Edmonds Judd

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Not that straightforward when it comes to property

You may have heard that ‘Marriage is betting someone half your stuff that you’ll love them forever’. But what happens about the ‘stuff’ you own before you formally say “I do”?

The law providing equal sharing of relationship property automatically begins after three years in a de facto relationship. However, what a de facto relationship looks like, and when it starts, isn’t always obvious and is often the subject of a dispute.

We take a closer look at de facto relationships as defined in the Property (Relationships) Act 1976 (PRA for short). This is key if you and your partner separate and have a dispute over property.

Harry and Kahurangi

If Harry and Kahurangi had been dating casually for a while before moving in together, we’d all agree their relationship evolved into a de facto relationship when they set up home as a couple. But what if Harry and Kahu were flatmates first? Would we assume they were in a de facto relationship from their first kiss?

The landscape changes again if Harry and Kahu each own their own home and want to keep their independence, or if Harry lives in Auckland away from Kahu in Tauranga? Does it matter that Harry hasn’t told Kahu about his significant credit card debt? Or that Kahu’s children think Harry is a ‘friend’?

Partners in relationships come with their unique experiences and backgrounds, forming bonds in any number of ways. Determining when a relationship becomes de facto requires an analysis of many factors.

The easy parts

A de facto relationship is a romantic relationship between two adults, who are not married or in a civil union, who live together as a couple. Many de facto relationships start when couples begin living together, as the legal term suggests. However, when couples have other commitments such as children or jobs in different cities requiring them to live apart, the science of determining when two people start living together as a couple becomes harder.

Living together as a couple

The PRA sets out nine factors to consider when determining whether two people are living together as a couple. The simplest factors are whether the couple lives together, the duration of the relationship and if a sexual relationship exists. Exclusivity is not a requirement of a de facto relationship: partners may be in more than one relationship or be having a sexual relationship with other people.

The nature and extent of the relationship must be taken into account. You should think about whether you would rely on your partner in an emergency and the level of dependency you have on your partner. A couple may date for many months or years before considering themselves to be serious or update their social media relationship status. It is also relevant whether the relationship is public or known to family and social circles of the couple when looking at whether a de facto relationship exists.

There are practical considerations: do the partners care for and support their partner’s family or children? Do they look after their partner’s home, including performing household chores and cooking? Entering a relationship with children from a previous relationship provides layers of complexity — deciding when to introduce partners to children, and navigating living arrangements, further complicates things.

The analysis of whether a de facto relationship exists also looks at whether there are financial commitments together such as owning joint property or bank accounts, and any support provided from one partner to the other. Some de facto partners retain separate accounts for their independence or security, but this alone will not stop a relationship from becoming de facto.

Ultimately, it is the degree of commitment and investment that each partner has to their shared life that is the tipping point of whether they are living together as a couple. They do not need to own property together and, on the other side of the coin, they can live in the same property without living together as a couple.

Why the fuss?

Many couples do not consider it relevant to define their relationship; and for many this is perfectly fine.

If, however, a couple is living in a property that was owned by one partner before the relationship began it will be classified as relationship property after the couple reaches its three-year anniversary, or earlier in some situations. If they separate, the property will be divided equally, rather than remaining the property of the original owner.

Protecting personal assets from a relationship property division is best done before reaching the three-year threshold, but can be done at any time. This is called ‘contracting out’. Independent legal advice for both parties is essential and should be obtained before entering into any formal agreement.

Conclusion

It is never too late to define your relationship with your partner. Whether you are introducing your partner to your family or buying some furniture together (or a house!), take a moment to consider whether you think you may have crossed into de facto, and potentially equal sharing, territory.

Whatever the stage of your relationship, it is wise to think about the longer-term impact this could have for both your futures.

 

NB: The Property (Relationships) Act 1976 has been reviewed by the Law Commission which recommended significant changes to this piece of legislation. However, in late November 2019, the government responded by stating it would not implement nearly all of those recommendations until the Commission has carried out a review of succession law.

