement. With rights of renewal factored in, that commitment can be for many years.

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

Further changes to the taxation of lease payments

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Introduction

There have been a number of changes in relation to lease inducement and lease surrender payments in 2013. Previously, lump sum payments to terminate or to induce entry into leases were treated as capital even though these payments were generally in substitution for rental income. From 1 April 2013, these payments are no longer treated as capital. Inland Revenue is now proposing broader changes to payments relating to leases, other interests in land, and licences to use land.

Proposed changes

The broad principle underlying the proposal is that a payment to acquire, dispose of, or terminate an interest in land or a licence to use land should be treated as income to the recipient and (if the deductibility tests are met) as deductible to the payer. This rule applies even where such amounts  would ordinarily be of a capital nature. A new rule would allocate income or expenditure (as the case may be) evenly over the life of the relevant right for the recipient or payer.

The latest proposals, if passed into law, will affect tax treatment of payments relating to land rights:

  • From 1 April 2014 at the earliest;
  • With a life of less than 50 years (not including periods of renewal or extension);
  • In relation to commercial leases and other land rights (but does not apply to residential tenancies).

There is a matching deduction provision which would apply to such payments. As part of “rationalising” the existing rules, the “right to use land” category of depreciable intangible property would be repealed.

Examples

Some examples of application include:

  • Contributions toward fit-out costs;
  • Payments associated with the assignment of a lease. Where an incoming tenant is making a  payment for the transfer of a lease with a term  of less than 50 years, the payment would result in taxable income to the exiting tenant. The exiting tenant would be required to return its income when derived because it is exiting the lease and has no remaining term over which to spread the income. The incoming tenant would be required to spread the expenditure over the remaining term of the lease.

Under current law, the assignment payment would generally be a non-taxable capital receipt for the exiting tenant and depreciable to the incoming tenant.

Conclusion

Landlords and tenants need to be aware that the tax treatment of lump sum payments relating to commercial leases or other land rights is now subject to two separate stages of reform, each with a different application date.

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

Resource Management Act side agreements: Is it acceptable to purchase approvals?

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The Resource Management Act 1991 (“RMA”) sets out the process undertaken by consent authorities (i.e. District and Regional Councils) in relation to applications for resource consents. Such applications are processed on a notified or non-notified basis, which determines the extent of public participation in the process.

There are two levels of notification, either full public notification or limited notification to adversely affected persons. When determining whether an application is to be notified and to what extent (a decision which is usually delegated to a council officer), the officer must among other aspects consider whether the application will have “more than minor” adverse effects on the environment. However, when evaluating those effects the officer must disregard effects on people who have given their written approval (in addition to a number of other matters). As a result of this test, applicants can avoid notification of an application (to the extent public notification is not required) by obtaining written approval from affected persons. One way of getting this approval is to enter into so called “side agreements”.

What is a side agreement?

A side agreement is a private arrangement between the applicant and an affected person (who would otherwise have been notified of the application and would have been entitled to participate in the decision-making process). Such agreements are entered into on a private, contractual basis and do not form part of the resource consent process.

A side agreement allows an applicant to effectively purchase the approval from affected persons, usually by offering a monetary sum which adequately takes into account the effects that person will suffer. In 1998, the then Parliamentary Commissioner for the Environment, Morgan Williams, described it as follows:

“Side agreements are any agreements entered into to obtain the written approval of an affected person. [They] may avoid notification of an application, seek to mitigate adverse environmental effects, or to realise an opportunity for financial gain.”

Based on the fact that side agreements are separate from the resource consent process, the officer managing the resource consent application does not need to be informed of the fact that a side agreement has been entered into, let alone its content. This means that the consent authority will have to rely solely on the information provided by the applicant in deciding whether the application should be approved or not.

What does the Environment Court say?