 

DISCLAIMER: All the information published in Fineprint is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Fineprint may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2021.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650


Property briefs

Impacts on property dealings during Covid

The country is now out of its second lockdown with Auckland and parts of the Waikato in Level 3 with the rest of the country sitting at Level 2. Given the current uncertainty with how we can get on top of the Delta strain outbreak, let’s have a look at where this leaves us and our property dealings across differing alert levels.

The following information is correct at the time of publication. However, the government could change the rules at any time and we strongly suggest you seek up-to-date and tailored legal advice for your circumstances.

Moving, buying and selling

Under the current Level 3 restrictions you are allowed to change addresses. This means that you can settle your property transactions and move in to and out of your homes. If you are relocating from a region in a different alert level to the region you are moving to that move must be on a permanent basis, such as starting new employment, attending tertiary education, or purchasing or renting a new principal home. It also means that you can’t travel for a holiday.

You will need to take evidence that you are crossing the border for a permitted purpose. You may need to take a copy of your sale and purchase agreement or tenancy agreement for your new home, and even a copy of your employment agreement or letter of acceptance, if applicable.

Under Level 3 you can have a moving company assist you with packing and the heavy lifting, although the movers will need to socially distance from you. Your family and friends who are not a part of your bubble can’t assist you with the move.

At level 2 you are able to have your friends and family help you in your move. Your moving company will still need to comply with social distancing rules and contact tracing.

Property inspections

Under Level 3 you may complete your pre-settlement purchase inspection. You can also arrange to view a prospective property, to rent or buy, provided that the viewing is on a one-on-one basis. It is recommended that you do these viewings via video from the property’s online listing. If that is not an option, you will need to socially distance, wear a mask and sign in using your tracer app.

At level 2 your open homes will be restricted to 100 people, your real estate agent may decide to limit numbers further. You need to make sure you are contact tracing and maintaining a 2-metre distance.

Landlords can inspect their rental properties during the revised Level 3 restrictions, but only with their tenant’s consent. As a tenant you should only withhold your consent if you have genuine concerns about your safety.

Under level 2 you still need your tenants’ consent before carrying out inspections or maintenance. Masks must be worn, and you should contact trace.

Rent relief for commercial tenancies

The government is also proposing an amendment to the Property Law Act 2007 which will make it compulsory for parties to negotiate and agree on a fair rent reduction where a tenant doesn’t have access to their business premises. The amendment is currently going through its second reading, you can read the Bill here.

The proposed amendment is similar to clause 27.5 of the ADLS lease which we discussed during the first lockdown in the Winter 2020 edition of Property Speaking.

Dispute resolution

Landlords and tenants, buyers and sellers are encouraged to talk to each other to reach an agreement on any issues that arise. Where this is not possible, your commercial lease is likely to detail a dispute resolution procedure which you will be able to do so online via Skype, Zoom or by teleconference. For your residential tenancies, the Tenancy Tribunal and the courts are still operating via teleconference.

More information on the Covid restrictions can be found here.

 

Using your property as an Airbnb

Coming into summer you may be thinking about letting out your holiday home or bach through Airbnb. This can be a great way to cover your property expenses over the summer months or to fund your own holiday — if you know what you’re getting into.

Before you go down the Airbnb route, you need to make sure that you understand the differences between a residential tenancy and an Airbnb arrangement. Otherwise, you may need to comply with the Residential Tenancies Act 1986.

This legislation applies to all tenancies for a person’s occupation, except in the limited circumstances set out at section 5 of the Act. These include where the property is used for temporary or transient accommodation of up to 28 days, or where the property is let for the tenant’s holiday purposes.

If the arrangement between you and your tenant falls outside the exception at section 5 then it will be a residential tenancy and you must comply with the legislative requirements. These include the healthy homes standards, having a valid tenancy agreement and restrictions on terminating the tenancy.

Come and talk to us before you fly into it to ensure that you don’t get any nasty surprises.

 

 

 


Caveats

Protecting your interest in land

The Latin word ‘caveat’ literally translates to ‘let him beware’. In a legal sense, caveats are generally used to protect the proprietary rights of the person registering the caveat by stopping the registered owner of the property from transferring, mortgaging or otherwise dealing with the property.

Why use a caveat?

There are a number of scenarios in which you may want to register a caveat. Some examples are:

  • When there’s a significant time lag between a purchaser signing an agreement and settlement, or where (after the agreement is signed) the vendor may try to cancel the agreement. A caveat should prevent the vendor from dealing with the property in any way that will interfere with your interest.
  • A beneficiary of a trust may need to register a caveat to prevent the land to which their beneficial interest relates being transferred. Again, a caveat registered in this instance will protect the beneficial interest being claimed on the land.
  • There is also a provision under section 42 of the Property (Relationships) Act 1976 available if you wish to prevent land that is the subject of a relationship property claim being dealt with by your ex-partner in a way that defeats your interest or estate in the land. Registering a caveat in this instance is a good way to protect your interest until any relationship property dispute involving the land has been resolved.

As you are likely to already be dealing with us (or another lawyer) in any of the above-type matters, we will work with you on the registration of a caveat.

When to register a caveat?

The Land Transfer Act 2017 sets the framework for the registration of caveats. One of the most important things to consider before deciding to register a caveat is whether the interest that you want to protect meets the criteria in section 138(1). A ‘caveatable interest’ should only be registered where it meets the relevant criteria.

If you register a caveat against the land without a caveatable interest, you are liable for any loss or damage suffered by the registered owner of the land as a result of the caveat. Therefore, it is important to get clear legal advice regarding the interest you want to protect, because a mistake as to whether your interest is sufficient to support a caveat could result in a costly damages claim.

Registering a caveat

Having determined that your interest or estate is a caveatable interest, we will help you ensure that the formative requirements of the caveat are met, and will prepare an authority and instruction form to register the caveat.

How do I remove a caveat from my land?

A caveat is generally removed in one of three ways. It is withdrawn by the person registering it, it lapses or it is removed by an order from the court.

Often a caveat is withdrawn – usually at the registered owner’s request – on the basis that they have or will fulfil any outstanding obligation to the person who has registered the caveat.

A caveat may lapse if it is not followed by the requisite order being made by the Registrar-General of Land pursuant to section 143 of the Act. The timeframes prescribed are either 10 or 20 working days unless the court makes an order that the caveat has lapsed at an earlier date.

Finally, the person whose estate or interest in the land is affected by a caveat may apply to the court for an order that the caveat is removed.

Caveats are very useful and effective in protecting your interests in land during disputes. However, it is important to talk with us early on to avoid the risk of incurring significant liability if they are registered incorrectly.

 

 

 


Disputes in contracts

Help is at hand if things go wrong with your build

Building your own home or doing renovations can be a way to get exactly what you want in your residential property. Even with the best preparation and planning, however, there are things that can go wrong in a build: the work may not be completed in the agreed timeframe, the quality may be poor or there may be surprise costs. One current common issue is unexpected delays or costs due to Covid-related supply disruptions.

If you find yourself in one of these situations, there are a few things to keep in mind.

Your contract may have the answer

The first step in any build dispute is to look at your contract with the builder. Often your contract will provide an answer about who is responsible for things like unexpected costs.

By law, for any residential building work over $30,000 (including GST) in value, your builder must provide you with a written contract setting out things such as the scope of the work, expected start and end dates, how changes are negotiated and how problems with the work will be fixed.[1]

Your contract also may set out timeframes for raising issues with your builder and how you need to do this. This is why it is particularly important to talk with us about your contract before signing and as soon as any issue arises.

Other laws may protect you

If things go wrong, you also might find help in the other legal obligations your builder has under the Building Act 2004, Fair Trading Act 1986 and Consumer Guarantees Act 1993 even if you do not have a contract.

For example, regardless of what your contract says, section 362I of the Building Act 2004 requires your builder to carry out the work in a competent manner, follow all laws around the work including the Building Code and complete the work within a reasonable time. If your builder fails to do any of these, you can require your builder to repair the work or replace materials or, in some situations, pay you compensation instead.