So far, the Environment Court has acknowledged that side agreements are entered into but has chosen to not interfere with or comment on the ethics of this practice. In BP Oil NZ Ltd v Palmerston North City Council *1995+ NZRMA 504, Judge Treadwell noted that it is of no concern to the Court to investigate whether written approvals from affected persons have been enticed by unconscionable means:

“[It] is open to a developer in terms of the Act [to pay for consents from affected persons] because a person who considers he may be adversely affected can effectively be compensated for that fear.”

More recently in Waitakere City Council v Estate Homes Ltd *2007+ 2 NZLR 149, the Supreme Court made the following statement in relation to the ability of applicants to enter into side agreements:

“There is an obvious alternative to the approach taken by the Council in this case of using the statutory planning consent process … It would be open, although not necessarily as advantageous to local authorities, for them to proceed by way of side agreements with developers to undertake certain work, and provide where necessary additional land, for an agreed amount of compensation. Such side agreements could be reached prior to consent decisions being taken by the local authorities. This approach would dispense with the need for councils to impose conditions requiring additional services and works, while at the same time committing themselves to payments for the additional element.”

This topic has been the subject of much debate among lawyers and planners alike and the practice continues to raise qualms about its appropriateness.

What are the disadvantages?

The disadvantages of side agreements are numerous. Perhaps one of the most significant disadvantages is the fact that these agreements do not have to be entered into on the basis of a resource management purpose, whereas consent conditions (which are imposed as a way to take into account effects on affected persons) are usually imposed as a way to mitigate adverse effects on the environment.

There is also a general fear of proposals being lazily evaluated when all affected persons have given their written approval. The danger in applications being less vigorously assessed by the consent authority is the increased risk that private interests are given priority, usually at the cost of the purpose of the RMA which is to ensure sustainable management of our natural and physical resources.

Concerns have also been raised about the potential for financial imbalances between the parties. Such an imbalance can give rise to a couple of situations:

  • The prospect of receiving a financial payout could lead to threats of objections when in actual fact none would be lodged; and
  • Affected persons with limited means could be “bullied” into signing side agreements which do not address actual environmental concerns.

The lack of consideration for adverse effects on the environment and the risk of compromising environmental values also affects future owners of a site, who are unable to take part in the process and gain no benefit from the side agreement. As a result, side agreements effectively only address private interests of the current owner/s.

Are there any advantages?

As with any private arrangements, there are of course benefits to side agreements as well. One obvious advantage is that based on the voluntary nature of entering into a contract, it is unlikely that an agreement would be entered into unless all parties are satisfied that the monetary sum received justifies the environmental outcome. In actual fact it is simply a transfer of work from the applicant to the party receiving the money (who is then able to undertake any necessary work which remedies the adverse effects).

In addition, private arrangements at least have the ability to create flexible and innovative compromises. Whilst side agreements usually consist of compensation in the way of money, there is nothing to stop parties from agreeing to more inventive terms which adequately accommodate the concerns of the affected party. This could for instance include a design improvement better tailored to the environment, as noted by the Supreme Court in Waitakere.

The result of an applicant obtaining written consents from all affected parties is a reduction in processing time of consent applications. This frees up time for the consent authority and allows an officer to spend time on other matters.

Concluding remarks

Arguably, private arrangements have a place in the resource management process just as they do in other areas of law. The question is what actions the Environment Court and/or consent authorities could or should take in relation to such arrangements and whether there is any ability to control what terms are entered into between parties affected by a resource consent application. To ensure that the purpose of the RMA ultimately continues to be upheld, it is important that these agreements are subject to at least some public scrutiny. Whether the right place for such scrutiny is in the Environment Court is questionable given the current statutory restrictions for this Court to review such agreements.