In addition, your builder has obligations under laws, such as the Fair Trading Act 1986, to not mislead you about the quality of the work, the qualifications of the people completing the work or the price involved. If these obligations are not met, your builder could face criminal prosecution.

Don’t withhold payment without following the correct process

When something goes wrong, it can be tempting to refuse to pay any invoices until the problem is fixed, but this can cause more headaches for you. Under the Construction Contracts Act 2002, after your builder has issued an invoice, you must pay within the time required by your contract (or otherwise 20 working days) or your builder can take legal action to recover this debt. Some build contracts also will include the ability for your builder to mortgage your home if invoices are unpaid.

If you dispute the amount owing — for example, you disagree that your builder has completed all of the relevant work — then you must issue what is known as a ‘payment schedule’. This sets out the amount you will pay on the due date and the reasons you dispute the remaining amount. You then must pay the agreed amount and try to resolve the dispute about the remaining portion of the invoice.

If negotiation doesn’t work, there are other options

If you have tried unsuccessfully to resolve a dispute directly with your builder, there are other options open to you. For example:

  • For claims of a value up to $30,000, you can apply to the Disputes Tribunal. Lawyers cannot attend this Tribunal and the process is less formal and costly than court.
  • For higher value claims, you can apply to the District Court for a judge to make a decision about your dispute.
  • For claims relating to weathertightness issues, you can apply to the Weathertight Homes Tribunal.
  • You could ask a private dispute resolution service to help with mediation or adjudication, such as the Building Disputes Tribunal.
  • If your builder has failed to provide you with a written contract and other documents where required by law, you can complain to the Ministry of Business, Innovation & Employment.
  • If your builder has been negligent or incompetent, you can complain to the Building Practitioners Board. This board does not deal with payment disputes.

If you have a building dispute, do contact us early on so we can help you assess your options and the next steps.

[1] Section 362F Building Act 2004; Building (Residential Consumer Rights and Remedies) Regulations 2014.


But you’re already the trustee of a trust

The rules around the use of KiwiSaver have evolved over recent years as banks and other financial institutions have developed their understanding of the KiwiSaver regime.

KiwiSaver members may use their funds to help buy their first home; this is straightforward. What happens, however, if you want to buy your first home and you are already a trustee of a trust that owns property?

Initially, you could only access your KiwiSaver funds to buy your first home in your personal name; using a trust as a vehicle to purchase was not allowed. Now, however, the situation is more nuanced. An increasing number of lenders allow KiwiSaver members to make a withdrawal to finance the purchase of a first home, even where trusts are involved.

Let’s look at three scenarios to illustrate how this can work.

  1. You are a trustee of your friend’s trust, but not a beneficiary; as a trustee, your name is on the title to your friend’s home
  2. You are a trustee and a beneficiary of your parents’ trust; your name is on the title to their home, and
  3. You are a trustee and a beneficiary of a trust that has just been settled and so far only holds the initial $100 settlement; the trust does not hold property.

Trustee but not beneficiary

In scenario #1, the general rule is that if you are currently registered on the title to a property or land you will not qualify for a KiwiSaver first home withdrawal. The Financial Services Council of New Zealand, however, suggests that you will be eligible if you are registered as an owner of ‘an estate in land as a trustee who is not a beneficiary under the relevant trust’, because you haven’t previously held an estate in land (as you didn’t have a beneficial interest)[1].

Your argument will be even stronger where the trust of which you are a trustee has sold the property and you can establish that you received no financial gain from the sale.

Trustee and beneficiary

In scenario #2 where you are a trustee and a beneficiary of a trust which already owns property, it is necessary to establish that you have ‘no reasonable expectation that you will be entitled to occupy the land as your principal place of residence before the death of the occupier or of their survivor.’[2]

It may be difficult to establish that you have no reasonable expectation of being entitled to occupy the land as your principal place of residence if, for example, you are:

  • 18 years old or over
  • A trustee of the trust
  • Named on the title to the trust property, and
  • Occupying the home with your parents under a resolution that says ‘the settlors and their children aged under 20 years may occupy the property on the basis that they pay the rates, insurance and all outgoings usually payable from income.’

However, you could argue that once you turned 20 you would no longer have a reasonable expectation until after the death of your parents.

If there is no resolution in place, however, or a resolution that only authorises the settlors to occupy the home, then you may be able to argue that you have no reasonable expectation of being entitled to occupy the land as your principal place of residence (that is, you are there at the whim of your parents/the trustees and they can ask you to leave at any time).

Trustee and beneficiary of new trust

In scenario #3 where the trust has not purchased any property, some lenders, such as ASB, now allow the withdrawal of KiwiSaver funds to purchase your first home through a trust. The provisos are that the property being purchased is your first home, you are both a trustee and beneficiary of the trust, and you intend to live in the property as your principal place of residence.

To be eligible, your name (as the KiwiSaver member applying for a first home withdrawal) must be on the sale and purchase agreement or on a deed of nomination. This is good news for first home buyers who have good reason to want to hold assets in a trust, though care must be taken to ensure that your KiwiSaver provider will agree you are effectively in the same position as a first home buyer: one way to ensure that is to apply for approval prior to finding a property.

Being a trustee of a property-owning trust can create unwitting complications if you want to buy your first home using KiwiSaver funds. If you need some help in steering your way through the process, please feel free to get in touch.

[1] Financial Services Council of New Zealand.

[2] Clause 8(5), Schedule 1, KiwiSaver Act 2006.


Buying off the plans

Becoming a more popular option in this tight housing market

It’s no secret that the housing market in New Zealand is incredibly competitive at the moment. Already on a trajectory pre-Covid, demand has shot up since New Zealand came out of lockdown. Many people are choosing to ‘nest’ rather than spend on overseas holidays and thousands of expats are returning home earlier than planned.

Open homes often have queues out the door, many vendors choose to sell at auction where they can expect to make top-dollar and the supply of existing homes for sale is starting to run low.

As a result of this tight market, many people are deciding to buy off the plans. Buying off the plans has become popular with increasing numbers of land developments both in central cities and the suburbs. It has become increasingly popular in Christchurch, for example, where developers are playing a key role in regenerating the city post-earthquakes.

What is ‘buying off the plans’?

Buying off the plans is when you sign an agreement to purchase a property sight unseen, typically from a developer, before construction has been completed or, in some cases, even before the build has begun. If you get in early enough, you may be able to modify the design to suit your taste and style.

Instead of going to an open home and getting the feel for a place when you walk in the door, you are deciding to buy based on your review of the plans and specifications prepared by the developer. While this prospect may be daunting to some (especially the visual learners out there), the result is you will end up with a brand new home constructed in accordance with the latest building standards. If you get in early enough, you may be able to modify the design to suit your taste and style.

How does it work?

With no open homes, no auctions and sometimes no real estate agents, the process of buying off the plans is different to purchasing an existing home. You still sign an Agreement for Sale and Purchase. However, unlike getting a building report to ascertain the condition of the dwelling, you need to consider whether the property will meet your needs by looking very carefully at the plans and specifications as well as considering the property’s location and outlook. The developer may have already completed other similar homes that you can view to get an idea of their style and workmanship.

When you decide to proceed with the purchase, you pay a deposit to the developer. This is usually 5% to 10% of the purchase price. You then may need to wait some time for construction to be completed and a code compliance certificate to be issued before you pay the balance of the purchase price to the developer and move in. This longer timeframe may be attractive to some buyers as the construction period allows more time to save.

Sometimes, the agreement may have a deadline date by which you can withdraw from the purchase and have your deposit refunded if construction has not been completed. This is known as a sunset date.

Why buy off the plans?

Unlike buying an empty section and building your own home where construction prices may increase over time, buying off the plans usually means the purchase price is locked in when you sign the agreement. The upside may be that, depending on the market, the property may have increased in value even before you move in.