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

Update on the Construction Contracts Amendment Bill

Posted on by au_common_admin

The Construction Contracts Amendment Bill was referred to Parliament earlier this year. The proposed changes to the Act are intended to apply from 1 November 2013. The main changes are:

  • Removing the distinction between residential and commercial construction contracts;
  • Extending the application of the Act to design, engineering and quantity surveying work; and
  • Allowing for the enforcement of adjudication determinations about rights and obligations of parties to a construction contract.
Removing the commercial/residential distinction

This is a significant change as it means that contracts between builders and homeowners for construction work will also be subject to the Act’s default provisions for progress payments, suspension of work for non-payment, and enforcement of adjudication proceedings.

Once the Bill comes in to force, the information sheets explaining, for example, how a payer is to respond to a payment claim, will need to be served on all payers, not just residential occupiers.

This will simplify things for contractors who carry out both residential and commercial construction work. Commercial contractors will need to update their payment claims so that they are compliant.

Extending the application of the Act

The Bill proposes that the definition of construction work be extended so that it applies to design, engineering and quantity surveying work. The Bill does not yet define these work types so it may capture a wider group than anticipated.

The main effect of this change is that the relevant parties will be able to use the payment provisions in the Act to enforce payment of their accounts. They will also be able to continue any pursuit for payment by using the adjudication and enforcement provisions of the Act. However, they may also find themselves on the receiving end of an application for adjudication.

Enforcement of adjudication determinations

The Act currently provides for the enforcement of adjudication determinations in respect of payments, but it does not provide for the enforcement of determinations regarding the rights and obligations of parties to a construction contract. This is impractical as such determinations are essentially worthless if a party does not comply.

The inclusion of rights and obligations determinations within the scope of the enforcement provisions is therefore a significant amendment to the Act. Adjudication will become a much more useful and efficient dispute resolution option and may increase its popularity and usage in relation to these types of disputes.

Conclusion

It is likely that the next step will be an invitation for public submissions in advance of a select committee report. This should occur relatively soon given the proposed 1 November date.

Overall, the Bill is aimed at increasing the Act’s efficiency and simplifying its procedures. Although there will be some additional work created for commercial contractors at the outset, the proposed changes to the Act are positive and are likely to be broadly welcomed.

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

Lease inducement and surrender payments

Posted on by au_common_admin
Introduction

Recent tax reforms provide for changes to the taxation of lease inducement and lease surrender payments. This article outlines these reforms, which apply from 1 April 2013.

The new rules only apply to commercial leases. Residential lease payments are expressly excluded from the new rules.

Lease inducement payments
The previous position

Before 1 April 2013, a landlord could often claim an income tax deduction for a lease inducement payment, while the tenant would treat the payment as a non-taxable capital receipt. As a result, the tenant might have agreed to a higher level of rent. The result being that the tenant was in a better position after tax while the landlord was in the same position.

Lease inducement payments were used by landlords to attract prospective tenants to enter into commercial leases, particularly during economic downturns.

In the leading case in this area, CIR v Wattie, the parties had entered into a commercial lease together with an inducement agreement (providing for a lease inducement payment). IRD argued that the lease inducement payment was taxable. This was rejected by the Privy Council which agreed with the Court of Appeal and held that the lease inducement payment was paid for the tenant undertaking an onerous lease for a substantial period, and so was capital in nature.

The current position

The new rule removes the tax advantage to the tenant of a lease inducement payment. These payments are now treated as taxable income in the hands of the tenant and deductible to the landlord.

Lease surrender payments

The previous position for lease surrender payments was that these payments were taxable to any landlord that was in the business of leasing property (with some exceptions), and not deductible to the tenant.

Lease surrender payments will, from 1 April 2013, also be treated as taxable income in the hands of the recipient and deductible to the paying entity.

Application

These changes apply to:

  • Lease inducement payments on commercial leases entered into on or after 1 April 2013. Payments made on or after 1 April 2013 will not be affected by the new rules if the agreement to lease was entered into before that date; and
  • Surrender payments made on or after 1 April 2013 (even if the agreement to surrender was entered into before 1 April 2013).

The lease inducement payment changes apply to leases as well as sub-leases, licences and easements.

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

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