You will also have the benefit of owning a brand new home constructed to the latest building standards. This means there should be little to no maintenance or repair work required by you, at least for the first few years. A brand new home will also typically be warmer and drier than an existing one.

Another advantage of buying off the plans is that by purchasing a new home you may be eligible to use the Kāinga Ora First Home Grant of up to $10,000 per person.

What to look out for

There are a few things to look out for when buying off the plans. If you need a roof over your head sooner rather than later, agreeing to buy a property off the plans could be problematic as the timeframes are usually quite long.

As there is no open home to ‘try before you buy’, you should get an understanding of the exact outlook and location of the dwelling — make sure there is sufficient sun, it won’t be overshadowed by a large building next door and so on. You should also note the room dimensions and compare with your existing living or bedroom space to get a feel for how much room you will have once the walls are up.

There might not be flexibility in layout and design so do check that the design of the dwelling is actually what you want.

Seeking out other dwellings completed by the same developer could help you get an idea on the look and feel of your new home.

Getting more technical, it is very important to check the fine print in the agreement and seek legal advice (talk with us!) as to whether the purchase price can be increased by the developer, and what happens if construction takes longer than expected. In addition, we can advise as to whether a sunset date is in place for you to withdraw from the purchase if construction has not been completed by a certain date. It is also important that only you can withdraw from the purchase in these circumstances, not the developer.

You should also ask around about the reputation of the developer and whether they are known for the quality of their buildings, sticking to their proposed timeframes and so on.

Buying off the plans can be a great way for prospective buyers to get on the property ladder and to own a brand new, warm and dry home.

We strongly recommend that if you are considering this way of buying a property, you talk with us early on so we can guide you through the process.


With the new Trusts Act 2019 that came into force on 30 January 2021, we now have a new edition (the 4th) of To Trust or Not to Trust: a practical guide to family trusts.

To Trust or Not to Trust has chapters on:

  • Establishing a family trust: is this for you?
  • Trusts Act 2019
  • Protection given by a family trust
  • Transferring assets
  • Decisions to be made
  • Completing your estate plan
  • Family trust administration
  • What will a family trust cost?

This new edition lists trustees’ mandatory and default duties and obligations. It sets out the changes the Trusts Act brings to some provisions for beneficiaries, and explains that trustees who are no longer mentally competent can be more easily replaced.

If you are thinking of how you would like your assets protected, this guide is a very good starter for you to understand how a family trust works. For those of you who already have family trusts, this 4th edition provides an update on the changes the new legislation has brought.

If you would like to talk more about asset protection or your current family trust, please don’t hesitate to contact us.


An independent trustee 

Can be more important than you might think

Managing a family trust is not getting cheaper, nor is the paperwork and compliance being reduced. Trustees have legal duties, must give beneficiaries information and be accountable. It is tempting to think you can reduce costs by removing the independent trustee of your family trust. There can, unfortunately, be disadvantages.

The ‘do it yourself’ attitude

We all like to save time and money, but you do get what you pay for. Without an independent trustee, your family trust may not protect the trust’s assets as you may expect.

Cook Islands case

The Webb case[1] arose in the Cook Islands under New Zealand law. Mr Webb set up two trusts but, after he separated from his wife, the court ruled that the trusts did not prevent her claiming her half-share (as beneficiary) of the trusts’ assets. Mr Webb had retained such power over the trust property that he could access the assets himself any time.

The court said that if Mr Webb had needed agreement from a ‘truly independent person’ such as an independent trustee, the result would have been different. In 2021, the Privy Council[2] agreed with the New Zealand judges in the Cook Islands’ courts that Mr Webb had not really disposed of the property and Mrs Webb had a claim.

Clayton case

The Webb decision followed a New Zealand Supreme Court 2016 decision (Clayton case[3]). Mr Clayton had put commercial property into a trust. The court agreed Mrs Clayton could claim half of the trust assets as relationship property. This was because, although the assets were in a trust, Mr Clayton could get the property back any time he wanted.

These cases indicate the risks of not having an independent trustee who would counter the settlors’ wishes to treat trust property as their own. Trustees must hold the trust property for all the beneficiaries, not just the person who established the trust.

Advantages of having an independent trustee

There are other advantages in having an independent trustee, particularly a professional trustee. The trustee can:

  • Advise about best practice
  • Remind about important things such as when to give information to beneficiaries (and when not to)
  • Help trustees meet other obligations, for example, retaining trust information as required by law
  • Spot things that need to be reviewed, and
  • Save cost if the trustee (if that person is the trust’s lawyer) drew up the trust deed and knows the family.

Talk with your trustee now

If you have a professional trustee, we recommend you find out what they can do to help keep the trust running smoothly without undue cost.

The recent changes to trust law – the Trusts Act 2019 took effect on 30 January 2021 – have placed additional responsibilities on trustees. An experienced professional trustee can advise the most time-and-cost-efficient way to ensure your trust is compliant and effective.

[1] Webb v Webb [2020] UKPC 22.

[2] The Privy Council in London is the body which hears appeals from Commonwealth countries that are too small to have their own top court.

[3] Clayton v Clayton [Vaughan Road Property Trust] [2016] 1 NZLR 551 (SC); [2016] NZSC 29.


Bright-line and interest deductibility

In March 2021, the government announced three changes to property tax rules that are likely to affect anyone with residential property investments. The changes include extending the bright-line period from five years to 10 years, changing the main home exemption ‘test’ and removing the ability to deduct mortgage interest from rental income.

Changes to the bright-line regime

The bright-line test was established in 2015 to classify as income the profit made from buying property and selling the same property within a set period. Once captured as income, tax must be paid on that income at your marginal tax rate.

Initially the bright-line period was two years from the date that you acquired the residential property. This was extended to five years from 29 March 2018. From 27 March 2021 onwards, if you purchase residential property and you sell it within 10 years, any profit from that sale will be subject to income tax.

The government has indicated, however, that for new build investment properties, the five-year period still applies, rather than the longer 10-year period.

The government has stated that a new build investment property will be a self-contained dwelling with its own kitchen and bathroom, which has received a code of compliance certificate. The government is consulting with interested parties until 12 July and it is proposed that any agreed measures will apply from 1 October 2021.

Main home exemption

There are, of course, some exemptions to the bright-line test.

If you are selling your main home and you don’t have a pattern of buying and selling properties (generally selling your main home two or more times within two years), the sale may not be captured under the bright-line rules.

Previously, if your property was your main home for most of the time that you owned it, the exemption would apply. For example, you buy a property to live in; over a four-year period you spend 18 months working overseas, during which time you let the property out to cover expenses. Under the old rules the property would still be your main home and you wouldn’t have to pay bright-line tax on any profit from the sale.

This test has now changed; a property can be your main home for periods of time and not others. The new rule takes into account that you may be called to work in other regions or countries and, in this respect, you are permitted to live somewhere else continuously for up to 12 months. If you live elsewhere for more than 12 months, however, and want to sell your home within the applicable bright-line period (10 years for any older property purchased after 27 March 2021), bright-line tax will apply to the period (over 12 months) you spent living elsewhere.

Using the same example from above, you acquire your property on 1 April 2021 and live in it for six months. On 1 October 2021 you work overseas for 18 months before moving back into your property on 1 April 2023; two years later you decide to sell it.

Inland Revenue will calculate how much the property increased in value and you will need to pay tax for the six months that the property was not your main home.

Interest deductibility

The final change affects interest deductibility. Previously, if you had a mortgage secured against your rental property, you could treat the interest paid as a loss. This could be offset against the income earned by way of rent or sale profit. From 1 October 2021, this will no longer be the case.

Initially the change will only apply to properties purchased after 27 March 2021. Over the next four years, however, the ability to deduct your interest as an expense and offset this against your property income for all properties, including those purchased prior to 27 March 2021, will be phased out completely.

You will be able to claim back 75% of interest paid for the 2022-23 tax year; 50% for the 2023–24 tax year; 25% for the 2024–25 tax year; and from 1 April 2025, you will not be able to treat any interest as a loss.

You should also note that if you borrow money after 27 March 2021 and secure that loan over a property purchased before that date, the interest deductibility rule will be applied as if the property was also purchased after 27 March 2021 and you will not be able to claim back the interest.

These changes make it more important than ever to get legal and accounting advice before you decide to purchase or sell your rental investments.

If you’re thinking of a change, or you want more advice on how the changes will affect you, please feel free to talk with us.


Address these before the lease is signed

In December 2020, a commercial landlord and their tenant found themselves in the High Court arguing about who was responsible for replacing fixtures and fittings because their lease was silent on the issue.[1] These types of disputes around fixtures and fittings in commercial leases are quite common.

For both landlords and tenants negotiating a commercial lease, it is always best to turn your mind to your intentions for any fixtures and fittings attached to the premises; this will help enormously in avoiding costly disputes later on.

Issues to think about

Which items are the landlords fixtures and fittings? Will a tenants fixtures and fittings be added to the premises?

A lease may allow the tenant to make various alterations to the premises to ensure the fit-out meets its business needs. Whether certain fixtures or fittings belong to the landlord or the tenant often affects the rights and responsibilities around those items. It is critical that a clear schedule of landlord’s fixtures and fittings (and the condition of those items) is included in the lease.

Who is responsible for maintaining and repairing the fixtures and fittings?

Under some leases, the landlord’s fixtures and fittings are defined as being part of the premises. This means that the tenant’s obligations around maintenance and repair of the premises include the maintenance and repair of fixtures and fittings. However, this is not always the case and you should make sure that the lease otherwise addresses who holds these obligations.

Who is responsible for replacing broken or worn out fixtures and fittings?

In the Ventura case, the lease was silent about who was responsible for replacing fixtures and fittings during the lease. The High Court determined that, on the wording of the lease, Ventura could decide whether to replace any fixtures and fittings if required for its business and either remove or allow its landlord to purchase these items at the end of its lease.

If it is intended that either the tenant or landlord must replace any fixtures and fittings where necessary, this should be clearly expressed in the lease.

What happens with the tenants fixtures at the end of the lease?

Ordinarily, fixtures are considered to be part of the building, and ownership will pass to the landlord at the end of the lease (subject to any requirements that the tenant reinstate the premises to their original condition).

However, if a lease does not specify otherwise, the default rules in section 266 of the Property Law Act 2007 allow a tenant to remove their trade, ornamental or agricultural fixtures at the end of the lease. These fixtures can be removed before, or a reasonable time after, the end of the lease as long as there is minimal removal damage and the tenant repairs (or compensates the landlord for) that damage.

Commercial landlords should make sure their leases provide specific direction on a tenant’s fixtures if, for example:

  1. The removal of the fixtures and repair of any damage must occur before the end of the lease or within a set timeframe following the end of the lease to avoid, for example, the landlord being unable to re-let the premises while the reinstatement is still ongoing, or
  2. The tenant is required to leave certain fixtures in place and transfer ownership to the landlord at the end of the lease.

Lease assignment

When a tenant assigns the lease, a new tenant may want to change which of the previous tenant’s fixtures they will need to remove at the end of the lease. If this is not done, you may be able to require the new tenant to meet the cost of removing all tenants’ fixtures and fittings – even those installed by the previous tenant.  Before agreeing to reduce the new tenant’s responsibilities, you will need to consider carefully how you want the premises to be left at the end of the lease and who should bear the cost of removing any unwanted fixtures and fittings.

Replacing an expired lease

When replacing an expired lease, both landlords and tenants should ensure that the records of the tenant’s fixtures are up-to-date and included in the new lease. Otherwise, there could be a dispute about whether those fixtures became the landlord’s property at the end of the expired lease.

Take care

The points in this article are just some of the matters to consider around fixtures and fittings in a commercial lease. If you are entering into a commercial lease, please do get in touch, we can advise you in more detail and tailor your lease’s terms to match your intentions for the fixtures and fittings in the property.

[1] Ventura Ltd v Robinson [2021] NZHC 932.